 Hello everyone. Welcome to KK Hendricks Theta Pen University. I am Dr. Deepankar Malhakar and today in this class we will discuss the first unit of financial management of become second semester. This discussion will cover meaning of financial management, finance function, significance of financial management, relationship of financial management with other areas of management, objective of financial management and role of the finance manager. So to know what is financial management, let us take a simple example. For the purpose of starting a new venture and entrepreneurs need to take some decisions like number one, he needs to decide which asset to buy. Next, he needs to determine the total investment required for buying those assets. Next, he need to determine how much cash he would require to run the daily operation of the business like payment of raw material, salaries, wages, etc. This component is also known as working capital. And finally, he needs to determine all sources that he can use to tap the required amount of finance. The source could be a share capital or borrowing from banks or investment from financial institutions. Thus, financial management is concerned with efficient acquisition and allocation of fund with an objective to make profit for owners. So in other words, focus of financial management is to address three major financial decision areas namely investment decision, financing decision and dividend decision. Any business enterprise requiring money and the three key questions being inquired into are where to invest the money that is known as investment decision. Next, where to get the money from that is known as financing decision and what portion of profit needs to distribute among the shareholders to keep them satisfied that is known as dividend decision. Thus, the functions of financial management can be broadly classified into three major decisions namely investment decision, financing decision and dividend decision. So now the investment decision. The investment decision is concerned with the selection of asset in which funds will be invested by a firm. The assets of a business firm includes long-term assets that is called fixed asset and short-term asset that is called current asset. Long-term assets will yield a return over a period of time in future whereas short-term assets are those assets which are easily convertible into cash within an accounting period that is a year. The long-term investment decision is known as capital budgeting whereas the short-term investment decision is defined as walking capital management. So capital budgeting means the long-term planning of allocation of funds among the various investment proposals. On the other hand, the finance manager is also responsible for the efficient management of current assets that is walking capital. Walking capital management constitute an integral part of financial management. The finance manager has to determine the degree of liquidity that a firm should possess. The next is financing decision. The second important decision is the financing decision. The financing decision is concerned with capital mix or the capital structure of the firm. The term capital structure refers to the proportion of debt capital and equit capital in the total capital of the firm. This must be decided taking into account the cost of capital, risk and return to the shareholders. It is the responsibility of the finance manager to determine and appropriate capital structure. And next one is the dividend decision. The third major decision is the dividend policy decision. Dividend policy decisions are concerned with the distribution of profits of a firm to the shareholders. How much of the profits should be paid as dividend? That is dividend payout ratio. The decision will depend upon the preference of the shareholders, investment opportunities available within the firm and the opportunities for future expansion of the firm. Now, why financial management is important? What is its significance? So, as you all know that finance is the lifeblood for any business organization. Financial management is the key to any successful business operation. Without proper administration of finance, no business enterprise can reach at its full potentials for growth and success. Money is to an enterprise, what oil is to an engine. So, financial management is all about planning the investment, funding the investment, monitoring expenses against budget and managing gains from the investment. So, financial management means management of all matters related to an organization's finance. So, that is why financial management is important for any business organization. Now, this financial management has close relationship with many disciplines. Financial management is not a totally independent area. It draws heavily on related disciplines and areas of study, namely economics, accounting, production, marketing and quantitative methods etc. Some of the relationships are being discussed here. Now, how financial management is associated with accounting? The relationship between financial management and accounting are closely related to the extent that accounting is an important input in financial decision making. The outcome of accounting is the financial statement such as balance sheet, income statement and a statement of change in financial position. The information contained in this statement and reports helps the financial manager in assessing the past performance and future direction of the organization. For its day-to-day decision making process, financial management also draws on other related disciplines such as marketing, production, quantitative methods, efforts from accounting. For instance, financial managers should consider the impact of a new product development and promotion plans made in marketing area