Savithri.D.D. M.

com, K-set

Introduction:
Finance is the lifeblood and nerve centre of a business, just as circulation of blood is essential in
the human body for maintaining life; finance is very essential for smooth running of the
business. The scope of finance is broad and dynamic, finance influences everything that an
organization does- from hiring capable workforce to designing marketing campaigns in order
increase sales or launching new advertising campaigns.

A company needs enough funding to execute their plans and support their operations. Thus
fiancé play a significant role in all types of businesses whether it is big, medium, or small.
Without fiancé one cannot start up business or survive. In order to setup a business enterprise
fiancé is needed which can be obtained from various sources such as bank loan, venture capital,
own funds, investors fund etc. Once the funds are obtained it used for procuring assists, further
finance is required to meet day to day requirements in terms of managing various costs
incurred in routine operations such as payment of rent, salaries, buying inventory and other
obligations, finance is also needed for expansion of business. Therefore fiancé is an essential
aspect of an enterprise for running and maintaining the business and it is the effective
management of finance that decides the victory or failure of a business.

Meaning of Finance: Finance is the science and art of managing money and other assets.

 Finance classified into following ways:

Public Finance Personal finance Corporate Finance

1. Public Finance: Public finance deals with role of the government in managing financial
requirements of the economy. This includes procuring funds from various resources of
the economy in an appropriate manner; some of the common sources of funds of
government include tax and non-tax revenues.
After generation of funds from various sources these funds are used to meet various
expenditures such as national defense, public welfare and infrastructure development.
Thus funds generation, funds allocation and expenditure management are the essential
components of a public finance
2. Personal Finance: Personal finance deals with monetary decisions and activities of an
individual or a family unit that includes routine income and expenses planning,
retirement is planning, tax planning investment and wealth accumulation goals.
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3. Corporate Finance: Corporate finance also called as Financial Management or Business

finance and its focus is concerned with planning, raising, investing and monitoring of
fiancé in order to achieve the financial objectives of the company

Finance Function: finance function refers to action performed by a finance department that
involves acquiring and utilizing funds of a business.

Relationship of finance with other functional areas of management:

Marketing R and D

The finance
function

Production HRM

1. Finance and Production: Production deals with conversion raw materials into the
finished goods or products by incorporating the factors of production namely, men,
money, machines, materials, methods and markets to satisfy the wants of the
customers.
In order to ensure effective working of production department funds are needed to
mobilize raw material, transportation, meet operational expenses of the entire plant
and funds are also required for expansion of production capacity. Thus the relation
between finance and production department is integral
2. Finance and Marketing: The key areas of marketing involve product development,
pricing, place and promotion. For developing the product, promotion activities and
distribution activities of marketing department need a fund which is supplied by the
finance department.
3. Finance and Human Resource Management: Human resources department is in charge
of Recruiting, Compensation. Performance appraisal, Man power planning and
Employee relations in an organization. Financial decisions are also very necessary in
human resource area in order to fulfill the objectives of HRM whether it is investment in
training of employees or incentive schemes and retirement schemes.
4. Finance and R and D: Research and Development department is in charge of creating
new products and innovation which cry important to stay ahead in competition.
Financing of research and development and innovative activities are essential to survive
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in business I n a freely competitive market, investing in R and D involves huge funds and
long term implications for the firms in terms of its profitability and risk exposure
 Financial Management: Financial management is a combination of two words, ‘Finance
and “Management”. Finance can be defined as the science and art of managing money;
on the other hand management is a process of using organizational resources to achieve
organizational objectives through planning, organizing and staffing, leading and
controlling. Therefore financial management is concerned with the management of all
activities associated with the cash flow of an organization.

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.

Definition:

According to Raymond Chambers “financial management comprises the forecasting,

planning, organizing, directing, coordinating and controlling of all activities relating to
acquisition and application of the financial resources of an undertaking in keeping with its
financial objective”.

