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UNIT1: INTRODUCTION TOFINANCIAL MANAGEMENTFM is a manageriaFM is a managerialactivity concerned witactivity concerned with

planning and controllinplanning and controllingof a firms financiaof a firms financial

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Overview of Finance Functions

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Capital Budgeting1. Strategic Planning: Define the businesses it wants

to be in.

2. Allocation of Capital: Buildings, machinery,Equipments, R & D, Distribution Network, Brands.This is known as the Capital Budgeting Decision

Two important aspects of investment decision include:(a) Evaluation of prospective yield/ profitability of new

investments: Expected Return(b) Measurement of cut off rate against whichprospective rate is evaluated: Risk

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Capital StructureThe central issue is to determine the appropriateproportion of equity and debt known as a

firms capital structure.Firm considers factors such as control, flexibility,loan covenants, legal aspects in deciding itsoptimum capital structure.

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Liquidity DecisionsCurrent Asset Management affects a firms

liquidity and profitability.

Profitability liquidity trade off requires a financemanager to develop sound techniques omanaging current assets.

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Interface between Finance andOther FunctionsFM is an integral part of job of managers-

planning, allocation of resource, control.

Specialists: The treasurer-for financing and investment

activities (obtaining finance, bankingrelationship, cash management, credit

administration and capital budgeting) The controller-accounting and control (financialaccounting, internal audit, taxation, managementaccounting, control)

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Organization of Finance Function

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Organization of Finance Function

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Other Finance FunctionsCFOs has line and staff responsibilities. A no. of

companies in India either has Finance Director or a

Vice President of Finance operating as CFO. Other functions routinely performed: Supervision of cash receipts & payments and

safeguarding of cash balances. Custody and safeguarding of securities, insurance

policies & other valuable papers. Taking care of mechanical detail of new outside

financing. Record keeping & Reporting.

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Financial Goals: Profit Maximizations. Wealth Maximization

The financial goal of a firm should be Shareholders Wealth Maximization (SWM), reflected in the marketvalue of shares.

In economic theory the behaviour of a firm is analyzed interms of profit maximization-input/output.

However, profit maximization suffers from the followinglimitations:

4. It is ambiguous.

5. It ignores timing of returns6. It ignores risk. SWM is consistent with survival goal meeting the

personal objectives of managers: recognition, power,status and personal wealth.

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Shareholders WealthMaximization SWM mean maximizing the Net Present Value (NPV) or

Wealth of a course of action. The finance manager maximizes returns in relation to

given risk. Management act as agents of owners andtrustees of various stakeholders of an economic unit.

The financial reporting system must be designed toprovide a timely and accurate picture of the firmsactivities.

The first step in decision making is to see that it isconsistent with firms strategy (technology,leadership, productivity, market standing, image,employee satisfaction ) followed by second level criterionof SWM.