NATURE OF FINANCIAL MANAGEMENT
Define the scope of financial management. What role should the financial manager play in a modern enterprise?
The scope of the financial management is to secure the capital needed by the enterprise, and employ it in production and marketing activities, in such a way that it can generate the sufficient returns on invested capital, with an intention to maximise the wealth of the owners.
The financial manager plays the crucial role in the modern enterprise by supporting investment decision, financing decision, and also the profit distribution decision. He/she also helps the firm in balancing cash inflows and cash outflows, and in turn …show more content…
Let us assume that the maximizing the profit means maximizing profit after tax, i.e., net profit as reported by income statement of the business firm. It should be understood that this would not maximize the welfare of the owners if some short-term actions were taken to improve profit. For example, the manager may sell some of the assets and then invest funds in lowyielding assets. The profit after taxes would go up in the short-term but the long-term profitability will suffer.
In what ways is the wealth maximizing objective superior to the profit maximization objective?
The wealth maximizing objective means maximizing the net present value, i.e., wealth of the owner. The net wealth of the owner is the difference between the present value of its benefits and the present value of its costs. Any action that has a positive NPV creates wealth for the owner.
The profit maximizing objective tries to maximize the profit after tax, i.e., net profit, which in the long term may reduce the net worth of the owner. (This is explained in answer no. 5). The profit maximization concept basically ignores the time value of money and the risk involved in firm's activities, which are very well taken care by wealth maximization concept.
‘The basic rationale for the
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Mr. Mohd Jamil Jelani is a Senior lecturer in banking and finance. He holds a Bachelor of Accountancy (Honours) and MBA in Applied Finance and Investment from National University of Malaysia; he is also a Chartered Accountant from Malaysian Institute of Accountants. Prior to his lecturing career, he served as a Group Financial Controller of a local company. Mr. Mohd Jamil has a wide experience in the teaching of Accounting and Finance, as he has been involved in the academic field for more than…