Financial Management33333333333333333.ppt

Financial management
Rajendra Prasad Nepal

Content Outline
• Concept
• Importance
• Objectives
• Natures
• Function
• Functional Areas
• Key Elements
• Role of CFO
• Relation with other discipline

Income and Expenses
• Income - Cash Inflow - Money Comes to you (us)
• Source of Income: Three way to earn Income:
• Selling Labor/idea (Working}
• Selling capital (Investing)
• Renting Capital (Lending to get income)
• Expenses - Cash outflow: Money goes from you (US)
• Housing, Transportation, entertainment, assets

Surplus vs Deficit
• Income greater than Expenses = Budget Surplus
we like (desired Situation). We invest
• Income less than Expenses = Budget Deficit
we don’t like (Undesired Situation). Cut your
Expenses or Increase your Income (search 2nd
Job).

Finance
• Finance may be defined as the position of money at the time
it is wanted.
• Financing consists in the raising, providing, managing of all
the money, capital or funds of any kind to be used in
connection with the business.
• The term ‘business finance’ is very comprehensive.
• It implies finances of business activities.
• The term, ‘business’ can be categorized into three groups:
commerce, industry and service. It is a process of raising,
providing and managing of all the money to be used in
connection with business activities.

Why do we need Finance?
• To start Business/Organization. Establishment.
• To run a business. Survival.
• To Expand, to modernize, to diversify.
• To buy assets: Tangible, Intangible
(Tangible- touchable ie machinery, furniture.
Intangible- untouchable ie trade mark, goodwill).
• To run day to day business activities.

Financial Management
• Management of Finance or the funds. Manage
Money.
• Two words: Finance and Management.
• Finance how to acquire and utilize. How to get
and use.
• Management: Planning, Organizing, Directing
and Control (PODC).

• Financial Management is Planning, Organizing,
Directing and Controlling of Raising of funds,
Investment of funds and Distribution of funds for
achieving goals of organization. OR
• Financial Management is Planning, Organizing,
Directing and Controlling of the procurement,
utilization of funds and disposal of profit so that
individual, organizational and social objectives are
achieved.
• (Money: from where to acquire? Where to invest? for
why and how? How to utilize profit? so that individual,
organizational and social objectives are achieved).

• Financial Management is concerned with PODC of
financial activities of the business. It is the study of
problems involved in the use and acquisition of
Funds.
• Financial Management is one of the functional areas
of management.
• Financial management is at the heart of running a
successful business. It affects every aspect, from
managing cash flow and tracking business
performance to developing plans that ensure that
business owners can make the most of opportunities.

Importance of Financial
Management
• Financial management is an integral part of overall management
rather than merely a staff activity concerned with fund raising
operations.
• Financial manager occupies a central position in any business firm
• Financial management involves the application of all managerial
functions.
• Planning, organizing , directing and controlling the use of financial
resources in order to ensure optimum efficiency of operations and
establish cordial relations with financiers, suppliers, workers and
members. Co-ordination of operations of different departments of
the business. Control through appropriate measures to secure
financial discipline in the use of available financial resources.

Importance of Financial
Management
• Financial management is important mainly because it
helps to make decisions towards the maximization of
value of the firm . Financial management helps:
• Financial Planning and Setting Clear Goal
• Deciding Sources Of Financing / Acquisition of Funds.
• Efficient Utilization Of Resources
• Making Dividend Decision
• In brief, Financial Planning, Acquisition of Funds, Proper Use
of Funds, Financial Decision, Improve Profitability, Increase
the Value of the Firm, Promoting Savings.

Objectives of Financial Management
There are two schools of thought
 Traditional: Profit maximization
 Modern: Wealth maximization
• The term ‘profit maximization’ implies generation of largest
amount of profits over the time period. (Large amount of profits)
• Wealth Maximisation refers to all the efforts put in for maximizing
the net present value (i.e. wealth) of any particular course of
action which is just the difference between the gross present
value of its benefits and the amount of investment required to
achieve such benefits. (Highest market value of common stock)

• Traditional thinkers believe that profit is appropriate
yardstick to measure operational efficiency of an
enterprise. They are of the view that a firm should
undertake only those activities that increase the profit.
• The primary objective of a business is to earn profit;
hence the objective of financial management is also
profit maximisation. If profit is given undue importance,
a number of problems can arise, such as
• It does not take into account the time pattern of returns.
• It fails to take into account the social consideration to
workers, customers etc.

