Principles of

Finance
MBA | Penol, Ann Cyra A.
 Scope
1. Profit Maximization vs. Wealth Maximization
2. Finance Management
 Profit Maximization
vs. Wealth
1
Maximization
 Profit Maximization

It is a term which denotes the maximum profit to

be earned by an organization in a given period of
time.

The profit maximization goal implies that the

Investment, Financing and Dividend decisions of
the enterprise should be oriented to profit
maximization
 Merits of Profit
Maximization
Best Criterion on decision making.
Efficient allocation of resources.
Optimum utilization
 Drawbacks of Profit
Maximization

It ignores time value of money.

It is vague conceptually.
It ignores the risk factor.
It may tempt to make such decisions which may
in the long run prove disastrous.
Its emphasis is generally on Short run projects.
In the new business environment Profit
maximization is regarded as unrealistic,
 Wealth Maximization

Fundamental objective of wealth maximization is

to maximize the market value of the firms shares.
Maximizes the net present value of a course of
action to the shareholders.
Accounts for the timing and risk of expected
benefits.
Benefits are measured in terms of cash flows.
 Merits of Wealth
Maximization

It focuses on the long term.

It takes into account the time value of money.
It considers risk.
It maintains market price of the shares of the
organization.
It recognizes the value of regular dividend
payments.
 Conflict
Profit Maximization Wealth Maximization
Its main objective is to Its main objective is to
earn large amount of achieve highest market
profits. value of common stock.
It emphasizes short term It emphasizes long term
It ignores time value of It considers time value of
money. money.
It ignores risk and It recognizes risk and
uncertainty. uncertainty.
It ignores timing of It recognizes the timings of
return return.
 Financial
2 Management
 Definition

refers to those management activities or efforts

denoted to the proper management of finance , it
includes financial planning, financial
administration, financial control.
 Objectives of Financial
Management

1. Maximization of Profit
2. Maximization of Wealth
 Scope of Financial
Management

Financial management has a wide scope. According

to Dr. S. C. Saxena, the scope of financial
management includes the following five 'A's.
1. Anticipation : Financial management estimates
the financial needs of the company. That is, it finds
out how much finance is required by the company.
 Scope of Financial
Management

2. Acquisition : It collects finance for the company

from different sources.
3. Allocation : It uses this collected finance to
purchase fixed and current assets for the company.
4. Appropriation : It divides the company's profits
among the shareholders, debenture holders, etc. It
keeps a part of the profits as reserves.
 Scope of Financial
Management

5. Assessment- It also controls all the financial activities of

the company. Financial management is the most important
functional area of management. All other functional areas such
as production management, marketing management, personnel
management, etc. depends on Financial management. Efficient
financial management is required for survival, growth and
success of the company or firm.
 Importance of Financial
Management
o Economic growth and development
o Improved standard of living
o Improved health
o Allows better financial decision
o Creates job
o Alleviation of poverty
o Promotes our environment
 Sources of Finance
Short Term Long Term
Trade credits Purchase of fixed
- Buy Now, Pay Later assets
Credit from suppliers Funding expansion
- deferred payment Diversifications
terms
Advance from
dealers
 Functions of Financial
Management

1. Financial forecasting
o This is one of the important function of financial
management.
o It means to establish the long term and short term financial
needs of the concern.
o The total financial requirements of the firm and the various
physical activities of the concern is estimated by financial
forecasting.
 Functions of Financial
Management

2. Estimating and controlling cash flows

Sufficient fund are required at the proper time for
financing the smooth flow of operations of an
enterprise.
Adequate funds at proper time can ensured by
proper estimating and controlling of the cash flow
of enterprise
 Functions of Financial
Management

3. Determination of financial objective,

financial policies and operational
procedures.
4. Designing the capital structure
i.e. determination of owns fund and borrowed
fund
5. Determination of the proper sources of
finance
i.e. it is like equity shares, preference share,
 Functions of Financial
Management

6. Investment decision
- it means to determination of the amount of funds to be
invested on fixed assets and on current assets.
7. Working capital management
- i.e. cash management ,inventory management etc
8. Disposal of profit /dividend decision
- decision making as to how much of profit of the concern
should be ploughed back
 Functions of Financial
Management

9. Routine incidental functions

o Safe keeping of imp. Documents, securities etc
o Complying with legal requirements.
o Maintenance of cordial relation with creditors.
o Discharge of duties of customers
o Discharge of duties to employees.
o Discharge of social responsibilities.
o Preparation and submission of financial reports
 Role of Finance/Financial
Manager

1. Responsibilities of finance manager

o Business forecasting
o Determination of financial objectives, financial polices and
operational procedures
o Estimation of the capital requirements of the business
o Designing the capital structure
o Determination of the proper sources of finance
 Role of Finance/Financial
Manager

1. Responsibilities of finance manager

o Investment decision
o Ensuring supply of required funds
o Controlling the use of funds
o Profit planning
o Disposal of surplus or profit, or dividend decision
o Management of working capital
o Helping in valuation decisions
 Role of Finance/Financial
Manager

1. Responsibilities of finance manager

o Wealth maximization
o Legal responsibilities
o Designing suitable system of providing information
o Keeping track of stock exchange quotations
o Co-ordination of the activities of subordinates
 Role of Finance/Financial
Manager

2. Other responsibilities
o Responsibilities to shareholders
o Responsibilities to employees
o Responsibilities to various creditors
o Responsibilities to customers
o Responsibilities to the society
 References

http://
www.accaglobal.com/hk/en/business-finance/types-finance/trade
-credit.html
http://
www.bcvaz.in/financial_management/decisions_financial_man
agement.htm
https://
www.linkedin.com/pulse/profit-maximisation-wealth-anshuman-
biswal
Thanks!