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Scope of Financial Management

Scope of Financial Management
Scope of Financial Management Facebook Buys WhatsApp: Boneheaded or Brilliant? This was the title of a  Forbes Article when Mark Zuckerberg acquired Whatsapp for $19 billion dollars, the price that may exceed the GNP of some of those countries. Mark is said to be an unconventional thinker and the WhatsApp acquisition shows Facebook’s determination to follow the road not yet paved. It is a bold move, yet filled with risks along the way. This is one of the finest examples of the big investment decisions of recent times and the right course of action,  if you measure the number of potential users of the mobile messaging service rather than the cost of acquiring each user and the potential for selling ads to each user today. Financial management is one of the important aspects of overall management, which is directly asscoiated with various functional departments like personnel, marketing and production. Financial management embraces wide area with multidimensional approaches. The following are the important scope of financial management. Some of the major scope of financial management are as follows: 1. Investment Decision 2. Financing Decision 3. Dividend Decision 4. Working Capital Decision. 1. Investment Decision: The investment decision involves Risk Evaluation Measurement of cost of capital and Estimation of expected benefits from a project. Capital budgeting and liquidity are the other two major components of investment decision. Capital budgeting takes care of the distribution of capital and commitment of funds in permanent assets to harvest revenue in future. Capital budgeting is a very focal decision as it impacts the long-term success and growth of a firm. All the same it is a very tough decision because it encompasses the estimation of costs and benefits which are uncertain and unknown. 2. Financing Decision: Financing decision is related to financing mix or financial structure of the firm. The raising of funds requires decisions regarding Methods and sources of finance Relative proportion and choice between alternative sources Time of floatation of securities, etc. In order to meet its investment needs, a firm can raise funds from various sources. Long Term Sources of Finance: Share Capital or Equity Shares Preference Capital or Preference Shares Retained Earnings or Internal Accruals Debenture / Bonds Term Loans from Financial Institutes, Government, and Commercial Banks Venture Funding Asset Securitization International Financing by way of Euro Issue, Foreign Currency Loans, ADR, GDR etc.  Picture Courtesy: Cash & Treasury Management file Medium Term Sources of Finance: Preference Capital or Preference Shares Debenture / Bonds Medium Term Loans from Financial Institutes Government, and Commercial Banks Lease Finance Hire Purchase Finance Short Term Sources of Finance: Trade Credit Short Term Loans like Working Capital Loans from Commercial Banks Fixed Deposits for a period of 1 year or less Advances received from customers Creditors Payables Factoring Services Bill Discounting etc. 3. Dividend Decision: In order to accomplish the goal of wealth maximization, a proper dividend policy must be established. One feature of dividend policy is to decide whether to distribute all the profits in the form of dividends or to plough back the profit into business. While deciding the optimum dividend payout ratio (proportion of net profits to be paid out to shareholders), the finance manager should consider the following: Investment opportunities available to the firm Plans for expansion and growth, Dividend stability Form of dividends, i.e., cash dividends or stock dividends, etc. 4. Working Capital Decision: Working capital decision is related to the FINANCING in current assets and current liabilities. Current assets include cash, receivables, inventory, short-term securities, etc. Current liabilities consist of creditors, bills payable, outstanding expenses, bank overdraft, etc. Current assets are those assets which are convertible into cash within a year. Similarly, current liabilities are those liabilities, which...
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Is Profit Maximization an Appropriate Goal

Is Profit Maximization an Appropriate Goal
Is Profit Maximization an Appropriate Goal Every business organisation’s aim is to make profit and more profit. Does it end there? What should be the real motive behind running an organization? Profit maximization alone does not help the organization to firmly plant its feet in the business environment, as the success of an organization in the long run is decided by many critical factors like, market share, value of the company shares, market stand, image etc. So, shall we say, let wealth maximization be the goal of any organization, which focuses on increasing the “earnings per share” of the share holders. What is Profit Maximization? Profit maximization does not take into consideration, the interest of share holders or stake holders, who ought to be the ultimate beneficiaries. Concentrating on short term profits confines a firm and limits its scope and growth whereas; value creation is something that the management should aim for, as it helps to increase the “net worth” of a company. Mere price versus output calculations make firms to operate in a profitable manner, but it should never be the only objective of a firm, as it has the moral and social responsibility to patronize its shareholders by increasing the net worth of the company. Learn How to Profit In Forex With Market Rhythms Underlying Logic While maximizing profit, a firm either produces maximum output for a given amount of input, or uses minimum input for producing a given output. Thus the underlying logic for profit maximization is efficiency. Under perfect competitive market conditions, profit serves as a perfect measure for the performance of a firm. If profit is the motive of a firm, it fails to consider the time value of money which is an important criterion that decides the success of a firm, and also it values benefits received today and after a period as the same. Moreover the uncertainty factor is there to be considered too. Firms always prefer to have smaller but surer profits rather than larger benefits but less certain. Impact of Taxes When we talk about profits, the next indispensable factor will be the taxes that demand a portion of your profit. Maximizing profits after the payment of taxes facilitates the firm to increase the net profit ratio to serve the best interests of the owners. But, this also fails to maximize the economic welfare of the owners, as it does not take into account, the timing and uncertainty of the benefits. Wealth maximization is the ideal alternative that is consistent with the survival goal and also with the personal objectives of managers such as recognition, power, status and personal wealth. The Right Balance between Risk and Return Mangers while deciding on investment options, seek to achieve a right balance between risk and return. If the firm borrows heavily to finance its operations, care should be taken to ensure that, the rate of return on investment should be sufficient enough to support the payment of interests on borrowings and also to repay the principal. If the firm is not able to “service the debt” there is a danger of the firm becoming bankrupt or insolvent. The firm’s investment and financing decisions are unavoidable and continuous. In order to make rational decisions, the firm must have a goal, which is nothing but the “shareholder’s wealth maximization” which is theoretically logical and operationally...
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