• To day, most of large business under taking witness a
divergence between ownership and management
and business is dependent largely on loan and
borrowed funds and only a small fraction being
financed out of owners funds. Hence, profit
maximization will only act as a narrow objective.
• In view of above, modern thinkers consider wealth
maximization as key objective of financial
management. This is also known as ralue
maximization or net present worth maximizations.

• In wealth maximisation business firm maximise its market
value, it implies that business decision should seek to
increase the net present value of the economic profit of
the firm.
• It is the duty of the finance manager to see that the share
holders get good return on the share (EPS Earning per
Share). Hence, the value of the share should increase in the
stock market.
• The wealth maximisation objective is generally in accord
with the interest of the various groups such as owners,
employees etc.

The other objectives of financial management
include
 To build up reserves for growth and
expansion,
 To ensure a fair return to shareholders and
 To ensure maximum operational efficiency by
efficient and effective utilization of finances.

Nature of Financial Management
Financial management is applicable to every type of
organization, size, kind or nature. Every organization aims to
utilize its resources in a best possible and profitable way.
• It is a centralized function
• Helpful in decisions of top management
• It applicable to all types of concerns.
• It needs financial planning, control and follow-up.
• Its function is different from accounting function
• It is an essential organ of business management.
• It related with different disciplines like economics,
accounting, law, information technology, mathematics etc.

• Financial Management is an integral part of overall
management. Financial considerations are involved in all
business decisions. Acquisition, maintenance, removal or
replacement of assets, employee compensation, sources and
costs of different capital, production, marketing, finance and
personnel decision, almost all decisions for that matter have
financial implications.
• Financial management is a sub-system of the institutional
system which has other subsystems like academic activities,
research wing, etc., In systems arrangement financial sub-
system is to be well coordinated with others and other sub-
systems well matched with the financial sub-system.

• Financial management essentially involves risk-return trade-
off. Decisions on investment involve choosing that types of
assets which generate returns accompanied by risks.
Generally higher the risk returns might be higher benefits and
vice versa.
• Financial management is a concern of every concern. Finance
functions, i.e., investment, raising of capital, distribution of
profit, are performed in all firms - business or non-business,
big or small, proprietary or corporate undertakings.

 The central focus of financial management is valuation of the
firm. Financial decisions are directed at increasing/
maximization/ optimizing the value of the institution.
• Financial management affects the survival, growth and vitality
of the institution
• Financial management of an institution is influenced by the
external legal and economic environment. The legal
constraints on using a particular type of funds or on investing
in a particular type of activity, etc., affect financial decisions
of the institution. Financial management is, therefore, highly
influenced/constrained by external environment.

• The nature of finance function is influenced by the special
characteristic of the business. In a predominantly technology
oriented institutions it is the R & D functions which get more
dominance, while in a university or college the different
courses offered and research which get more priority and so
on.

Function of Financial Management
Function of Financial Management basically
means the decisions involved in a business
firm (organization). The main decisions
involved in a business firm are:
• Investment Decision.
• Financing Decision including Dividend
decision.

Investment decision / Capital
Budgeting Decisions
• Investment Decision relates to the determination of
total amount of assets to be held in the firm, the
composition of these assets and the business risk
complexities of the firm as perceived by the
investors. It is the most important financial decision.
Since funds involve cost and are available in a limited
quantity, its proper utilization is very necessary to
achieve the goal of wealth maximasation.

