JAMIA MILLIA ISLAMIA

Name: MD Nishad
Class: Bcom(Hons), 3 semester
Student id: 201904360
Submitted to: Ashima Gaba Ma’am
ASSIGNMENT OF FINANCIAL MANAGEMENT

Question: “Financial management is more than procurement of funds”. What 

do you think about the responsibilities of a financial manager. Explain the 
various decisions made by a financial manager in the light of this statement. 

Answer: ​Financial Management is about preparing, directing and managing the money
activities of a company such as buying, selling and using money to its best results to
maximise wealth or produce best value for money. It is basically applying general
management concepts to the cash of the company. Financial Management can also be
defined as – The management of the finances of a business / organisation in order to
achieve financial objectives

“Financial management is concerned with raising financial resources and their effective
utilisation towards achieving the organisational goals” Dr. S. N. Maheshwari

“Financial management is the process of putting the available funds to the best
advantage from the long term point of view of business objectives” Richard A. Brealey

It is crucial for both public and private sector organisations.

Taking a commercial business as the most common organisational structure, the key
objectives of financial management would be to:

• Create wealth for the business

• Generate cash, and
• Provide an adequate return on investment bearing in mind the risks that the business
is taking and the resources invested

There are three key elements to the process of financial management:

(1) F
​ inancial Planning

Management need to ensure that enough funding is available at the right time to meet
the needs of the business. In the short term, funding may be needed to invest in
equipment and stocks, pay employees and fund sales made on credit.

In the medium and long term, funding may be required for significant additions to the
productive capacity of the business or to make acquisitions. This links in with the
financial decision making process and forecasting.
(2) F
​ inancial Control
Financial control is a critically important activity to help the business ensure that the
business is meeting its objectives. Financial control addresses questions such as:

• Are assets being used efficiently?

• Are the businesses assets secure?
• Do management act in the best interest of shareholders and in accordance with
business rules?
(3) F
​ inancial Decision-making

The key aspects of financial decision-making relate to investment, financing and

dividends:

•Investments must be financed in some way – however there are always financing
alternatives that can be considered. For example it is possible to raise finance from
selling new shares, borrowing from banks or taking credit from suppliers. This is
connected with the capital budget and forecasting when dealing with fixed assets and
projects.
•Financial options – this is connected to the raising of finance from various sources like
banks or financial investors, which will depend on the options of the type of source,
period of financing, cost of financing and the net present returns generated.
•A key financing decision is whether profits earned by the business should be retained
rather than distributed to shareholders via dividends. If dividends are too high, the
business may be starved of funding to reinvest in growing revenues and profits further.

All these areas of financial management apply to your personal life and family life, how
families finances are managed are all related to financial management.

Routine Functions of Financial Management

Routine functions are clerical functions. They help to perform the Executive functions of
financial management:

1. Supervision of cash receipts and payments.

2. Safeguarding of cash balances.
3. Safeguarding of securities, insurance policies and other valuable papers.
4. Taking proper care of mechanical details of financing.
5. Record keeping and reporting.
6. Credit Management.

​ Responsibilities of a financial manager

A financial manager plays a critical role in providing financial guidance and support to a
company. Also known as a finance manager or finance lead, they can make a real difference to
a business’ success. Discover whether the role of a financial manager is for you, with expert tips
on how to progress through the ranks of finance officer to assistant finance manager, and
beyond.
The role of a financial manager involves producing reports and research on the company’s
financial situation, as well as its short and long term goals.Some financial managers, particularly
the more senior ones, provide input into key business decisions, such as mergers and
acquisitions, expansion and large deals.

Although the roles and responsibilities of a finance manager vary from one organisation to
another, there are certain tasks that are common across all jobs.
The duties of a finance manager include:
● Daily reporting.
● Analysing targets.
● Meeting with department heads.
● Managing and coordinating monthly reporting, budgeting and reforecast
processes.
● Providing back office services such as accounts payable, collection and payroll.
● Monitoring cash flow.
● Liaising with accountant teams.
● Finance manager responsibilities can also include:
● Providing insights on the financial health of the organisation.
● Ensuring the business meets all its statutory and compliance obligations,
including statutory accounting and tax issues.
● Keeping track of market trends.
● Looking for cost-reduction opportunities.
● Developing relationships with external contacts such as auditors, solicitors and
HM Revenue & Customs.
● Supervising staff.

There are four main financial decisions-

1. Capital Budgeting or Long term Investment decision (Application of 

funds)
The process of planning and managing a firm’s long-term investments is called capital
budgeting. In capital budgeting, the financial manager tries to identify profitable investment
opportunities, i.e., assets for which value of the cash flow generated by asset exceeds the
 cost of that asset. Evaluating the size, timing, and risk of future cash flows (both cash
inflows & outflows) is the essence of capital budgeting.
A finance manager has to find answers to questions such as:
What should be the size of firm?
In which assets / projects funds should be invested?
Investments in which assets / projects should be reduced or discon​tinued?
Capital budgeting decisions determine the fixed assets composition of a firm’s Balanc Sheet.
Capital budgeting decision gives rise to operating risk or business risk of a firm.
Risk-Return Trade-Off:
Risk and return move in tandem. Higher the risk, higher the return. Lower the risk, lower the
return. This holds true for all investments (projects & assets).

