INTRODUCTION Finance is the life-blood of a business. Business requires money almost on a daily basis.

You need money to commence operations. You need money to support growth and expansion activities. You need money to push rivals to the wall. A firm can raise funds from several sources and put them to effective and efficient use. When funds are put to judicious use, they help a firm to maximize returns. When the firm is able to make good use of funds at its disposal, it is able to grow continually. It is able to outwit competition, expand its operations, maximize returns for shareholders and thus serve society profitably. When a firm is able to raise money on attractive terms and is able to make good use of it, it is able to run the show in an excellent manner. What the experts say?
Financial Management is an area of financial decision making harmonizing individual motives and enterprise goals.- Weston and Brigam. Financial Management is the application of the planning and control functions to the finance function.- Howard and Upton. Financial Management is the operational activity of a business that is responsible for obtaining and effectively, utilizing the funds necessary for efficient operations.- Joseph and Massie. Financial Management is theactivity concerned with the planning, raising, controlling and administering of funds used in business Guthman and Dougal.

Meaning Financial Management may be defined as the planning, organizing, directing and controlling the financial activities of a firm. It is concerned with the procurement and utilization of funds in an efficient and effective manner. Funds must be raised from various sources at the lowest possible cost and risk. They must be put to optimum use in order to offer excellent returns to shareholders. Every financial manager, thus, is expected to deal with three questions: Where to procure funds and in what amount? Where to invest funds and in what amount? How much should be paid in dividends?

Objectives

Financial managers are expected to put funds to best use and maximize returns to owners. To survive and flourish in a competitive environment, every firm must earn profits. How much to earn is a matter of debate and discussion. Without profits, of course, business would collapse under its own weight. When a firm is able to generate sufficient profits, it is able to please its shareholders. Modern writers, however, insist on a firm trying to maximize shareholders wealth in place of profit maximization. Owners wealth, simply stated, would improve when the capital invested initially would increase steadily over a period of time. Wealth maximization means maximization of the market price per share of a company. (number of shares held multiplied with market price of share). Lets examine the controversy between profit maximization and wealth maximization more closely: How to maximize shareholders wealth? Ensure adequate and regular flow of funds (liquidity) Raise funds at lowest possible cost; plan for an optimal capital structure for the firm (cost) Put funds to economical use (effective utilization) Get the best returns out of invested money (adequate returns) Ensure safety of funds through creation of reserves, reinvestment (reduce risk) Utilize retained money for further expansion ( growth ) Keep track of overall corporate goals and run the show along with other departments in a coordinated manner (coordination)

1. Profit Maximization: Many writers believe that profitability is the real test of how funds are put to use. It indicates economic efficiency. You make profits only when funds are put to excellent use. Without making profits, a business cannot grow and expand its operations. The prospect of making money excites people to give their best to business. It will spur people to put in extra effort while running the race. In a way, profit has the benefit of being a simple and straight forward statement of purpose. It makes sense to talk about profit as a rational economic goal. When a firm makes money, it can give something to society as well and fulfill its social obligations. More importantly, when every firm makes money, it indicates

efficient allocation of scarce resources of an economy. A firm which seeks to make profits, thus, is able to maximize social economic welfare as well. The problem, according to modern writers, is not about making money. It is about maximization of profits. If firms try to maximize returns for themselves, they become easy targets for public criticism. The concept of profit maximization has become the focal point of attack for a variety of reasons: The concept of is a vague one. it is put to loose interpretation in many cases. Are we talking about short run profits or long run profits? In fact, it is ambiguous in its computation. We are not very clear about what profit figure would appease the hungry owners. At what point firms would stop looking at profit as the ultimate goal of business? ( Rs. 1 crore or 100 crore or 1000 crore 10 per cent, 20 per cent or 30 per cent? Are we talking about total profit, operating profit, profit before tax or after tax? The time value of money is put to rest here. It assumes that bigger is better and ignores the time value of money. The fact that money received today has a higher value than money received next year is discounted. The amount of risk and uncertainty associated with a course of action is ignored. The profit maximization objective considers only the quantity of profits realized by following a course of action without looking at the degree of risk and uncertainty associated with the proposal closely. If returns from a proposal look uncertain (or even fluctuating from time to time) it should be put to close scrutiny. In the name of making money a firm should not blindly embark on a journey that would put its future at risk.

It does not consider the effect of dividend policy on the market price of the share. To improve the earnings per share, the firm should retain profits rather than distribute them. If the intent is to maximize earning per share, the firm should never pay dividends. It should reinvest the money and generate additional returns. According to Van Horne, to the extent payment of dividends can affect the market price of the share, the maximization of earnings per share will not be a satisfactory objective by itself The interests of society at large (including workers, consumers, government and the general public) are completely ignored when firms try to maximize profits for themselves. Profit maximization policies might compel firms to discount the worth of research and development totally. 2. Wealth Maximization: Wealth maximization implies the maximization of the market price of shares. It is also known as value maximization of net present worth maximization. The net present value criterion involves a comparison of value to cost. Any action that has a discounted valuetaking both time and risk into account---that exceeds its cost is said to create value (Solomon). Such actions should be pursued. Actions with less value than cost reduce wealth and should, therefore, be rejected. If two or more desirable courses of action are mutually exclusive (i.e, only one can be undertaken) then the decision should be to do that which creates most wealth or shows the greatest amount of net present worth. The goal of wealth maximization is not to put focus on profits but on the current value of firms securitiesthat is, equity shares. The wealth of owners improves when market price of shares improves. The share price would improve when the long run prospects of a company look pretty good (in terms of growth prospects, amount of risk that is inherent in firms actions, the dividend it offers to shareholders etc). Wealth Maximization, therefore, is a viable alternative due to the following reasons:

Wealth maximization objective is unambiguous. It reduces the whole rhetoric surrounding financial goals to just one thing. If you want to get ahead, a firm should try everything possible to improve the market value of its shares The market price of a share adequately discounts the quantity and quality of expected returns from a company. The prospects of a company in terms of future cash flows, quality of earnings, quantity of profits, growth prospects---all get evaluated and judged by investing community from time to time. Wealth maximization strikes a happy balance between value and cost. Only those proposals that bring in value should be favoured---as a rule. If a proposal looks shaky and risky, and returns look uncertain---it should be rejected. As a long term strategy, wealth maximization criterion compels firms to put competing proposals to close scrutiny. Proposals that impact the net worth of a company negatively, as a result, are pushed to a corner. Wealth maximization does not come in the way of pursuing other corporate goals such as maximizing sales or conquering market share. Wealth maximization serves as a benchmark, a measuring rod to assess the mood and sentiment of the investing public toward a company---whether a company is able to run the show in sync with other corporate goals or not is automatically put to close scrutiny Wealth maximization serves as a true indicator of the progress achieved by a company. If the investing community is impressed with the track record of a company it will get a good rating and its share price would improve over time consistently.

As rightly pointed by Solomon, value maximization is simply an extension of profit maximization to a world that is uncertain and multi-period in nature. Where the time period is short and the degree of uncertainty is not great, value maximization and profit maximization amount to essentially the same

thing. Profit maximization can be part of a wealth maximization strategy. Quite often the two objectives can be pursued simultaneously. Of course, care should be taken to see that profit maximization does not overshadow the broader objective of wealth maximization.