The financial management was initially perceived that the study with reference to only procurement of funds but later it was extended to one more additional feature that efficient
utilization of funds.
It is imperative to understand the meaning of the term “Finance”
Money with objective
Money with purpose
Money with direction
Money with target
Money with achievement
Money with aim
The above explanation is able to understand the real meaning of the term finance which is
nothing but effective utilization raised money with some purpose to achieve in desired direction.
The study of role of finance in the organization is with reference to financial management.
The financial management is the course which has drawn major focus points from the
many more disciplines. To study them, the inter relationship in between the financial
management and other related disciplines.
The following are the related disciplines viz
Finance and Economics
Finance and Accounting
Finance and Marketing
Finance and production
Finance and Quantitative Methods
Finance and Economics
The relationship in between these two disciplines are studied in two different headings
viz Micro and Macro economics
The major part of the financial management is to raise the financial resource to the
requirements. While raising the financial resources, the availability is subject to the macro
economic influences.
Banking system
Money and capital markets
Financial intermediaries
Monetary and credit policies
Finance and Accounting
The two are embedded with different disciplines. The finance is the discipline which is mainly based on the cash basis of operations but the accounting is totally governed by the accrual system. Accounting is mainly vested with the collection and presentation of data, but the finance is closely connected with the decision making of the organization. Till this moment, the differences are discussed only to know the role of finance over the accounting of any organization. The following is the major relationship which lies in between the finance and accounting as follows "Finance begins where accounting ends"
The projects are considered on the basis of the following criterion: If the project is having the scope to have an increase in the volume of profits, the project is suggested to accept and vice versa. The financing, investment and dividend decisions of the enterprise is dome shaped towards the profit maximization. Under this, the profit is defined in two different angles viz. Owner's and Operational perspective. Owners' perspective definition of profit is the share of national income paid to the owners. Operational perspective defines the term profit as when the output exceeds the inputs of the process.
The testing, selecting of the assets and projects are normally on the basis of the profitability
of the firm. If the firm is found to be profitable, suggested to accept, otherwise, the
decision is vice versa. Profit is a test of economic efficiency which is individual aim to achieve at always though it is closely associated with the social welfare
The next important set of objectives taken for discussion is Wealth maximization Only in order to replace bottlenecks which were associated with the profit maximization. Wealth maximization means that value / net worth maximization. The Worth of Action normally happens only at when the Value of benefits are more than the Cost of its undertaking. In other words, the wealth maximization is defined in the angle of the concept of cash flows. The Cash flows are clearly dealt only in accordance with the "CASH SYSTEM"-Definite Connotation
It eliminates the ambiguity associated with accounting profits
Second feature - timing of benefits and quality of benefits are jointly considered
Operational implications of timing of benefits and quality of benefits
The timing and quality of benefits are given greater importance under the wealth maximization through the incorporation of capitalization rate which is applied to the tune of risk and timing of benefits associated with the project. The discounting component mainly depends upon the time and risk preferences of the owners of the capital The importance of the wealth maximization is explained through the discount rate component Higher the discount Rate reveals that Higher Risk and Higher uncertainty Lower the discount Rate portrays that Lower Risk and Lower uncertainty The Decision Criterion is based on the comparison in between the Value and Cost Financial Management The Creation of Value takes place only at when the economic benefits are more than Cost The Reduction of wealth just contrary to the earlier which normally produces lesser Economic Benefits than Cost The decision of either acceptance or rejection is subject to the net present value It is imperative to refer the words of Ezra's Solomon to illustrate the importance of the wealth maximization
"The gross present worth of a course of action is equal to the capitalised value of the flow future expected benefit, discounted at a rate which reflects their certainty/uncertainty. Wealth or net present worth is the difference between gross present worth and the amount of capital investment required to achieve the benefits being discussed. Any financial action which rates wealth or which has a net present worth above zero is a desirable one and should be undertaken. Any financial action which does not meet this test should be rejected. If two or more desirable courses of action are mutually exclusive, then the decision should be to do that which creates most wealth or shows the greatest amount of net present worth"
The next aspect is that organization of finance function. The finance function is classified into two categories viz routine functions and functions of special importance. The routine functions are normally Accounting aspects of transactions of the business enterprise which mainly given controller of the finance department. The functions of special importance are normally involved in the process of preparing the policies of the organization with reference to finance administration ; which is mainly earmarked to the Treasurer of the finance department of the organization The following are the important functions of the Treasurer which normally have special importance in characteristics:
Obtaining finance
Banking relationship
Investor relationship
Short-term financing
Cash management
Credit administration
The following are the vital functions of the Controller which regularly include:
Financial accounting
Internal audit
Management accounting and control
Budgeting, planning and control
Economic appraisal and so on

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