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Financial Management

SUBMITTED TO: SUBMITTED BY:

MBA II Semester

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Financial Management

It is concerned with the efficient use of an important

economic resources, namely capital funds.

It is concerned with the managerial decisions that resultsin the acquisition and financing of short term and long

term credits of the firm.

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Nature of Financial

Management

Part of overall management.

Closely related with other disciplines.

Continuous process Different from accounting

Fast growing

Helpful in decision making

Wider scope

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Scope of Financial

Management

Financial management is concerned with optimization of output from

the given input of funds.

Traditional Approach- arrangement of funds.

Modern Approach-effective utilization of funds

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Functions of Financial

Manager

Investment decision or long term asset mix decision.

Finance decision or capital mix decision

Dividend decision or profit allocation decision

Liquidity decision or short term asset mix decision

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Sources of Finance-Internal

Sources of Finance and Growth

Organic growth growth

generated through the

development and expansion of

the business itself. Can be

achieved through: Generating increasing sales

increasing revenue to impact on

overall profit levels

Use of retained profit used to

reinvest in the business

Sale of assets can be a doubleedged sword reduces

capacity?

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Selling more goods and services to consumers is oneway to grow the business.

Title: Home Depot quarterly profit rises 53%. Copyright: GettyImages, available from Education Image Gallery

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External Sources of Finance

Long Term may be paid

back after many years or not

at all!

Short Term used to coverfluctuations in cash flow

Inorganic Growth growth

generated by acquisition

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The existence of capital markets enable firms to raiselong term loans and share capital.

Title: Dow up on Wall Street. Copyright: Getty Images, availablefrom Education Image Gallery

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Long term (Means?)

Loans (Represent creditors to the company not owners)

Bank loans and mortgages suitable for small to medium sized firmswhere property or some other asset acts as security for the loan

Merchant or Investment Banks act on behalf of clients to organiseand underwrite raising finance

Government/EU may offer loans in certain circumstances

Grants

Shares (Shareholders are part owners of a company only inPLCs)

New Share Issues arranged by investment banks.

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Short Term

Bank loans necessity of paying interest on the payment,

repayment periods from 1 year upwards but generally no longer

than 5 or 10 years at most

Overdraft facilities the right to be able to withdraw funds youdo not currently have

Provides flexibility for a firm

Interest only paid on the amount overdrawn

Overdraft limit the maximum amount allowed to be drawn -

the firm does not have to use all of this limit

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Continued..

Trade credit Careful management of trade credit can help ease

cash flow usually between 28 and 90 days to pay

Factoring the sale of debt to a specialist firm who secures

payment and charges a commission for the service.

Leasing provides the opportunity to secure the use of capital

without ownership effectively a hire agreement

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'Inorganic Growth'

Acquisitions

The necessity of financing

external inorganic growth

Merger:

firms agree to join

together both may

retain some form of

identity

Takeover:

One firm secures controlof the other, the firm

taken over may lose its

identity

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Safeway subject to a 3 billion takeover byMorrisons. Securing the 3 billion necessary is aspecialist job.

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Business Angels

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Business Angels

Individuals looking for investment opportunities

Generally small sums up to 100,000

Could be an individual or a small group

Generally have some say in the running of the company

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Venture Capital

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Venture Capital

Pooling of capital in the form of limited companies VentureCapital Companies

Looking for investment opportunities in fast growing businessesor businesses with highly rated prospects

May also buy out firms in administration who are going concerns

May also provide advice, contacts and experience

In the UK, venture capitalists have invested 50 billion since1983

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