Page 11 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes Self Assessment

Fill in the blanks:
5. There is a ………………. relationship between risk and profit.

6. ………………. is also known as Value maximization or Net Present Worth maximization.
7. A firm with a stakeholder focus, consciously avoids actions that would prove ……………….
to stakeholders.

8. Ethics programme reduces potential litigation and ………………. costs and gain the loyalty,
commitment and respect of the firms stakeholders.

1.3 Finance Functions

Financial Management is indeed, the key to successful business operations. Without proper
administration and effective utilization of finance, no business enterprise can utilize its potentials
for growth and expansion.

Financial management is concerned with the acquisition, financing and management of assets
with some overall goals in mind. In the contents of modern approach, the discussions on financial
management can be divided into three major decisions viz., (1) Investing; (2) Financing; and
(3) Dividend decision. A firm takes these decisions simultaneously and continuously in the
normal course of its business. Firm may not take these decisions in a sequence, but decisions
have to be taken with the objective of maximizing shareholders' wealth.
Investing

(a) Management of current assets (cash, marketable securities, receivables and inventories)
(b) Capital budgeting (identification, selection and implementation of capital projects)
(c) Managing of mergers, reorganizations and divestments

Financing

(a) Identification of sources of finance and determination of financing mix

(b) Cultivating sources of funds and raising funds

Dividend Decision

This is the third financial decision, which relates to dividend policy. Dividend is a part of profits,
that are available for distribution, to equity shareholders. Payment of dividends should be
analyzed in relation to the financial decision of a firm. There are two options available in
dealing with the net profits of a firm, viz., distribution of profits as dividends to the ordinary
shareholders' where, there is no need of retention of earnings or they can be retained in the firm
itself if they require, for financing of any business activity. But distribution of dividends or
retaining should be determined in terms of its impact on the shareholders' wealth. The Financial
manager should determine optimum dividend policy, which maximizes market value of the
share thereby market value of the firm. Considering the factors to be considered while
determining dividends is another aspect of dividend policy.

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