 Features of Financial Management:

1. Prospective – future oriented: the finance department takes into account both short-term
and long –term goals of the business enterprise to plan for the future of the organization in
a realistic way.
2. Rational –analytical thinking: financial decision making involves analyzing the financial
problems and analyze the effects of alternative courses of action, so use the analytical
techniques of financial analysis in order to address various financial problems and
challenges.
3. Perpetual – Continuous process: Financial management is a continuous process by which
financial mangers creates, operates and directs purpose of the organization through
systematic manner.
4. Pedestal of decisions- Basis of managerial decisions: The financial management is the base
of managerial decisions because every decision made in a business has financial implication.
5. Directive- coordination between process: Almost all business activities in an organization
directly or indirectly involve the acquisition and use of funds
6. Centralized- Minimum autonomy and restrictive: The finance function remains
centralized as it influences the operations of other crucial functional areas of the firm such as
production, marketing and human resources hence decisions in regard to financial matters are
centralized.
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 Scope and Functional Areas of Financial Management: The term “Scope of

financial management” implies to extent of the area or subject matter that financial
management deals with or to which it is relevant.
A. Anticipation of funds: Estimation of financial needs of the company:
I. Estimating the financial requirement: Prior to starting a new business or expanding an
existing business which requires financing. The finance department identifies capital
requirements needed accurately for meeting long term and short term needs of the business.
II. Determining the capital structure: The capital structure can be a combination of debt,
common equity and preferred equity. The capital structure decided should offer a balance
between the ideal debts-to –equity range and minimize the firm’s cost of capital.

B. Acquisition of funds: gathering funds for the company from different sources:
i. Identifying sources of funds: There are a number of ways of raising finance for a
business; however the type of fiancé chosen depends on the nature of the business.
Internal External
Retained earnings Financial institutions
Owner’s investment Shares
Sale of fixed assets Venture capital
Personal sources Bonds and debentures
ii. Selecting a source of finance: The selecting a specific source of finance should be based
on amount of risk involved and the cost of fiancé. Any source that offers cheapest form of
money with minimum amount of risk can be regarded as an ideal source of fiancé.

C. Allocation of Funds: Use of funds to buy fixed and current assets:

i. Assessing risk and return: After procuring funds from various sources the fiancé
department must identify various investment proposals based on the needs and
requirements of the business.
ii. Investment of funds: After assessment of risk and return the next step is investing
funds. Investment is application of funds acquired from various sources

D. Appropriation of funds: Dividing and distribution of profits: The total business profits, a
portion is retained as reserves for reinvestment in the business and rest in distributed to
shareholders as dividend. Thus management involves deciding as to what portion of the profits
should be distributed by way of dividend and what portion should be retained in the business.

E. Assessment: Evaluation of financial plans and polices: Assessment of financial plans

and policies helps the business to ensure that it is meeting its goals.
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Areas of decision making in financial management: The key aspects of financial