A finance manager seeks to select projects / assets which:

(a) Minimize the risk for given level of return or

(b) Maximize return for given degree of risk.

Hence there is a risk return trade off in case of capital budgeting decision. Investment in small
plant is less risky than investment in large plant. But at the same time small plant generates
lower return than a large plant. Hence deciding about the optimal size of the plant requires a
careful analysis of risk and return.
ii. Capital Structure Decision:​

A firm’s capital structure or financing decision is concerned with obtain​ing funds

to meet firm’s long term investment requirements. It refers to the specific
mixture of long-term debt and equity, which the firm uses to finance its assets.
The finance manager has to decide exactly how much funds to raise, from which
sources to raise and when to raise.

Different feasible combinations of raising required funds must be carefully

evalu​ated and an optimal combination of different sources of funds should be
selected. The optimal capital structure is one which minimises overall cost of
capital and maximises firm’s vale. Capital structure decision gives rise to financial
risk of a firm.

Risk-Return Trade-Off:

Risk return tradeoff is involved in capital structure decision as well. Usually Debt
is considered cheaper than equity capital because interest on debt is tax
deductible. Also since debt is paid before equity, risk is lower for investors and so
they demand lower return on debt investments. But excessive debt is riskier than
equity capital from the company’s viewpoint as debt obligations have to be
compulsorily met even if firm incurs losses.
Thus there is a risk-return trade-off in deciding the optimal financing mix. On
one hand, debt has lower cost of capital thus employing more debt would mean
higher returns but is riskier while on the other hand, equity capital gives lower
return due to higher cost of capital but is less risky.

iii. Dividend Decision:

Dividend decision involves two issues-whether to distribute dividends and how

much of profits to distribute as dividends. A finance manager has to decide what
percentage of after tax profit is to be retained in the business to meet future
investment requirements and what proportion has to be distributed as dividend
among shareholders. Should the firm retain all profits or distribute all profits or
retain a portion and distribute the balance?

Proportion of profits distributed as dividend is called dividend pay-out ra​tio and

the proportion of profits retained in the business is retention ratio. Finance
manager here is concerned with determining the optimal dividend pay-out ratio
which maximises shareholder’s wealth. However, the actual decision is affected
by availability of profitable investment opportunities, firm’s financial needs,
shareholder’s expectations, legal constraints, liquidity position of the firm and
other factors.

Risk Return Trade Off:

Dividend decision also involves risk return trade off. Generally investors expect
dividends because dividends resolve future un​certainty attached with capital
gains. So a company should pay dividends. However when a company, having
profitable investment opportunities pays dividends, it has to raise funds from
external sources which are costlier than retained earnings.
Hence return from the project reduces. A high divi​dend payout is less risky but
also results in less return while a low dividend payout is more risky but results in
high return in case of growing firms. Therefore a firm has to strike a balance
between dividends and retained earnings so as to satisfy investors’ expectations.

iv. Working Capital Management Decision:

Working capital management is concerned with management of a firm’s

short-term or current assets, such as inventory, cash, receivables and short-term
or current liabilities, such as creditors, bills payable. Assets and Liabilities which
mature within the operating cycle of business or within one year are termed as
current assets and current liabilities respectively.

Working capital management involves following issues:

(1) What are the possible sources of raising short term funds?

(2) In what proportion should the funds be raised from different short term
sources?

(3) What should be the optimum levels of cash and inventory?

(4) What should be the firm’s credit policy while selling to customers?

Risk-Return Trade-Off:

Working capital management also involves risk-re- turn trade off as it affects
liquidity and profitability of a firm. Liquidity is inversely related to profitability,
i.e., increase in liquidity results in decrease in profitability and vice versa. Higher
liquidity would mean having more of current assets. This reduces risk of default
in meeting short term obliga​tions.

But current assets provide lower return than fixed assets and hence reduce
profitability as funds that could earn higher return via investment in fixed assets
are blocked in current assets. Thus higher liquidity would mean lower risk but
also lower profits and lower liquidity would mean more risk but more returns.
Therefore the finance manager should have optimal level of working capital.
Inter-Relationships between Financial Decisions:

All the four financial management decisions explained above are not inde​pendent
but related with each other’s. Capital budgeting decision requires calculation of
present values of cost and benefits for which we need some appropriate discount
rate. Cost of capital which is the result of capital structure decision of a firm is
generally used as the discount rate in capital budgeting decision.

Hence investment and financing decisions are inter​related. When operating risk
of a business is high due to huge investment in long term assets (i.e. capital
budgeting decision) then companies should have low debt capital and less
financial risk. Dividend decision depends upon the operating profitability of a
firm which in turn depends on the capital budgeting decision.

Sometimes firms use retained earnings for financing their investment projects
and if some amount of profit is left, that amount is distributed as dividend. Hence
there is a relationship between dividends and capital budgeting on one hand and
dividends and financing decision on the other.