Question: What are the Functional areas of Financial Management?

The finance function is related to every other functional area of the management,
wherever and whenever a policy decision is to be taken. Every policy decision involves
some or other financial implication. The relationship between financial management and
other functional areas have been analyzed in the following discussions:-

a) Financial Management & Production Department:

• The production dept. in any firm is concerned with provision of

production facilities, production cycle, skilled & unskilled labour, storage
of finished goods, capacity utilization, etc

• The financial management has a useful role to play in interaction with the
production management as the cost of production assumes a substantial
portion of the total cost.

• Production department may be required to take various decisions like

increase in capacity utilization, installation of a safety device, replacing
machinery, installation of materials monitoring device, improvisations of
production facilities, etc.

b) Financial Management & Materials Department:

• The materials constitute a substantial portion of the cost of production

which can be controlled and possibly can be reduced also by keeping a
strict vigil on the financial implications of material movement in the firm.

• The Finance Manager and the Materials Manager may come together
while determining the EOQ, Safety Level, Storing Place requirements, etc.

c) Financial Manager & Personnel Department:

• The personnel department has to work with the finance manager while
evaluating different schemes of training programmes, Employees Welfare,
Economy in manpower, computerization, incentive schemes, revision of
pay scales, etc. The best possible implication of all these decisions is an
important dimension.

d) Financial Management & Marketing Department:

• The Marketing Department of a firm is concerned with the ultimate

activity of the firm i.e., the selling of goods & services to the customers. It
is entrusted with the responsibility of framing marketing, selling,
advertisements & other related policies to achieve the sales target.
 • It is also required to frame credit & collection policies to maintain &
increase the market share, creating a brand name, to acquire a competitive
edge, etc.

• Different policy decisions all of which have financial implications are to

be taken. The Finance Manager has to play an active role in interaction
with the marketing department in the process of these decisions.

Question: Why is Maximizing Wealth a better goal than Maximizing Profit?

GOAL OBJECTIVE ADVANTAGES DISADVANTAGES

Profit Maximization Large amount of 1. Easy to calculate 1. Emphasizes the
profits profits short term.
2. Easy to determine 2. Ignores risk &
the link between uncertainty.
financial decisions 3. Ignores the timing
and profits. of returns
4. Required
immediately
resources.

Stockholder Wealth Highest market 1. Emphasizes the 1. Offers no clear

Maximization value of common long term. relationship between
stock 2. Recognizes risk financial decisions
or uncertainty. and stock price.
3. Recognizes the 2. Can lead to
timing of returns. management anxiety
4. Considers and frustration.
stockholders’
returns

Other reasons:-

1. The value maximization objective of a firm considers all future cash flows,
dividends, EPS, risk of a decision, etc. Whereas Profit Maximization objective
doesn’t consider the effect of EPS, dividend paid or any other returns to
shareholders or the wealth of the share holders.
2. A firm that wishes to maximize the shareholders wealth may pay regular
dividends whereas a firm with the objective of profit maximization may refrain
from dividend payments to its shareholders.
3. Shareholders would prefer an increase in the firm’s wealth against its generation
of increasing flow of profits.
4. The Market Price of a share reflects the shareholder’s expected return,
considering the long term prospects of the firm, reflects the differences in the
 timings of the returns, considers risk & recognizes importance of distribution of
returns.

The Maximization of a Firm’s value are reflected in the Market Price of a share is viewed
as a proper goal of a firm. The profit maximization can be considered as a part of the
wealth maximization strategy.