Investment decision
• Investment decision more specifically related with: Management of
working Capital, Capital Budgeting Decisions, Management of
Merger, reorganization, disinvestment etc, Buy or Lease decision,
Securities Analysis and portfolio management (Portfolio
management refers to managing investments in the form of bonds,
shares, cash, mutual funds etc so that he earns the maximum
profits) .
• Identify need of finance. How much do I have? How much do I
Need?
• Identify Source of income. (Borrow funds or Shareholder funds)
• Comparison in-between different source. (Risk and Cost).
• Investment: where are funds may be invested?

Investment decision
• The investment decisions can be classified under two broad
groups; (i) long-term investment decision and (ii) Short-term,
in vestment decision.
• The long-term investment decision is referred to as the
capital budgeting and the short-term investment decision as
working capital management.
• Capital budgeting is the process of making investment
decisions in capital expenditure. These are expenditures, the
benefits of which are expected to be received over a long
period of time exceeding one year.

Investment decision
• The investment decision is important not only for the setting
up of new units but also for the expansion of present units,
replacement of permanent assets, research and development
project costs, and reallocation of funds, in case, investments
made earlier, do not fetch result as anticipated earlier.
• Investment Decision relates to the determination of total
amount of assets to be held in the firm, the composition of
these assets and the business risk complexities of the firm as
perceived by the investors.

Financing decision/ Capital
structure decision.
• It includes both financing and dividend decision.
• How should the business firm/ organization/ company pay for
the investments it makes?.
• It also known as capital structure decision.
• It involves the choosing the best source of rising funds and
deciding optimal mix of various source of finance.
• A business firm can not depend upon only one source of
finance. Hence a varied financial structure is developed. But
before using any particular source of capital, its relative cost of
capital, degree of risk and control etc should be thoroughly
examined.

Financing decision
• The major sources of long term capital are shares
and debentures.
• Firms regularly make new investments, the needs for
financing and financial decisions are on going, Hence,
a firm will be continuously planning for new financial
needs.
• The financing decision is not only concerned with
how best to finance new asset, but also concerned
with the best overall mix of financing for the firm.

Financing decision
• A finance manager has to select such sources of
funds which will make optimum capital structure.
• The important thing to be decided here is the
proportion of various sources in the overall
capital mix of the firm.

Dividend decision
 The third major financial decision relates to the
disbursement of profits back to investors who
supplied capital to the firm.
 What should be done with the profit of the business?
 The Dividend decision is concerned with determining
how much part of the earning should be distributed
among the shareholders by way of dividend and how
much should be retained in the business for meeting
the future needs of funds internally.

Dividend decision
• The term dividend refers to that part of profits of a
company which is distributed by it among its
shareholders.
• It is the reward of shareholders for investments
made by them in the share capital of the company.
• The dividend decision is concerned with the
quantum of profits to be distributed among
shareholders.

Dividend decision
• A decision has to be taken whether ail the profits are
to be distributed, to retain all the profits in business
or to keep a part of profits in the business and
distribute others among shareholders.
• The higher rate of dividend may raise the market
price of shares and thus, maximize the wealth of
shareholders.
• The firm should also consider the question of
dividend stability, stock dividend (bonus shares) and
cash dividend.

Liquidity Decisions
• Liquidity and profitability are closely related.
• The finance manager always perceives / faces the task of
balancing liquidity and profitability.
• The term liquidity implies the ability of the firm to meet bills
and the firm’s cash reserves to meet emergencies. Whereas
the profitability means the ability of the firm to obtain highest
returns within the funds available.
• If a finance manager wants to meet all the bills, then
profitability will decline similarly where he wants to invest
funds in short term securities he may not be having adequate
funds to pay-off its creditors. Lack of liquidity in extreme
situations can lead to the firm’s insolvency.

FUNCTIONAL AREAS OF
FINANCIAL MANAGEMENT
• Capital Budgeting
• Working Capital
Management
• Dividend Policies
• Acquisitions and Mergers
• Corporate Taxation
• Determining Financial
Needs
• Determining Sources of
Funds
• Financial Analysis
• Optimal Capital Structure
• Cost Volume Profit
Analysis
• Profit Planning and
Control
• Fixed Assets
Management
• Project Planning and
Evaluation.

