Introduction to Financial

Management
Dr. Priyanka Zala
Finance
Why finance is regarded as the life blood of a business
enterprise?
Finance

• It is the basic foundation of all kinds of economic

activities

• Finance can be defined as the provision of money at

the time it is wanted
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?
It has rightly been said that, “Money brings more money, only
when it is properly managed”.
List of Companies referred for Insolvency
Definition

“Financial Management is the operational activity of a business that is

responsible for obtaining and effectively utilizing the funds necessary for
efficient operations.”
-Joseph & Massie

Financial Management includes- Anticipating Financial needs, Acquiring Financial

resources and Allocating Funds in Business (i.e., Three A’s of financial management)
Finance Functions/Decisions
.
Procurement
of funds
(Financing
decision)

Ensuring Deployment
liquidity Finance of funds
(Liquidity (Investment
decisions)
Functions
decisions)

Distribution
of dividend
(Dividend
decisions)
Finance functions/decisions
• Key finance function can be classified under long term and
short term finance decisions.

Long term finance decisions

• Finance decision
• Investment decision
• Dividend decision

Short term finance decision

• Working capital and Liquidity Decision
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Financing Decision
The financing decision covers two interrelated aspects:

Capital structure Decision

Financing -Does firm have an optimum capital structure?
Decision
Determination of an appropriate capital structure
-Maximization of share holders wealth.
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Investment Decision
The investment decision relates to the selection of assets in
which funds will be invested.

The assets which

Long term assets (Capital budgeting)
can be acquired
fall into two broad
groups
Short-term or current assets (working capital
Management)
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Dividend 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.
 13

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 company’s 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.

Functions of Finance
Routine functions of finance department
1. Maintaining cash and ensuring receipts and payments
2. Safe custody of cash
3. Keep track of lender’s interest payments and loan
repayments
4. Actions on debentures and bonds
5. Keeping track of important papers and their safe custody
6. Management reporting
7. Record keeping of transactions
Functions of Finance Manager

.
 18

Scope of Finance
Main activities of a firm are,

Finance and Accounting

Marketing

Production (Operations)

Human Resource
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Finance and Accounting

Accounting
• Financial accounting uses the historical accounting
information for decision making
• Income Statement
• Balance Sheet
• Finance
Decision making with respect to procurement of funds,
deployment of funds and dividend decisions
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 salesmen
o Credit terms extended to customers.
o Product promotion and advertisement policies
o Investment in inventory
o Marketing cost analysis (Function of finance manager)
 22

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.
 23

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.
o Decisions related to recruitment, training, increment
have implications of finance.
Objectives/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 of grounds.
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.
 Profit maximization as an objective or goal of the firm
suffers from a number of limitations.
1. Time value of money
2. Ignores quality of benefits
3. Ambiguity
Wealth Maximization

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 the primary goal of
financial management
 Important

Share holder
Value

Function of financial management

Business and economic environment

Measuring Shareholders’ Value Creation
• Two methods commonly employed for measuring the value added are:

•EVA is a concept which compares return on capital

Economic employed with opportunity cost of capital of the firm.

value added •EVA = Net Operating Profit after Tax – Cost of

Capital Employed
(EVA)

•This concept is based on comparing the market value

Market of the securities (equity and debt together) with the
funds that have been invested in the firm.
value added
• If the figure is positive, it would mean value has been
(MVA) created.
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.
Why wealth maximization is superior
over profit maximisation

1. It is Clear
2. It considers time value of money
3. It considers the risk element in evaluation
Organization of financial management
function
• In big corporate structure, finance function is not
restricted to one person and divided among many
• Mainly there is one chief financial executive, treasurer
and controller
Organization of Financial Management Function
Role/Functions of CFO as Controller
and Treasurer