Financial Management

Meaning of financial managenent
Financial management can be define as the process of acuiring and using funds to accomplish a financial objective. Simply put ,financial management has ti do with getting your hands on money and deciding how best to spend, save, or invest it.

Some important firm level financial management activities include identifying a business' strengths and weakness, evaluating investment opportunities, forecasting future needs and managing the implementation of the investment. All of these financial management activities require that the manager project the future position of the firm under different scenarios and determine the likelihood of accomplishing stated goals.


Financial management decisions regarding the acquisition of funds must consider whether to acquire funds through one's own financial resources, the financial resources of other investors or by borrowing. Possible outside sources of funding might include commercial banks, the Farm Credit System,Life Insurance Companies, individuals and others, stocks, or bonds.Decisions will also be made about whether to obtain long, short-term,or some combination of long and short tern funds.

Financial management decisions also focus on asset investment opportunities. There is an almost limitless set of investment opportunities available with a wide variety of different characteristics. Some investment will be of a short term nature, such as 'cash' or investor's, while others, such as real estate or production facilities, will provide long term returns. There are investments available that provide fairly certain, low risk returns, while others will provide uncertain,high risk returns.

Liquidity decision

Financial manager should manage the liquidity position of his firm. Current assets should be managed efficiently for safeguarding the firm against the dangers of liquidity and insolvency. If the firm against the dangers as liquidity and insolvency . If the firm does not invest sufficient funds in current assets, it may become liquid. But current assets are non- profit generating assets. Therefore financial manager must concerned.

Diviend Decision

The financial manager is concerned with dividend decisions. The financial manager must decide whether the firm should distribute all profits, retain earning, or distribute a portion and reation the balance. The financial manager must determine the optimum payout ratio, which maximizes the firm's value.

Distribution of profit among shareholders is known as dividend decision. Dividend decision is closely the related with financing decision . Dividend decision includes the decision regarding the retention of profit and profit is retained to meet the need of fund. Therefore dividend decision is also considered as internally financing decision. Critical part of dividend decision is to decide the dividend pay out of ratio. Dividend payout ratio is the proportion of retained earning and dividend out of firm's net profit.

Wealth maximization

Due to limitations of the objectives of profit maximization, it is suggested that the objective of the firm should be maximization of the value of the firm. Wealth maximization means maximizing the net present value of a course of action. The net present value of its benefits and the present value of its costs. A financial action resulting in positive net present value should be accepted . Negative net present value should be rejected. Net present value calculated as follows:
NPV=CF/(1+k)+........CF/(1+k)-I

Objective of firm

Financial managers are primarily concerned with investment decisions and financing decisions within business organizations. The great majority of these decisions are made within the corporate business structure. One such issue concerns the objectives of financial decision -making. what goal or goal do managers have in mind when they choose between financial alternatives? Whenever a decision is to be made, management should choose the alternative that most increase the wealth of the owners of the business. These decisions relating to corporation are continuous. To apply these decisions, the corporation.

The difference between firm value maximization and shareholder maximization

Stock price maximization is the most restrictive of the three objective functions. It requires that managers that managers take decisions that maximize stockholder wealth, that bondholders be fully protected from expropriation, that markets be efficient and that social costs be negligible.

Stockholder wealth maximization is slightly less restrictive, since it does not require that markets be efficient. Firm value maximization is the least restrictive, since it does not require that bondholders be protect from expropriation.

Thus, when we make the argument that an action by a firm (such as investing or financing) increase firm vale,this increase in firm value will necessarily translate into increasing stockholder wealth and stock price only if the more restrictive assumptions hold. Conversely,an action that stock price in a world where the less restrictive assumptions do not hold may not necessarily increase firm value.