This post was last updated on 03-Jul-2017
Finance is the life and blood of every organization. As blood flows in human body through vital organs, finance also flows in the same fashion in the organization. Every decision that the company takes involves finance directly or indirectly. Broadly, finance is required to purchase raw material, machinery, and to pay salaries and dividends, etc.
Financial management’s major function is to see that the firm is maximizing its profits and creating wealth for the shareholders. These two concepts i.e. Profit Maximization and Wealth Maximization are at the center of Financial Management.
Another important concept – Time Value of Money is dealt in Unit – I. The concept of Time Value of Money is very very important in Finance. It is very useful for making various investment decisions. Almost all investment decisions are based on the principle of Time Value of Money. The students who write CFP, CFA, and NCFM exams know very well how much emphasis and importance is given to Time Value of Money.
Financial management focuses on four major decisions such as
- Financing Decisions
- Investment Decision
- Operating or Working Capital Decision
- Dividend Decision
Financing Decision – Ever business requires funds for various reasons such as Investment, replacement, renovation, expansion, etc. Financing decision is all about deciding from where to get the money for above mentioned activities. The finance department should analyze which source of finance to be used. Whether to go for equity or debt? What should be the debt equity ratio? The finance manager should analyze which sources of finance will be suitable for his company and what will be the cost of capital and what will be the return on investment. After weighing all alternatives the company makes financing decision. These are also known as capital structure decisions.
Investment Decision – After raising the capital, the organization should make the most important decision of where to invest. It is not easy to take these types of decisions as the amount involved is huge. If the company makes one minor mistake here, the ripple effects will be felt for years. The capital budgeting itself has long term impact on the performance of the company. This is the reason why various techniques of capital budgeting are employed to determine the right project for the investment. A company has various investment options and it cannot invest in all investment options. It has to find out the most lucrative project and make investment in that. For this purpose capital budgeting is employed that guides the company in choosing the right investment alternative.
Operating Decision – This decision is mainly about the day to day activities of the business. Purchasing car is not a big task these days, maintaining it is. In the same way, business needs working capital to run day to day activities. If these activities are not performed properly then it will have direct impact on the accomplishment of the company’s mission, vision, and objectives. Working capital management exhorts that the organization should not keep more liquid cash for day to day operations. At the same time the organization should keep adequate liquid cash to meet the immediate or emergency expenditure.
For instance, it is risky for a person to keep heavy amount of Rs.1,00,000 in his pocket and venture out daily. Someone can steal the cash or he might lose that amount. At the same time he should also not venture out without a single rupee. Because during emergency he should have minimum amount of funds to deal with it. Operating decisions are based on Inventory Management (ABC Analysis, EOQ), Cash Management (Cash Budgeting, etc), Debtors and Creditors management. etc.
Dividend Decisions – The shareholders are the individuals who have invested their hard earned money in the company and they demand respectable return on their investment. The amount paid to shareholders annually from the profit of the company is known as dividend. The finance department should decide as to how much percentage of the profit to be disbursed as dividend to the shareholders. Here we come across dividend payout ratios and dividend retention ratio. Walter and Gordon methods are employed here.
Basic and advance level understanding of this subject is very essential for the students who wish to take finance as their major specialization (elective) in third semester. Practicing more problems along with deep understanding of the theoretical concept would definitely give fruitful results. Few concepts such as International Capital Budgeting, International financing, Equity valuation, etc of third and fourth semester are based on Financial Management.
This is a scoring subject. If all questions are answered properly then you can easily score more than 70%. Few concepts of this subject were already studies by B.com and B.com (Hon) students.
You can expect a practical problem from every unit of this subject. Usually, from unit one theory questions are asked. Rarely, a problem on Time Value of Money or Risk Return Trade off is asked. From rest of the four units, compulsory practical problem will be asked.
Books for FM
- Khan & Jain, Financial Management, Latest Edition, TMH.
- Prasanna Chandra, Financial Management, Latest Edition, THM.
- Van Horne, Financial Management, PHI.
- S.N.Maheshwari, Financial Management
New Syllabus CBCS- 2016
Important Questions for Financial Management Password is 78692FmmRB22016