CHAPTER ONE
INTRODUCTION
BACKGROUND TO THE STUDY
Financial management involves all activities of a financial
manger concerned with raising of capital, planning cash and credit requirements
including the effective control of financial resource of a corporate body.
The activities could be segregated as follows
i) Converting of forecast into plans and
budgets
ii) Planning the appropriate capital
structure
iii) Raising cash from outside the business
iv) Forecasting the future availability of
and requirements of cash.
v) Investing surplus funds
vi) Controlling cash balances and
flows in accordance with plans and with changing circumstance. (Gray et al
(1977)
With the emergence of finance as a separate field of
study the emphasis was more or less on legal matters such as
Since most business firm’s objectives are profit
maximization the search for profitability under imperfect/perfect competition
continues to be the induction to improve the wealth of the owners.
This urge to implore and maximize, wealth has led to the
study of financial management of which attribute factors can be socialized as
follows:
a. Saving
b. Business growth
c. Research and development expenses
d. Inflation
e. Competitor etc.
Based on the above background, some taught to were
given a financial management to provide skillful planning control and execution
of financial activities. The praising
managers are interested in this subject because among the most crucial decisions
of the firm are those which related, to finance and therefore need to
understand financial management which provides them with conceptual and
analytical insight of the capital funds and using the suppliers of fund are
called the finance function of any firm.
Finance which is the life wire of any business organization
and it is developed in 1900s since it concerns with the actual flow of money as
well as any clam. Against money.
The financial manager subsequently decisions are made in
much more coordinated marker directly responsible for the
control process.
The principal responsibility of financial manager involves a
theory of Evaluation of investment financial and dividend decisions with the
objective of maximizing wealth. The financial manager studies the
factors which influence both internal and external environment.
Only sound financial decision based on analysis
the planning and control activates therefore can help optimization of value of
operations.
Optimization of profits and share holders wealth is one of
those guiding objectives of business enterprise, which govern
it allocation of resource and other financial decision of managers.
The financial manager, finally must be aware of the source
available for financing the business and be guided by time
selection and combination of these variables that is the financial
managers determinant the principles of suitability. Financial
manager determine is that of profitability and liquidity while suitability is
the principle of time balancing between assets and liabilities that is using
short term liabilities to finance short term assets and long term liabilities
for finance long term assets , the financial manager is concerned with
note T.P. Martin
a) Financial planning within the enterprise.
b) Allocation of fund
c) Financial controlling
d) Interpretation
FINANCIAL PLANNING
This involves estimating and planning of the future flow of
cash receipts and disbursement.
RAISING OF FUNDS
The raising of funds involves organizing and ensuring that
fund necessary for carrying on the operations of the planning is
available. The second fact of financial manager is the acquisition of
fund. There is wide Varity of sources available for the acquisition
of fund. Each has certain characteristic as cost, maturity availability,
the encumbrance of assets and other terms imposed by the supplier of capital.
On the basis of these factors, the financial manager must
determine the best mix financial for the firm.
Therefore, the financial manager has task of formulation and
execution of suitable financial policies in the interest of the organization
The major purpose of such polices is to plan, coordinate,
motivate and control those activities of the firm which are responsible for an
efficient management of resources. An efficient financial manager
thus serves as a valuable aid to the process of decision – making and a major
contribution to the pale of Economic progress.
ALLOCATION OF FUNDS
Wise use of funds by allocating such funds in such project or
ventures that would yield optimal returns ensuring efficient use of
funds. The financial manager oversees the allocation of
funds. Among attentive uses, the allocation must be in
accordance with the underlying objectives of the firm, to maximize shareholders
wealth. The role of financial manager has expanded from the
management of working capital to long-term assets and liabilities.
He concerns with ways of efficiently managing these current
assets in order to maximize profitability relatives to the amount of fund
tied up in the assets.
FINANCING CONTROLLING:
Financial manager monitors financial operation to
ensure that cash flows are proceeding according to plan.
INTERPRETATION:
A company is part of the financial community it’s financial
management can be fully interpreted only with the context created by the
working of financial institution and markets.
1.2 ORGANIZATION GOALS
Since this project is concerned with the role of
financial managers in a cooperate organization therefore, it is important to
note the goals of any corporate organization.
a. MAXIMIZATION OF
WEALTH:
The main objective of financial management is the
maximization of owners wealth owners maximization is accomplished by maximizing
the sum of the present value of the increased in the market value of the shares
of stock lead by the shareholder. This apparent wealth maximization is
the best Economic objective for shareholders as the owners and for the company
whose primary interest is to shareholder/owners.
a) Profit Maximization:
This is the second of frequently encountered goals of any business
in fact, all business firms believed that as long as they are earning as
much as possible while holding down cost they are achieving this goal of profit
maximization. The inavailability or the lack of human resources and the
organizational self- imposed standard.
b) The
eternal environment factor such as the political legal framework,
cultural and social values the Economic climate technological trend and
investors at attitude.
