Explain The Objectives Of Financial Management 5k526

1. Explain the objectives of Financial Management.

The objectives or goals or financial management are- (a) Profit maximization, (b) Return maximization, and (c) Wealth maximization. We shall explain these three goals of financial management as under: (1) Goal of Profit maximization. Maximization of profits is generally regarded as the main objective of a business enterprise. Each company collects its finance by way of issue of shares to the public. Investors in shares purchase these shares in the hope of getting medium profits from the company as dividend It is possible only when the company's goal is to earn maximum profits out of its available resources. If company fails to distribute higher dividend, the people will not be keen to invest their money in such firm and persons who have already invested will like to sell their stocks. On the other hand, higher profits are the barometer of its efficiency on all fronts, i.e., production, sales an management. A few replace the goal of 'maximization of profits' to 'fair profits'. 'Fair Profits' means general rate of profit earned by similar organisation in a particular area. (2) Goal of Return Maximization. The second goal of financial management is to safeguard the economic interest of the persons who are directly or indirectly connected with the company, i.e.,shareholders, creditors and employees. The all such interested parties must get the maximum return for their contributions. But this is possible only when the company earns higher profits or sufficient profits to discharge its obligations to them. Therefore, the goal of maximization of returns are inter-related. 3. Goal of Wealth Maximization. Frequently, Maximization of profits is regarded a the proper objective of the firm but it is not as inclusive a goal as that of maximising it value to its shareholders. Value is represented by the market price of the ordinary share of the company over the long run which is certainly a reflection of company's investment and financing decisions. The log run means a considerably long period in order to work out a normalized market price. The management ca make decision to maximize the value of its shares on the basis of day-today fluctuations in the market price in order t raise the market price of shares over the short run at the expense of the long fun by temporarily diverting some of its funds to some other s or by cutting some of its expenditure to the minimum at the cost of future profits. This does not reflect the true wort of the share because it will result in the fall of the share price in the market in the long run. It is, therefore, the goal of the financial management to ensure its shareholders that the value of their shares will be maximized in the long-run. In fact, the performances of the company can well be evaluated by the value of its share.

2. What do you understand by financial decisions? Discuss the major financial decisions. Financial decisions refer to decisions concerning financial matters of a business firm. We can classify these decisions into three major groups: 1. Investing decisions. 2. Financing decisions. 3. Dividend decisions.

Investment Decisions : These involve the allocation of resources among various type of assets. what portion of the firm's fund should be invested in various current assets such as cash. marketable securities and receivable and what portion in fixed assets, such as inventories and plant and equipment. The assets mix affects the amount of income the firm can earn. For example, a

manufacturer is in business to earn income with fixed assets such as machinery and not with current assets. However, placing too high a percentage of its assets in new building or new machinery may leave the firm short of cash to meet an unexpected need or exploit sudden opportunity. The firm’s financial manager must invest in fixed assets. but not too much. Besides determining the assets mix financial manager must also decide what type of fixed and current assets to acquire. All this covers area pertaining to capital budgeting and working capital management. 2) Financing Decision : It is the next step in financial management for executing the investment decisions once taken a look at the balance - sheet of a company indicates that it obtains finance from shareholders ordinary, preference, debenture holders, or long - term loans from the institutions, bank and other sources. There are variations in the provisions contained in preference shares, debentures, loans papers etc. Thus financing decisions i.e. The financing mix of capital structure. Efforts are made to obtain an optimal financing mix for a particular company. This necessitates study of capital structure as also the short and intermediate term financing plans of the company. In more advanced companies financing decision today , has become fully integrated with top - management policy formulation via capital budgeting, long - range planning , evalution of alternate uses of funds and establishment of measurable standards of performance in financial . 3) Dividend Decisions : The third major decision of financial management is the decision relating to the dividend policy. The dividend decision should be analysed in relation to the financing decision of a firm . Two alternatives are available in dealing with the profits of a firm; they can be retained in the business. Which courses should be followed - dividend or retention ? One significant factor is that the dividend pay out ratio i.e. what proportion of net profits should be paid out to the shareholders. The decision will depend upon the preference of the shareholders and investment opportunities available within the firm. The second major aspect of the dividend decision is the factors determining dividend policy of a firm in practice.

3. Critically analyze the functions of Financial Manager in a large scale industrial establishment. The financial manager performs the following functions: 1. Finance manager manages the funds in such a way to ensure their optimum utilisation with the available resources. 2. He forecasts the requirement of funds for both short term and long term purposes.

3. He also actively takes part in budgeting, risk management and financial reporting. 4. He makes financial reports, have and eye on profits and losses, etc. 5. He decides how much of the firm’s profits should be invested, how much should be given to the shareholders in the form of dividends and how much should be kept as reserves. 6. He also monitors the cash flows, prepares s and works on financial models. 7. He decides what type of capital structure is required be the company and decides whether to raise funds from loans/borrowing or from share capital. 8. He also ensures that adequate funds at cheap rates are supplied to various parts of the organization at the right time. 9. He constantly reviews the financial performance of various units of the organization. 10. He also ensures that no excess cash is lying idle.

4. What is capital budgeting? Examine its need and importance. Capital budgeting is the process of making investment decisions in capital expenditure. A capital expenditure may be defined as an expenditure the benefits of which are expected to be received over period of time exceeding one year. Examples would include the development of a major new product, a plant site location, or an equipment replacement decision.

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Capital budgeting decision must be approached with great care because of the following reasons: Long time period: consequences of capital expenditure extends into the future and will have to be endured for a longer period whether the decision is good or bad. Substantial expenditure: it involves large sums of money and necessitates a careful planning and evaluation. Irreversibility: the decisions are quite often irreversible, because there is little or no second hand market for may types of capital goods. Over and under capacity: an erroneous forecast of asset requirements can result in serious consequences. First the equipment must be modern and secondly it has to be of adequate capacity. Long term effect on profitability: These decisions have a long-term and significance on the profitability. An unwise decision may prove disastrous and fatal to the very existence of the concern.

5 What are the various types of capital investment decisions known to you?

One of the classifications is as follows,   

Expansion of existing business Expansion of new business Replacement and moderation

Expansion and Diversification A company may add capacity to its existing product lines to expand existing operation. For example, the Company Y may increase its plant capacity to manufacture more “X”. It is an example of related diversification. A firm may expand its activities in a new business. Expansion of a new business requires investment in new products and a new kind of production activity within the firm. If a packing manufacturing company invest in a new plant and machinery to produce ball bearings, which the firm has not manufacture before, this represents expansion of new business or unrelated diversification. Sometimes a company acquires existing firms to expand its business. In either case, the firm makes investment in the expectation of additional revenue. Investment in existing or new products may also be called as revenue expansion investment. Replacement and Modernization The main objective of modernization and replacement is to improve operating efficiency and reduce costs. Cost savings will reflect in the increased profits, but the firm’s revenue may remain unchanged. Assets become outdated and obsolete with technological changes. The firm must decide to replace those assets with new assets that operate more economically. If a Garment company changes from semi automatic washing equipment to fully automatic washing equipment, it is an example of modernization and replacement. Replacement decisions help to introduce more efficient and economical assets and therefore, are also called cost reduction investments. However, replacement decisions that involve substantial modernization and technological improvements expand revenues as well as reduce costs.