Question

Management 

(a) Explain what is meant by the 'financial function' in a business. 

(b) Explain what is meant by 'financial management' in a business 

(c) Explain the objectives of financial management 

Answer 1

(a)  Financial function in a business

The Finance Function is a part of financial management,In a business, the finance function involves the acquiring and utilization of funds necessary for efficient operations.Finance is that administrative area or set of administrative functions in an organisation which relate with the arrangement of cash and credit, so that the organisation may have the means to carry out its objectives as satisfactorily as possible

A business needs to grow otherwise it may become redundant in no time. With the finance function, you can determine and acquire the funds required to do so.

(b)  Financial management.

Financial management is that managerial activity which is concerned with planning and controlling of the firm’s financial resources. In other words it is concerned with acquiring, financing and managing assets to accomplish the overall goal of a business enterprise (mainly to maximise the shareholder’s wealth)

Financial management is an integral part of overall management. It is concerned with the duties of the financial managers in the business firm, Financial Management deals with procurement of funds and their effective utilization in the business,

In today’s world where positive cash flow is more important than book profit, Financial Management can also be defined as planning for the future of a business enterprise to ensure a positive cash flow. Some experts also refer to financial management as the science of money management.

There are two basic aspects of financial management viz., procurement of funds and an effective use of these funds to achieve business objectives.

(C)  objectives of financial management.

Objectives of Financial Management may be broadly divided into two parts such as:

1. Profit maximization

2. Wealth maximization.

(I) PROFIT MAXIMIZATION

It has traditionally been argued that the primary objective of a company is to earn profit; hence the objective of financial management is also profit maximisation. This implies that the finance manager has to make his decisions in a manner so that the profits of the concern are maximised. Each alternative, therefore, is to be seen as to whether or not it gives maximum profit.
However, profit maximisation cannot be the sole objective of a company. It is at best a limited objective. If profit is given undue importance, a number of problems can arise.

(II) WEALTH / VALUE MAXIMISATION

We will first like to define what is Wealth / Value Maximization Model. Shareholders wealth are the result of cost benefit analysis adjusted with their timing and risk i.e. time value of money.

• so, Wealth= Present value of benefits-present value of Costs

It is important that benefits measured by the finance manager are in terms of cash flow. Finance manager should emphasis on Cash flow for investment or financing decisions not on Accounting profit. The shareholder value maximization model holds that the primary goal of the firm is to maximize its market value and implies that business decisions should seek to increase the net present value of the economic profits of the firm. So for measuring and maximising shareholders wealth finance manager should follow:

• Cash Flow approach not Accounting Profit
• Cost benefit analysis
• Application of time value of money.