decision-making relate to financing, investment, dividends and working capital management.
Decision making helps to utilize the available resources for achieving the objectives of the
organization.
1. Financing decision: The financing decision relating to choice between the use of internal
versus external funds, the use of debt versus equity capital and the use of long-term versus
short-term debt depends on type of source, period of financing, cost of financing and the
returns thereby.
2. Investment Decision: This decision in financial management is concerned with allocation of
funds raised from various sources into acquisition assets or investment in a project,. The
scope of investment decision includes allocation of funds towards following areas:
 Expansion of business
 Diversification of business
 Productivity improvement
 Research and development
 Acquisition of assets
 Mergers and acquisitions
3. Dividend Decision: The payment of dividend is decision involves deciding whether profits
earned by the business should be retained rather than distributed to shareholders in the
form of dividends. If dividends are too high, the business may be starved of funding to
reinvest in growing revenues and profits further. keeping this in mind an optimum dividend
payout ratio is calculated by the finance manger that would help the firm to maximize its
market value.
4. Working capital decisions: working capital signifies amount of funds used in its day-to-day
trading operations. Working capital deals with currents assets and current liabilities one of
the key objectives of working capital management is to ensure liquidity position of a firm
to avoid insolvency.
The finance manager-role, functions and duties
Finance manager is one of the important role players in the field of finance function as his
actions directly affect the profitability, growth and goodwill of the firm.
1. Forecasting and planning: it is the basic function of financial manager. It deals with
drafting out a future course of action and deciding in advance the most appropriate
course of actions for achievement of pre-determined goals. Therefore it is the duty of
the finance manager to ascertain and arrange adequate funds required by the
organization.
2. Executing financing and investment decisions: One of the key responsibility of a
finance manager is determining capital requirements of the company and also to
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decide capital structure the company needs and further to identify the sources to fulfil
capital requirements.
3. Coordination and control: the financial manager must interact with other departments
to ensure that the firm is operated as efficiently as possible
4. Management of financial resources: The financial manager needs to ensure the supply
of adequate, timely and cheap fund to the various parts of the organization.
5. Maximize profits and minimize cost: To maximize profits financial manager should
initiates steps that results in increased revenues more than its costs.
 Financial planning: planning generally means deciding in advance what to do and how
to do. It is one of the managerial functions. Financial planning is the process of
ascertaining an organization’s financial needs for the future and identifying how to
achieve them
 Classification of financial plans:
1. Long term financial plans: Long term financial plans lay out a company’s planned
financial actions and the anticipated impact of those actions above 5 years.
2. Medium-term financial plans: Medium term financial plan is prepared for a period of
one to five years and focuses on provided fixed working capital for operational activities.
3. Short-term financial plans: short-term financial plan is prepared for maximum one year.
This plan emphasis on the working capital needs of the company and its efficient usage.

Steps in financial planning or financial planning process:

Assessing
Developing Framing Ensuring Review of
business
financial goal financial policies adaptability financial plan
environment
and procedures and flexibility
1. Analyzing business environment: Analyzing business environment involves
environmental scanning which includes procurement and sue of information about
internal and external environment of the organization like competitor’s analysis,
government policies and regulations. Availability of finance and investment
opportunities etc… the knowledge of which would assist financial managers in
planning their strategies.
2. Developing financial goals: Once the assessment of business environment is
complete, the financial planning typically kicks off with a company establishing its
goals. These goals may be numeric – such as profit, return on investment, achieving
greater market share and wealth maximization.
3. Framing financial policies and procedures: Based on these financial objectives a
business has to formulate policies and procedures to achieve these objectives.
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Policies and procedures are a set of principles rules and guidelines formulated by an
organization to guide decisions and achieve long-term goals.
4. Ensuring Adaptability and flexibility:
 Principles and characteristics of sound financial planning :
1. Simplicity: The financial plan should be easily understandable to all the stake holders
and it should be free from complications. Ambiguities and suspicious statements.
2. Objectivity: Financial plan should be formulated in such a way that it should comply
with the pre-determined goals of the management.
3. Foresight: Organization must prepare a financial plan considering not the current
requirements of business but also the future needs.
4. Flexibility: A financial plan should have the property of being easily changed or
modified, adjustable when there is a change in the organization, and it should not be
rigid.
5. Liquidity: Liquidity is how easily an asset can be converted to cash, financial plan should
ensure availability of cash in times of uncertainty and for other unforeseen payments
that do not usually occur in a normal business operation.
6. Economy: The cost of borrowing funds should always be kept in mind while formulating
the financial plan. Cost should be the minimum possible,
7. Provision for contingencies: Financial plan should be formulated by providing
provisions of funds for meeting the contingencies likely to arise in future.
8. Optimum use: Financial plan should confirm that funds available in the organization
should be critical reviewed from time to time and employed properly and profitably.
9. Stake holder’s perspective: Financial plan should comply to basic ethics standards and
should not harm the interest of stake holders and society at large.