since their plans will require capital outlays and have an impact on the projected cash flows and have an impact on the projected cash flow. Next, requirement and promotion of employees is clearly a responsibility of the HR functions but it requires payment of wages and salaries and does involve finance. So, recruitment and promotion is also associated with the financial management. Likewise, senses in the production process may require capital expenditure which the financial manager must evaluate and finance. So, the production process is also associated with financial management. Finally, the tools and techniques of analysis developed in the quantitative methods discipline are helpful in analyzing complex financial management problem. So, we need the help of those quantitative methods in financial management. So, financial management in this way related with many interrelated areas. Now, the objective of financial management. Efficient financial management requires the existence of some objectives or goals. Basically, financial management has two objectives. These are profit maximization and wealth maximization also called value maximization. So, what is profit maximization? It has traditionally been argued that the primary objectives of a company is to earn profit. Hence, the objective of financial management is also to maximize the profit. This implies that the finance manager has to make his decision in a manner so that the profit of the concern are maximized. Its alternative therefore is to be seen as to whether or not it gives maximum profit to the firm. However, profit maximization cannot be the sole objective of a company. It is at best a limited objective. If profit is given under importance, a number of problems can arise. Some of these have been discussed below. Number one, the term profit is vague. It doesn't clarify what exactly it means. It conveys a different meaning to different people. For example, profit may be in short term or long term. It may be total profit or rate of profit. It may be gross profit or net profit. So, it is vague. So secondly, profit maximization has to be attempted with a realization of risk involved. There is a direct relationship between the risk and profit. Higher the risk, higher is the possibility of profit. If profit maximization is the only goal, then risk factor is altogether ignored. So, in the sake of profit, the business may be in a very high risk. So, next is profit maximization as an objective doesn't take into account the time pattern of the returns. For example, if the returns of proposal A begin to flow 10 years later, proposal B may be preferred, which may have lower overall profit, but the return flow is more early and quick than proposal B. The next is, profit maximization as an objective is very narrow. It fails to take into account the social considerations as also the obligations to various interests of workers, consumers, society as well as ethical trade practices. If these factors are ignored, a company cannot survive for long. So, profit maximization at the cost of social and moral obligations is a short sighted policy. So, the next objective of financial management is wealth maximization. Wealth maximization on the other hand is considered as an appropriate objective of an enterprise. When the firm maximized the stockholders' wealth, when the firm maximized the stockholders' wealth, the individual stockholders can use this wealth to maximize his individual utility. So, stockholders' wealth we mean number of shares owned by the shareholders into current stock price per share. Higher the stock price per share, the greater will be the stockholders' wealth. Maximizing the shareholders' economic welfare is equivalent to maximizing the utility of their consumption over time. The wealth created by a company through its actions is reflected in the market value of the company's share. Therefore, this principle implies that the fundamental objective of a firm is to maximize the market value of its shares. The market price which represents the value of a company's share reflects shareholders' perception about the quality of the company's financial decisions. Thus, the market price of shares serves as the company's performance indicator. So, we can say that wealth maximization objective is a better objective than profit maximization. Now finally, we are going to discuss the functions of a finance manager. What role a finance manager plays in an organization? So, since the financial management is a very important task of an organization, definitely the role of finance manager is very crucial. The financial analysis and planning part is the responsibility of the finance manager. So, determining the proper amount of funds to be employed in the firm that is designating the size of the firm and its rate of growth are to be determined by the finance manager. The next is investment decision. The efficient allocation of funds to a specific asset is need to be done or it is need to be taken by the finance manager which is a very important decision. Next, financing and capital structure decision raising funds on favorable terms as possible that is determining the composition of liabilities is to be determined by the finance manager. So, it is the functions of the finance manager to decide the capital structure of the organization. Next, management of financial resources. So, all financial resources management the decision of managing the financial resources is in the hand of financial manager such as walking capital etc. So, he need to decide how to manage the financial resources of the organization. And finally, the risk management that is how to protect the asset of the organization that decision is need to be taken by the finance manager. So, finance manager plays very crucial role in any organization. Thank you.