FINANCIAL MANAGEMENTText Book: Financial Management, Prasanna Chandra, Tata MC Graw Hill Publishing House. Other Readings:Financial Management, I.M.Pandey, Vikas publishing houseFinancial Management, Srivastava, Oxford Publishers.

Prepared By: Swati GoyalLecturerDept. of Mgmt, LSB

What is Finance?WorkingCapitalWorkingCapitalInvestmentDecisionsFinancingDecisionsMacro Finance

Sheet1

ABC Company

Balance Sheet

As of December 31, 2003

Assets:Liabilities & Equity:

Current AssetsCurrent Liabilities

Cash & M.S.Accounts payable

Accounts receivableNotes Payable

InventoryTotal Current Liabilities

Total Current AssetsLong-Term Liabilities

Fixed Assets:Total Liabilities

Gross fixed assetsEquity:

Less: Accumulated dep.Common Stock

GoodwillPaid-in-capital

Other long-term assetsRetained Earnings

Total Fixed AssetsTotal Equity

Total AssetsTotal Liabilities & Equity

Sheet2

Sheet3

EVOLUTION OF FINANCIAL MANAGEMENT.Traditional Phase: formation, issuance of capital, major expansion, mergers, reorganization, liquidation in the life cycle of a firm.Transitional Phase: Began in 1940 through early 1950s, emphasis was on day to day problems faced by financial managers in the area of fund analysis, planning & control, focus shifted to WCM

EVOLUTION OF FINANCIAL MANAGEMENTModern Phase: began in mid 1950sa) Rational matching of funds to their uses so as to maximize the wealth of current shareholders.b) More analytical and quantitative.

Finance FunctionsInvestment or Long Term Asset Mix DecisionFinancing or Capital Mix DecisionDividend or Profit Allocation DecisionLiquidity or Short Term Asset Mix Decision

Profit MaximizationMaximizing the Rupee Income of Firm Resources are efficiently utilizedAppropriate measure of firm performanceServes interest of society also

Objections to Profit MaximizationIt is VagueIt Ignores the Timing of ReturnsIt Ignores RiskAssumes Perfect CompetitionIn new business environment profit maximization is regarded as UnrealisticDifficultInappropriate Immoral.

Maximizing EPSIgnores timing and risk of the expected benefitMarket value is not a function of EPS. Hence maximizing EPS will not result in highest price for company's sharesMaximizing EPS implies that the firm should make no dividend payment so long as funds can be invested at positive rate of returnsuch a policy may not always work

I. M. Pandey, Financial Management, 9th ed., Vikas.

Should Firms Maximize Profit?Corporations commonly define profit as Earnings per Share (EPS).A measure of total earnings divided by total number of ownership shares.EPS ignores critical factors ofthe timing of the returns.cash flows available to common shareholders.risk factors facing the firm.

Shareholders Wealth MaximizationMaximizes the net present value of a course of action to shareholders.Accounts for the timing and risk of the expected benefits.Benefits are measured in terms of cash flows.Fundamental objectivemaximize the market value of the firms shares.

Or Should Firms Maximize Shareholder Wealth?Evaluating Shareholder Wealth addresses factors of timing, cash flows and risk ignored by the EPS.Therefore, Maximizing Shareholder Wealth is a more comprehensive goal for the firm, its managers and employees.This can be explored through economic valued added and a focus on stakeholders.

Role of The Financial ManagerFinancialmanagerFirm'soperationsFinancialmarkets

Finance Managers RoleRaising of FundsAllocation of FundsProfit PlanningUnderstanding Capital Markets

Risk-return Trade-offRisk and expected return move in tandem; the greater the risk, the greater the expected return. Financial decisions of the firm are guided by the risk-return trade-off.The return and risk relationship: Return = Risk-free rate + Risk premiumRisk-free rate is a compensation for time and risk premium for risk.

DECISIONS, RETURN, RISK, AND MARKET VALUE Centre for Financial Management , Bangalore

Capital Budgeting

Decisions

Return

Capital Structure

Decisions

Market Value of

the Firm

Dividend

Decisions

Risk

Working Capital

Decisions

Corporate Organization Chart

Organization of Finance FunctionsCFO Chief Financial OfficerTreasurer responsibilities:Financial planning, fund raising, capital budgeting decisions, cash and credit management.Controller responsibilities:Corporate accounting, management & cost accounting, and tax management, internal auditing. The treasurers function is to raise and manage company funds while the controller oversees whether funds are correctly applied.

RELATIONSHIP OF FINANCE TO ECONOMICS

Macroeconomic environment defines the setting within which the firm operates. GDP growth rate, savings rate, fiscal deficit, interest rates, inflation rate, exchange rates, tax rates, and so on have an impact on the firm

Microeconomic theory provides the conceptual underpinnings for the tools of financial decision making. Finance, in essence, is applied microeconomics

Centre for Financial Management , Bangalore

RELATIONSHIP OF FINANCE TO ACCOUNTING

Accounting is concerned with score keeping, whereas finance is aimed at value maximising.

The accountant prepares the accounting reports based on the accrual method. The focus of the financial manager is on cash flows.

Accounting deals primarily with the past. Finance is concerned mainly with the future. Centre for Financial Management , Bangalore

EMERGING ROLE OF THE FINANCIAL MANAGER IN INDIA

The job of the financial manager in India has become more important, complex and demanding due to the following factors: Liberalisation Globalisation Technological developments Volatile financial prices Economic uncertainty Tax law changes Ethical concerns over financial dealings Shareholder activism Centre for Financial Management , Bangalore

EMERGING ROLE OF THE FINANCIAL MANAGER IN INDIA

The key challenges for the financial manager appear to be in the following areas: Investment planning and resource allocation Financial structure Mergers, acquisitions, and restructuring Working capital management Performance management Risk management Corporate governance Investor relations Centre for Financial Management , Bangalore