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Unit 1: Introduction to Financial Management

to maximize shareholder’s wealth. Financial leverage or trading on equity is an important Notes
method by which return to shareholders can be increased.

2. For evaluating capital expenditure (investment) decisions, a finance manager uses various
methods such as average rate of return, payback, internal rate of return, net present value
and profitability index.
3. In the area of working capital management, there are various methods for efficient
utilization of current resources at the disposal of the firm, thus increasing profitability.
The centralized method of cash management is considered a better method of managing
liquid resources of the firm.

4. In the area of dividend decision, a firm is faced with the problem of declaring dividend or
postponing dividend declaration, a problem of internal financing. There are tools to
tackle such situation.
5. For the evaluation of a firm’s performance, there are different methods.

Example: Ratio analysis is a popular technique to evaluate different aspects of a firm.
6. The main concern of the finance manager is to provide adequate funds from the best
possible source, at the right time and the minimum cost and to ensure that the funds so
acquired are put to best possible use through various methods/techniques are used to
determine that funds have been procured from the best possible available services and the
funds have been used in the best possible way. Funds flow and cash flow statements and
projected financial statements help a lot in this regard.

Task Which of the following statements do you agree with?

1. Financial management is essential only in private sector enterprises.
2. Only capitalists have to bother about money. The bureaucrat is to administer and
not to manage funds.

3. The public administrators in our country must be given a basic understanding of
essentials of finance.
4. A state-owned transport company must immediately deposit in the bank all its
takings.
5. “Financial Management is counting pennies. We do not believe in such miserly
attitude”.

1.4.2 Forms of Business Organization

The three most common forms of business organization are sole proprietorship, partnership
and the company. Other specialized forms of business organizations also exist. Sole
proprietorship is the most in terms of total receipts and in net profits the corporate form of
business dominates.

Sole Proprietorship

A sole proprietorship is a business owned by one person who runs for his own profit. Majority
of the business firms are sole proprietorships. The typical sole proprietorship is a small business

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