Introduction to Financial Management

Introduction to Financial Management

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  Introduction to Financial Management FINANCIAL MANAGEMENT SESSION1 1
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  Objective At the endof this session you should be able to understand ◦ Objectives ◦ Functions and Scope ◦ Evolution ◦ Interface of Financial Management with Other Functional Areas ◦ Environment of Corporate Finance 2
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  Forms of BusinessOrganisation •Sole Proprietorship •Partnership •Cooperative Society •Company • Private Limited • Public Limited 3
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  Financial Decisions ina Firm •Capital Budgeting •Capital Structure •Working Capital Management 4
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  Goal of FinancialManagement •There are three compelling arguments in support of the goal of shareholder wealth maximization, viz. • legal, • economic and • decisional. •From a legal point of view, managers, as agents of shareholders are expected to further the interests of shareholders, who are their principals, as established in Anglo- Saxon law 5
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  Goal of FinancialManagement •The economic argument for maximizing shareholder wealth rests on the premise that the pursuit of this goal serves the larger public interest by maximizing social wealth. •According to the decisional argument, for purposeful or rational behavior, an organization requires a single-valued objective function, because it is logically impossible to maximize in more than one dimension. 6
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  The Fundamental Principleof Finance •The key question that you have to ask before making a business decision is: will the decision raise the market value of the firm? •A business proposal – regardless of whether it is a new investment or acquisition of another company or a restructuring initiative – raises the value of the firm only if the present value of the future stream of net cash benefits expected from the proposal is greater than the initial cash outlay required to implement the proposal. 7
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  Building Blocks ofModern Finance •The years since the early 1950s have witnessed the development of the following major building blocks of modern financial economics • Efficient Markets Theory • Portfolio Theory • Capital Asset Pricing Theory • Option Pricing Theory • Agency Theory 8
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  Risk-Return Tradeoff •Financial Decisionsoften involve alternative courses of action. •Should the firm setup a plant which has a capacity of one million tons? •Should the debt-equity ratio of the firm be 2:1 or 1:1? •Should the firm pursue a generous credit policy or niggardly credit policy? •Should the firm carry a large inventory or a small inventory? 9
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  Agency Problem •In proprietorships,partnerships and cooperative societies, owners are actively involved in management •But in companies, particularly large public limited companies, owners typically are not active managers. •Instead, they entrust this responsibility to professional managers who may have little or no equity stake in the firm 10
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  Business Ethics andSocial Responsibility Is the goal of shareholder wealth maximization congruent with high standards of ethical behavior and concern for societal problems? Yes, it is Every company should consider its business ethics and its corporate social responsibility. Business ethics essentially consider its business ethics and its corporate social responsibility is concerned with the contributions that a company should make to worthwhile social causes. 11
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  Relationship of Financeto Economics and Accounting Economics – The macroeconomic environment defines the setting within which a firm operates and the microeconomic theory provides the conceptual underpinning for the tools of financial decision making Accounting – Accounting is concerned with score keeping, whereas finance is aimed at value maximizing. Financial decision making requires considerable inputs from accounting 12
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  Environment of CorporateFinance The key challenges for the financial manager appear to be in the following areas •Investment planning •Financial structure •Mergers, acquisitions, and restructuring •Working capital management •Performance management •Risk management •Investor relations 13
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  Conclusion In this sessionwe learnt about ◦ Objectives ◦ Functions and Scope ◦ Evolution ◦ Interface of Financial Management with Other Functional Areas ◦ Environment of Corporate Finance 14