Functions of Financial Management

Functions of Financial Management
Finance functions are carried on to achieve the objective of the firm.
There are mainly two approaches to express the "Financial Function".
The first approach relates it to the collection of funds. The second
approach relates finance functions to the procurements of funds and
their effective utilization. The first ignores the uses of funds it was. It
was major finance function at the early stage of the development of
finance. The second is comprehensive and universally accepted; we
are following the Second One.
Finance Function
Executive Finance Function
Routine Finance Function
1) Supervision of cash receipts and
1) Investment decision
disbursements
2) Safeguarding of cash balances
2) Financial Decision
3) Custody and safeguarding of
3) Dividend Decision
valuable documents
Like securities and policies
4) taking care of mechanical details
4) Working Capital Decision
of financing
5) Record keeping of the financial
performance of the
Firm.
6) Reporting the top management
7) supervision of fixed assets and
current assets

Executive finance functions are those functions that require managerial
skills in their planning, execution and control. Since these functions
require greater managerial ability, they are also known as managerial
functions.
The executive finance functions are explained here:
1.

2.

3.

4.

5.

Investment Decision
It refers to acceptance/ rejection of long-term investment proposal.
Proposal related to acquisition, modification and replacement of assets
are long-term investment proposal. Long-term refers to the time horizon
of more than one year. The long term assets like plants, machines,
equipments, land, buildings etc…………
Financing Decision
Is concerned with the collection of the fund. The financial manager
needs to decide about the appropriate amount and sources of the fund.
………………
Dividend Decision
The net income after paying preference dividend belongs to the equity
shareholders. However, there is no legal obligation to pay dividend to
the equity shareholders. The dividend decision is the allocation of net
profit after tax and preference dividend to equity shareholders.
……………….
Working Capital Decision
Working capital decision refers to the commitment of funds to current
such as inventory, bills receivable, cash balance, prepaid, etc. this
decision is known as current assets management also……………..
Routine Finance Decision
It is also the incidental finance function, which is performed to execute
the executive finance effectively. Routine finance function does not

require specialized skills of finance. They are of clerical nature. So they
are called clerical finance function too. These function cover
procedures and system and involve a lot of paper work and time, some
of them are below:
1.
2.
3.
4.
5.
6.
7.

Supervision for cash receipts and disbursements
Safeguarding of cash balances
Custody and safeguarding of valuable documents like securities
and insurance policies
Taking care of mechanical details of financing
Record keeping of the financial performance of the firm
Reporting to the top management
Superviion of fixed assets and current assets.

Profit Maximization Objective
In the conventional theory of the firm, the principle objective of a
business fir is to maximize profits. Under the assumption of given
tastes and technology, price and output of a given product under
perfect competition are determined with the sole objective of
maximization of profit.
Maximization of profit simply refers to the maximization of rupees
income of the firm. Under profit maximization objective, business firm
attempt to adopt those investments projects, which yield profits, and
drop all other unprofitable activities.
In maximizing profit, input-output relationship is crucial, either input is
minimized to achieve a given amount of output or the output is
maximized with a given amount of input. Thus, this objective of the firm
enhances productivity and improves the efficiency of the firm.
The conventional theory of the firm defends profit maximization
objective on the following grounds;
a. Only those firms survive in the long-run in a competitive market,
which are able to make a reasonable amount of profit. Once they are

able to make profit, they will always try to make it large as possible. All
other objectives are subjected to this primary objective.
b.

Profit maximization assumption is a time-honored objective of a firm
and evidence against this objective is not conclusive or unambiguous

c.

Profit maximization objective has been found extremely accurate in
predicting certain aspect of firm's behavior and trends as such the
behavior of most firms are directed with the objective of profit
maximization.

d.

Though not perfect, profit is the most efficient and reliable measure
of the efficiency of a firm

e.

Under the condition of competitive market, profit can be used as a
performance evaluation criterion, and profit maximization leads to
efficient allocation of resources
Wealth Maximization Objective
Wealth refers to the market price of stock. Wealth maximization
(shareholders wealth maximization) is almost universally accepted
goal/ objective of a firm. According to this goal, the manager should
take decision that maximizes the shareholders wealth. In other words, it
is to make the shareholders as richer as possible. Shareholders wealth
is maximized when a decision generates net present value. The net
present value is the difference between present value of the benefits of
a project and present value of its costs. A decision that has a positive
net present value creates wealth for shareholders and a decision that
has a negative net present value destroys wealth of shareholders.
Therefore only those projects which have positive net present value
should be accepted.
Wealth maximization: A superior Decision Criterion

a.
b.
c.
d.
e.

Efficient allocation of resources
Separation between ownership and management
Residual owners
Emphasis on cash flow
Recognizes time value of money
Financial Market
Financial markets consist of financial markets, financial institutions,
financial instruments, and financial services. Financial markets are the
place where transactions of financial instruments and services take
place. Financial markets exist in order to bring buyer and seller of
securities and financial services together. They are the mechanism that
exists in order to facilitate the exchange of financial assets, thus adding
to the liquidity of financial assets. Financial markets facilitate the flow of
saving generated from one sector of the economy to another, where
there is the demand for funds. In financial markets fund suppliers and
funds borrowers are brought together with the help of financial
intermediaries directly. These intermediaries channel nation's savings
into most productive uses.

Division of Financial Markets
1. Primary Market: - When securities are issued for the first time, they
are traded in the primary market. All proceeds from the issue in this
market go to issuing corporation. It is the market for first issue of
securities by corporation, in which the corporation raise new capital.
However in issuing the securities, the issuing corporation could take the
service of investment bankers and securities dealers, which could
cover wide geographical area for distribution of securities by forming
underwriting syndicat.
2. Secondary Market: - Secondary market is the market for existing
securities. It deals with trading of outstanding securities. Once the
securities are issued in primary markets, they become a part of

secondary market. A secondary market is the market for already
existing securities, where trading between investors to investors take
place. The original issuer has no role in secondary markets, and the
proceeds from securities transaction do not go to them.
3. Money Market: - money market deals with trading of securities with
less than one year of life spam, it is the market for borrowing and
lending for relatively short period of time, usually less than one year.
Government, corporations and individuals requiring short-term loan are
major participants of money market. Government issues Treasury bills
to meet its need of short-term funds. Corporation could issue
commercial papers or take loan on short-term basis from banks to
satisfy their short-term needs of funds. Other money market
instruments include bankers' acceptance, certificate of deposits,
promissory notes, bills of exchange and any other with less than one
year life.
4. Capital Market:-Capital market involves the trading of financial assets
having a life spam greater than one year .all long terms securities
issued by corporation and government such as common stock,
corporate bonds, government bonds are the instruments of capital
market. These capital market instruments are also traded in both
primary as well as secondary market. Capital market instruments are
not as liquid as money market instruments because of longer maturity.
However the existence of secondary market adds to the liquidity of
these instruments to a greater extent. When there is a change in
market interest rates, value of these instruments fluctuate widely tan
money market instruments because of longer maturity.
Financial Institutions
Organizations that issue financial claims against themselves for cash
and use the proceeds from this assurance to purchase primarily the
financial assets of others. They help in generating the saving from

people, business and government which is supplied to the users of
funds.
They are specialized firms that facilitate the transfer of funds from
savers to borrowers. They offer accounts to the savers and in turn the
money deposited are used to buy the financial assets issued by other.