Overview
This lecture covers the meaning, nature, and scope of financial management; its objectives; core aspects; the organizational structure of finance; duties of finance executives; and main fields within finance.
Meaning, Nature, and Scope of Financial Management
- Financial management manages a firm's financial resources regarding acquisition and application.
- It involves procuring, financing, and managing business assets to achieve organizational goals.
- Fund management focuses on raising and controlling funds to meet financial goals.
- Financial management is an internal function, integrated with other business departments.
Scope and Role of Financial Management
- Involves ratio analysis, equities, debts, portfolio management, dividend distribution, capital raising, hedging, and currency fluctuations.
- Determines capital requirements and structure (short- and long-term).
- Decides allocation of funds into profitable, safe avenues.
- Manages cash efficiently for liquidity and profitability.
- Ensures overall financial control for safety, profitability, and fund conservation.
Objectives of Financial Management
- Profit maximization (achieved when marginal cost equals marginal revenue).
- Ensuring company survival through sound financial decisions.
- Maintaining proper cash flow for daily operations.
- Minimizing capital cost for higher profitability.
- Maximizing shareholders' wealth (number of shares × market price per share).
Aspects of Financial Management
- Procurement of Funds: Raising finance from various sources like equity, bonds, loans, etc.
- Utilization of Funds: Deploying funds to maximize returns while maintaining solvency.
- Balances risk and return, both short-term and long-term.
Organizational Structure of Finance
- No fixed structure; varies by organization size and nature.
- In small firms, owners manage finances; in large firms, specialized finance executives handle these functions.
- Hierarchy: Board of Directors → CEO → Vice President Finance/CFO → Controller & Treasurer.
Roles and Responsibilities in Finance
- Board of Directors: Sets policies, appoints CEO, approves budgets, and oversees performance.
- CEO: Manages organization, implements strategy, maximizes value, and reports to the board.
- CFO/Vice President Finance: Oversees financial planning, strategy, accounting, investments, and audits; reports to CEO and board.
- Controller: Prepares financial statements, manages accounting, budget, and audit functions.
- Treasurer: Manages investments, capital raising, mergers/acquisitions, and financial planning.
- Managers (Credit, Inventory, Capital Budgeting): Handle credit policies, inventory control, and evaluation of investment projects.
- Accountants (Cost, Financial, Tax): Handle cost data, prepare financial statements, and ensure tax compliance.
Centralization and Importance of Finance Function
- Finance is typically centralized due to its crucial impact on organizational solvency and success.
- Financial decisions are not outsourced because of their importance.
Duties of Finance Executives
- Recurring Duties: Regular activities like fund raising, allocation, income distribution, fund control, and financial evaluation.
- Non-Recurring Duties: Infrequent tasks such as financial planning at startup, crisis management, and company valuation during mergers.
Fields of Finance
- Business Finance: Covers all profit-oriented financial activities in trade and industry.
- Corporate Finance: Focuses on financial operations of corporate enterprises.
- International Finance: Manages funds flow across borders, dealing with currency exchange and regulations.
- Public Finance: Relates to government financial matters, mainly tax collection and social/economic objectives.
- Private Finance: Involves financial matters of non-government entities.
Key Terms & Definitions
- Financial Management — Managing acquisition and application of a firm's funds.
- Solvency — The ability to meet long-term financial obligations.
- Controller — Executive in charge of accounting, reporting, and audit functions.
- Treasurer — Executive responsible for investments, capital raising, and financial strategy.
- Capital Budgeting — The process of evaluating and selecting long-term investments.
Action Items / Next Steps
- Review organizational charts of finance departments for different company sizes.
- Prepare examples of recurring and non-recurring duties of finance executives for discussion.
- Study distinctions among fields of finance for further exploration.