Question

- What is financial management all about?

-Differentiate the objective of maximizing earnings with that of maximizing wealth

- What are the three major functions (DECISION AREAS) of the financial manager? How are they related?

-Should the managers of a company HAVE SIZABLE amounts of common stock in the company? What are the pros and cons?

-What is corporate governance? What role does a corporation’s board of directors play in corporate governance?

Answer 1

1. Financial management is mainly concerned with planning, organizing, directing & controlling the financial activities such as procurement & utilization of funds of the enterprise. It also means applying the principles of management to the financial resources of the company. its main objectives is to ensure regular & adequate supply of funds to the enterprise, to ensure adequate returns to the shareholders, to ensure optimum utilization of funds & also to have a sound capital structure.
2. Maximization of earnings is to earn a large amount of profits whereas wealth maximization is improving the market value of the company’s shares.

Profit maximization mainly emphasizes on achieving short term objectives whereas wealth maximization emphasizes on long term objectives.

Profit maximization doesn’t consider the risks or uncertainty involved in it whereas wealth maximization would consider the various risks & uncertainty involved in it.

The main advantage of profit maximization is that it acts as a yardstick for calculating the operational efficiency of a company. Whereas advantage of wealth maximization is that it helps in gaining large market share.

3. Three major functions of the financial manager:

1. Investment Decision:

The most important decision. It begins with the firm determining the total amount of assets needed to be held by the firm.There is two types of investment decision:

a):Capital Investment Decision:

Involves large sums of money. The impact is critical. Example acquire a new machine or to set up a new plant.

b) Working Capital Investment Decision:

A more routine or schedule form of decision. Examples are determination of the amount of inventories, cash and account receivables to hold within a certain period.

2): Financing Decision:

The second major decision. After deciding on what assets to buy or what securities to invest in, the financial manager would have to decide on how to finance these assets.

3): Assets Management Decision:

The third and the last decision. Once the assets have been acquired and appropriate financing provided, these assets must be managed efficiently. By managing currents assets effectively and efficiently, the company can increase its returns and minimizes its risk of illiquidity.

4. It depends on the company & solely on the manager. But the benefits of holding the shares of the company are that their performance is tied to their pay. Suppose if the managers are performing well, the company will do well & the shares will increase in value. As a result of which the company, its manager & the shareholders will be happy.

The con is that there can be conflicts of interest & they also make decisions that are beneficial to themselves & that are detrimental to the minority shareholders.

5. Corporate governance is defined as the system of rules, practices & processes by which a firm is directed & controlled. It majorly involves putting together the interests of shareholders, management, customers, suppliers, financiers, government & the community.

Role of directors in corporate governance:

The fundamental responsibility of the director is to represent the interests of the shareholders, to be loyal to the corporation, not to allow personal interests to function against the shareholders interests; the main purpose is also to ensure that the company’s prosperity is directed towards company’s affairs.