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Intorduction to Financial Management

Mrs.Priyanka Gohil

IBMR, Ahmedabad

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Importance of Finance

o Money is an arm or a leg, you either use itor lose it.

o The Sanskrit sayingarthah sachivah,which means finance reigns supreme.

o Money brings more money, only when it is

properly managed.

o Finance is the backbone of every business.

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If you are planning to start your own business.

What capital investments should you make?

How will you raise money to pay for the proposed capital

investments?

How will you handle the day-to-day financial activities

like collecting your receivables and paying your

suppliers?

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Definition

Financial Management is the operational activity of a business

that is responsible for obtaining and effectivelyutilizing the funds necessary for efficient operations.

-Joseph & Massie

FinancialManagement includes- Anticipating Financial needs, Acquiring Financial

resources and Allocating Funds in Business (i.e., Three As of financial management)

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Framework of Financial Management

Management of Long term Funds:CapitalstructureCostofcapital

SourcesofLong-termFundsFinancialLeverage

Dividendpolicy

Management of Long- Term Assets

CapitalBudgeting

Operationalleverage

RiskAnalysis

Financial Management

Working Capital Management

Management of Short term funds

Management of short-term

Liabilities like creditors, bank

Overdrafts, Bills payable, short-term

Loans. Principles of working capital

Management, Working capital Policy

Management of short-Term Assets:Receivable ManagementInventoryManagement

CashManagementPrinciplesofworkingcapital

ManagementWorkingcapitalpolicy

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Goals of Financial Management

1. Profit Maximization

2. Wealth Maximization

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Profit Maximization

Profit is considered to be the main driving force in business.

It is one of the dominant goals or objectives of the firm.

Profit = Total revenue Total cost

Profit maximization objective is justified on a number ofgrounds.

1. The firm exists for earning profits. Therefore, there is

nothing wrong if this driving force is set as an objective.

2. The efficiency of the firm is measured in terms of its

capacity to earn profit.

3. Profit maximizing firm will be in a better position to extend

its market share.

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Profit maximization as an objective or goal of the

firm suffers from a number of limitations.

1. Time value of money

2. Risk

3. Cash flows.

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WealthMaximization

o Financial management centers around the core

concept of Value.

o Creating wealth for shareholders by increasing the

value of their investment in the business is theprimary goal of financial management

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Business and economic environment

Important

Function of financial management

Share holderValue

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o The market price takes into account the present and

expected earnings or cash flows per share. The

timing, duration, and the risks of these earnings or

cash flows.o The market takes into account the projects in hand,

dividend policy of the company, and all the other

factors that have a bearing on the price of the share of

the company.

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Finance Function

FinancialDecisions

Investment Decisions LiquidityManagement FinancingDecisions DividendDecisions

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InvestmentDecision

The investment decision relates to the selection of assets in

which funds will be invested.

The assets whichcan be acquired

fall into two broadgroups

Long term assets (Capital budgeting)

Short-term or current assets (working capitalManagement)

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o Investment decisions are also known as Capital

Budgeting Decisions.

o Dividend policy formulation requires the decision

of the management as to how much of the profitsearned will be paid as dividend.

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Financing Decision

The financing decision covers two interrelated aspects:

1. Capital structure theory

One dimension of the financing decision whether there is an

optimum capital structure? And in what proportion shouldfunds be raised to maximise the return to the shareholders?

2. Capital structure decision

The second aspect of the financing decision is the

determination of an appropriate capital structure.o Maximization of net wealth of the shareholders.

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Dividend Policy Decision

Two alternatives are available in dealing with the

profits of a firm:

1. They can be distributed to the shareholders in the

form of dividends.

2. They can be retained in the business itself.

The decision as to what will be the dividend pay out ratio,

that is, what proportion of net profits should be paid out to the shareholders.

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The following need adequate consideration in deciding

on dividend policy.

1. Preferences of share holders- Do they want cash

dividend or Capital gains?

2. Current financial requirements of the company.

3. Legal constraints on paying dividends.

4. Striking an optimum balance between desires of

share holders and the companys funds

requirements.

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Liquidity Decision

Liquidity decisions are concerned with the current assets management.

There should be trade of between profitability and liquidity.

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Interface between Finance andother Business Functions

Finance andMarketing

Finance and Production (Operations)

Finance and HR

Finance and Accounting

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Finance and Accounting

Accounting and finance are closely related:

o Financial accounting uses the historical

accounting information for decision making

o Ex. For calculating Return on Investment,

EPS and various ratios for financial analysis

the data base will be accounting information.

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Finance and Marketing

Many marketing decisions have financial implications.

o Selection of channels of distribution

o Deciding an advertisement policy

o Remunerating the salesmeno Credit terms extended to customers.

o Product promotion and advertisement policies.

o Investment in inventory

o Marketing cost analysis (Function of finance manager)

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Finance and Production (Operations)

Finance and operations management are closely related.

o Decisions on plant layout

o technology selection

o production/ operations, process plant size

o Flow of input material in the production

o operation process

All are operations management decisions but their formulation

and execution cannot be done unless evaluated from the

financial angle.

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Finance and HR

o Organizational productivity depends upon its

man power.

o The value of human resources plays an

important role in valuing a firm.

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Thank You