It is therefore imperatives that financial management should
take cognizance of environmental factor that effect their decision.
1.3
STATEMENT OF THE PROBLEM
The principal aim
of making investment decision is to get adequate returns from it. According to Needham and Dransfield (1991),
“people as a rule will only tie up their money in a business if they are
satisfied with the returns they get from it”.
In an
attempt to achieve maximum returns from investment in production, services
shares or stock and/or other securities outside the firm, a comprehensive
analysis of the company which is intended to be invested in should be carried
out using the company’s financial management to ascertain both its explicit and
implicit investment opportunities.
However, organizations that do not use finance management in making
investment decisions could be ill formed.
As a result, the following problems may arise:
(i) Inability to identify viable investment
opportunities(ii) Decreasing
returns from investments.
(iii)
Decline
in organizational overall profitability.
(iv)
Increased
investment risk: The organization might not achieve its corporate objective at
the end of the period.
If the trend
continues, it will likely lead to the failure of the organization. Therefore, there is a great need for
organizations to consider and analyse company’s finance management before
investing in that company. These are the
focus of this study.
1.4 OBJECTIVES
OF THE STUDY
On noting that most investments made by firms
end in failure, it is the overall objective of this study to determine how corporate
body can use finance management to aid management decisions. Specifically, the study is designed to:
i) Find
out how the use of finance management can assists organizations in identifying
investment opportunities.
ii)
Find out how increasing investment
returns can be achieved using finance management
iii) Find
out the extent to which a company’s overall profitability can be hampered if it
does not manage corporate finance
iv)
Find out how business failures can be
curbed or minimized and corporate objective achieved through successful
investment.
v)
Identify alternative ways of minimizing
investment risk.
1.5 RESEARCH
QUESTIONS
The
following questions are put forward for the purpose of the study.
1)
Is corporate finance management important/necessary
in every organization?
2)
Who are the users of finance management?
3) How
can a corporate finance management of an organization be interpreted?
4) How
can its interpretation be used in making effective management decisions?
1.6 SIGNIFICANCE
OF THE STUDY
The purpose of this project, the role of financial manager in
corporate organization is to equip the practicing financial managers,
financial controllers directors of finance treasures students of finance
and reader with a basic understanding of financial decision.
The financial manager caries out financial decisions in
manner that the wealth of shareholders is maximized through the following:
a. Current Asset management
b. Capital budgeting Decision
c. Dividend Decision
d. Financial Decision.
a. CURRENT ASSET MANAGEMENT:
Financial manager has every right to manage the long term
assets, and also the duty to mange current assets efficiently to
safeguard the firm against liquidity or insolvency.
Investment in current assets affects firm’s profitability: liquidity and
risk, if the firm close not invest sufficient fund in current assets it may
become liquid. But it would less profitability, as idle current
assets would not earn anything’s. In order to ensure those neither
insufficient nor unnecessary fund are invested in current intact he should
develop sound techniques of managing current assets.
b. CAPITAL BUDGETING DECISION
Capital budgeting is investment decisions of the firm
to have it fund invested in long-term project in anticipation of expected
flow of future benefit over a period of years.
These decisions could be either to mechanize a process,
replace a machine with another modern type, selecting between two machines,
production of new product or business expansions it’s features are:
i. Investing current funds for future
benefits
ii. The period of investment which involves
long term activities
iii. To potential benefit which will accrue to the firm
over a period of time
c. DIVIDEND DECISION:
The financial manager must determine the optimum dividend
payment ratio; he should consider the questions of dividend stability stock
dividend and cash dividend:
The financial manager must decide whether the firms should
distribute all profits or retain the balance.
d. FINANCIAL DECISIONS:
The financial manager must determine the time the method and
who to acquire fund to meet the firm’s investment need. The significant
issue before him is to determine the proportion of equity capital and debt
capital. A proffer balance will have to be struck between return and risk
once the financial manager is able to determine the best combination of debt
and equity, he must raise the appropriate amount through best available
sources.
1.7 RESEARCH
HYPOTHESIS
Ho:
There is no significant relationship between a corporate body profitability and
financial management analysis based on policy making decision of a corporate
body.
H1: There is a significant
relationship between a corporate body profitability and financial management analysis
based on policy making decision of a corporate body.
1.8 DEFINITION OF
TERMS
1) Capital Budgeting: In this context means the
whole process of planning expenditure whose returns are expected to cover a
serves of years.
2) Cash flow management: The ability to
manage efficiently the movement of cash in and outside the corporate
organization (Accelerate cash in flows and decelerate cash out flows.
3) Liquidity Decision: current assets of
the firm should be managed very efficiently to prevent the firm from becoming
insolvent or illiquid.
4) Interpretation: Analyzing
and giving full details of working of financial institution and markets.