Money required for carrying out business activities is called business finance. Almost all business activities require some finance. Finance is needed : •
To establish a business ,
To run it
To modernize it
To expand it or diversify
It is required to buy whole variety of assets, they may be tangible like machinery ,factories,building,offices or intangible like patents, technical expertise etc.
Success of business depends considerably on how well the funds are deployed in assets Financial management is concerned with optimum procurement as well as usage of finance. The financial management has to take three important decision viz. (i) Investment decision i.e., where to invest fund and in what amount, (ii) Financing decision i.e., from where to raise funds and in what amount, and (iii) Dividend i.e., how much to pay dividend and how much to retain for future expansion. In order to make these decisions the management must have a clear understanding of the objective sought to be achieved. It is generally agreed that the financial objective of the firm should be maximization of owner's economic welfare. There are two widely discussed approaches or criterion of maximizing owners' welfare – (i) Profit maximization, and
(ii) Wealth maximization.
Profit maximization would probably be the most commonly cited business goal, but this is not a very precise objective. Do we mean profits this year? If so, then actions such as deferring maintenance, letting inventories run down, and other short-run, cost-cutting measures will tend to increase profits now, but these activities aren't necessarily desirable. The goal of maximizing profits may refer to some sort of “long-run” or “average” profits, but it's unclear exactly what this means. First, do we mean something like accounting net income or earnings per share? As we will see, these numbers may have little to do with what is good or bad for the firm. Second, what do we mean by the long run? As a...
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