NATURE OF FINANCIAL MANAGEMENT

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Introduction:
The Nature of financial management refers to its function, scope and objectives. Financial management is concerned with the planning and controlling of the financial resources of the firm.
The subject of financial Management is of immense interest to both the academicians and the practicising managers. It is of great interest to academicians because the subject is still developing and there are still certain areas were controversies exist for which unanimous solutions have been reached.
As an academic discipline, it has undergone fundamental changes in relation to its scope, function and objectives. In the past, when it was a branch of economics, it was treated as the raising of funds. But at present, it is used in a broader sense, Which includes the efficient use of resources in addition to procurement of funds.
The practicing Manager dare interested in this subject because among the most crucial decision of firm or those which relate to finance and an understanding of the theory of financial management provides them with conceptual and analytical insides, to make those decision skillful.
Objectives:
Financial management is concerned with decision making in regard to the size and composition of asset and the level and structure of finance. The objective provides a framework for the optimum financial decision making.
The firm must make at least three fundamental financial decisions. It must determine
1. Where to invest fund and at what amount i.e investment decision
2. Where to raise funds and at what amount i.e financing decision
3. How much to pay as dividend i.e the dividend policy decisions
These decisions relate to firms investment and financing policies. It is generally agreed that the financial objective of the firm should be the maximization of owner’s economic welfare. Two areas from maximization of owners economic welfare is profit maximization and wealth maximization.
PROFIT MAXIMIZATION:
In the economic theory, the term profit maximization is deep routed term. It simply means maximizing the rupee income of the firm.
In financial management, profit maximization criterion implies that the investment, financing and dividend policy decision of the firm should be oriented to the maximization of profit.
The term profit can be used in two senses:
As a Owner oriented concept, it refers to the amount and share of rational income which is paid to the owners of Business i.e., those who supply equity capital.
According to the operational concept, it signifies economic efficiency i.e., according to the efficiency of the proprietor, output is more than the input.
Hence according to this approach, actions that increase profits should be undertaken and those that decrease profits are to be avoided.
1. Profit is a test of economic efficiency. It provides the yardstick by which economic performance can be judged.
2. Efficient allocation of resources
3. It ensures maximum social welfare.
According to Ansoff, the objectives of profit maximization is justified on the following score of points.
1. A human being performing any economic activity rationally aims at utility maximization. It is argued that, utility can be easily measured in terms of profit. Thus profit maximization is justified on the ground of rationality.
2. By maximizing profit, a firm maximizes socio –economic welfare of shareholders.
3. Profit maximization ensures growth and survival i.e. only those firms that maximise profits survive in the industry.
4. Profit maximization acts as a strong motivating force to acquire monopoly powers, in the imperfect commodity markets
5. Profit maximization is not an assumption but rather a rational goal to which every firm attempts to achieve.
Profit maximization criterion is criticized under the two grounds.
1. Those that are based on misapprehensions about the workability and fairness of the private enterprise itself.
2. Those that arise out of the difficulty of applying this criterion in actual real world situations.
Apart from the foresaid objectives, it suffers from the following limitations.
1. It is vague
2. It ignores the timing of returns
3. It ignores risk
In the present day business investment, profit maximization has been regarded as unrealistic, difficult, inappropriate and immoral.
Ambiguity:
The term profit is vague and ambiguous. It is amenable to different interpretations. For instance,
1. Profti may be Short term profit or long term profit
2. Profit before tax or after tax
3. Total profit or profit per share
4. Operating profit or profit to shareholders
If profit maximisation objective does not consider, the benefits received in different periods from the investment proposals.
The following table shows the returns from two alternative proposals x and y over a period of 3 years.
Profits in different periods
Period X (In Rs.) Y (In Rs.)
I 10000 -
II 20000 20000
III 10000 20000
Total 40000 40000
The above table shows that the returns from the two alternative proposals are identical. If profit maximization is the objective, the two proposals are of equal important. But there is difference in time pattern of benefits received from the two proposals.
Proposals X gives higher returns in the earlier year and proposal Y provides large returns in the later years. The returns received earlier are more valuable because it can be reinvested to get a return. Therefore proposal X is better, than proposal Y through both the alternative yield same benefit.
The profit maximization criterion does not consider the time pattern of benefits received and treats all benefits having equal value.