Factors to be taken into consideration while formulating financial plans: It is important for
finance managers to understand aspects of the business environment because it can affect the
firm and its operations. Prior to drafting financial plans. Understanding of business environment
is essential to discover the opportunities and threats that are evolving and that need to be
addressed by the enterprise.

1. Nature of business: The nature of an organization’s business directly influences its fund
requirements for example manufacturing industries require large investments and
trading concerns need relatively lesser investment.
2. Risk appetite: Risk appetite refers to the level of risk that an organization is willing to
undertake in its normal course of business. When we deciding risk appetite for each
category of risk in its financial plan. The board of directors should consider the risk
capacity of the company.
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3. Position of the firm: Position of the firm implies to market share, goodwill. Reputation
of the management and financial performance of the business enterprise. If a company
is a good position it becomes easy for it raise funds from various sources
4. Study of financial markets: financial markets offers variety of financing to meet the
requirements of the organization. Therefore study of financial market is necessary to
strike out a balance between cost and risk involved in financing decisions and its impact
on profitability.
5. Economic conditions: economic condition means the state of the economy that is
determined by macroeconomic and micro economic factors, including monetary and
fiscal policy. These micro and macro economic factors influences working of a business
enterprise therefore a financial plan should be designed keeping in mind these factors.
6. Future plans: Most of the organization have plan of expansion capturing wider market
share and also going international. Hence the assumption of future plans which financial
planning is very necessary for the success of all future Endeavour’s of the organization
7. Government policies and control: Government creates the rules and framework in
which business operate. Therefore while preparing financial plans the financial
managers should take into consideration these policies

Need and importance of financial planning: financial plans can be a critical tool for
any company. They help ling a company’s daily operations to its mission and both its short
and long-term goals.

1. Increase financial efficiency: financial plans help helps to reduce evils of shortage and
surplus funds. It aims to give highest returns at the lowest possible cost thus increases
the overall efficiency.
2. Reduce the finance related risks: The proper assessment and balance of the various
risk-return trades-offs is part of creating a sound financial plan.
3. Coordination with other departments: Proper financial planning ensures that different
business functions to work together in order to achieve goals efficiently.
4. Gives right decisions: Financial analysis determines the efficiency and performance of
firm’s management, as reflected in the financial planning. A financial plan gives business
a direction and helps preparing for the challenges in the future.
5. Helps in achieving objectives of financial management: financial planning provides
managers with the information and knowledge they need to support operational
decisions and to understand the financial implications of decisions before they are
made.
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6. Keeps good control of financial activities: The financial planning ensure that the
financial resources of the organization are being correctly and effectively used and that
activities are correctly and accurately reported.

Steps in financial planning or financial planning process: A business needs a clear, delineated
guide to get to its destination. The financial planning process is a logical process and generally
involves six steps:

1. Analyzing business environment: Analyzing business environment involves

environmental scanning such includes procurement and use of information about
internal and external environment of the organization like competitor’s analysis,
government policies and regulations. Availability of finance and investment
opportunities etc

Limitation of financial planning: financial planning primarily involves planning and

organizing the future business activities of a firm. The increased uncertainty in business
environment means that planning for the future has become more difficult. Therefore
financial planning suffers from the following limitations.

1. Future is uncertain: Financial planning requires peeping in future, analyzing it and

predicting it. But future is always uncertain, so the reliability of financial planning is also
uncertain.
2. Use of information: Timely, reliable, comparable and available information of business
plan a key role in financial planning. However incorrect or inadequate information for
management can results in problems, waste of time and money that leading to
complete failure of financial plans formulated based on this information
3. Difficult to change: Most of the capital expenditure is irreversible in nature, financial
plan cannot be changed.
4. Problem in co-ordination: Financial planning is successful only when there is proper
coordination among all other functional areas of business. However in practice
5. Changing business environment: The business environment is dynamic in nature, as it
keeps on changing an these changes are unpredictable