Key elements of Financial
Management
• There are three key elements to the process
of financial management:
• Financial Planning
• Financial Control
• Financial Decision-making
(The key aspects of financial decision-making relate to
investment, financing and dividends)

Chief Finance Officer/ Finance
Manager
• CFO is an integral part of corporate management of
an organization. He occupies a very important
position. He is expecting to manage the funds in such
a manner as to ensure their proper utilization.
• With his profession experience, expertise knowledge
and competence, he has to play a key role in optimal
utilization of financial resources of the organization.
• As the size of organization grow and volume of
financial transactions increases, his role and functions
assumes greater importance.

Major functions of Chief Finance Officer
Primary functions
 Management functions:
Planning, Organizing,
Directing, Coordination,
Controlling
 Functions relating to finance:
i. Acquisition/raising of funds
ii. Allocation/ investment of
funds
iii. Distribution of income
(profit)
Subsidiary functions
i. Maintaining liquidity
ii. Profitability
iii. Evaluation of financial
performance &
reporting
iv. Upkeep of records
and other routine

Functions of Modern Age CFO :
1. Achieving corporate goals – Besides goals of organization.
goals of different departments have to be achieved.
2. Financial projections– for next 5-10 years consisting of cost
and revenues for coming long term period keeping in view
companies long term plans.
3. Corporate Governance – for image building in the eyes of all
stake holders of the company, transparency in systems /
procedure and adherence of laws as well as rules and
regulations.

4. Merger and acquisitions initiative – for - Including new product lines
- Technological tie-up/ collaboration with foreign firms - Financial
restructuring for incrcasing profitability - Tie-up arrangements for
greater penetration in new markets in the country & abroad.
5. Risk management – Preparing strategies for combating risks arising
out of - internal & - external factors . A CFO has to keep close eyes
on risk factors.
6. Financial engineering - A CFO has to keep himself abreast with new
techniques of financial analysis and new financial instruments
coming in market. In financial engineering, a CFO has to work on
finding out solutions to the problem through complex mathematical
models and high speed computer solutions.

• Estimating requirement of
funds.
• Decision regarding Capital
Structure.
• Investment decisions
• Divident decision
• Managing Assets
• Managing Funds
• Maximising wealth of
company.
• Evaluating financial
performance with return
on investment
• Financial negotiations
with Bank, Financial
Institutions etc
• Keeping touch with
Stock Exchanges
• Managing the Flow of
Internal Funds

Relationship with other discipline
• Financial Accounting: It is concerned with the preparation of reports
which provide information to users outside the firm. The main objective
of these-reports is to inform stockholders, creditors and other investors
how assets are controlled by a firm. In the light of the financial
statements and certain other information, the accountant prepares
funds film statement, cash flow statement and budgets.
• Cost Accounting: It deals primarily with cost data. It is the process of
classifying, recording, allocating and reporting the various costs
incurred in the operation of an enterprise. It includes a detailed system
of control for material, labour and overheads. Budgetary control and
standard casting are integral part of cost accounting. The purpose of
cost accounting is to provide information to the management for
decision making, planning and control. It facilitates cost reduction and
cost control. It involves reporting of cost data to the management.

• Management Accounting: It refers to accounting for the
management. It provides necessary information to assist the
management in the creation of policy and in the day to day
operations. It enables the management to discharge all its
functions, namely, planning, organizing, staffing, direction and
control efficiently with the help of accounting information.
Functions of management accounting include all activities
connected with collecting, processing, interpreting and
presenting information to the management.
• Financial Management is concerned with raising funds
providing a return to investors.

• Financial accounting: Historic,concerned with identification,
decording, classifying, summarising and analysis financial
transaction (ratio, trend)
• Cost accounting: Deals primarily with cost data. Provide
information to the management for decision making, planning
and control. Facilitates cost reduction and control.
• Management Accounting: Providing relevent information to
management for assisting the in decision making
• Financial Management: Futuristic, Focus on cash Flow, Play
with risk and hope for both maximization wealth and profit.

Financial Management33333333333333333.ppt

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