Financial Management

Chapter 1
Introduction
 Introduction
 Finance
 Public Finance and Private Finance
 FM is Concerned with the acquisition, financing and management
of assets to achieve organizational goal – Share holders Wealth.
 Anticipating the financial needs – Current and Fixed or Short-term
and Long-term assets
 Acquiring financial resources – to finance the anticipated financial
needs
 Allocating the funds among the best plans of assets – maximize
share holders wealth
FM is ;
 Investment Decision
 Financing Decision
 Dividend Decision
Definition
“Financial management is the operational activity of
a business that is responsible for obtaining and
effectively utilizing the funds necessary for efficient
operation”
By Joseph & Massie
Evolution of FM
B4 • Traditional Phase
19
40

19
40-
• Transitional Phase
19
50
Aft
er
• Modern Phase
19
50
1. Traditional Financial Management:
 Emphasis was on maintaining accurate records, ensuring
compliance
 Focused on bookkeeping, financial reporting, and basic
budgeting.

2. Financial Planning and Analysis (FP&A):

 Businesses became more complex
 Introduced financial planning and analysis.
 Forecasting future financial performance
 Creating budgets
 Conducting variance analysis
 Providing insights to support strategic decision-making.

2. Risk Management:
 Volatility in global markets
 Financial crises
 Identifying, measuring, and mitigating risks associated with
investments, operations, and financing decisions.
4. Strategic Financial Management:
 Operational focus to a strategic perspective
 Aligning financial objectives with overall business goals
 Wealth Maximization
5. Technology-driven Financial Management:
 Computers and the internet
 Automation and Digitalization streamlined processes,
improved data analysis capabilities, and facilitated real-
time financial reporting.
 Cloud computing and data analytics for Informed
decisions
6. Integrated Financial Management:
 Other functional areas such as marketing, operations, and
human resources to achieve overall business objectives.
 Financial managers play a vital role in strategic planning,
performance measurement, cost optimization, and capital
allocation decisions.
7. Sustainability and Ethical Financial
Management:
 Businesses are expected to incorporate environmental,
social, and governance (ESG) factors into their financial
decision-making processes.
8. Data-driven Decision-making:
 Big data and advanced analytics - data-driven decision-
making.
 Financial managers leverage sophisticated tools and
techniques to analyze large volumes of data, gain
insights into financial performance, identify trends, and
make strategic choices based on empirical evidence.
9. Financial Technology (FinTech):
 Digital payments, blockchain technology, robo-advisors,
and peer-to-peer lending platforms have disrupted
traditional financial systems and provided new avenues
for managing finances, raising capital, and making
investments.
Scope of FM
Undergone notable changes over the years.
Financial Managers role also changed.
Study of these changes – “Scope of FM”
Two Approaches:
1. Traditional Approach
2. Modern Approach
 Traditional Approach
Narrow Scope
Expected Functions:
 Raising funds
 Preparation and Preservation of financial statements
/reports
 Management of Cash Level
Limited to first expectation
Ignored day-to-day Problems
Outsider looking-in Approach – internal decision making
Ignored Working Capital Financing
Ignored Allocation of Capital
Modern Approach
Wider Scope – Conceptual and analytical frame work
for financial decision making
Covers both procurement and efficient allocation of
funds
Emphasize on 3 Major Decisions:
 Investment Decision
 Financing Decision
 Dividend Decision
 Financial Decisions

Financial
Decision

Investment Financing Dividend

Decision Decision Decision
Investment Decision
Total amount of assets required .
 Long term assets (Capital Budgeting).
 Short term assets (Working Capital Management).
Financing Decision
Decision related to the formation of an optimum
capital structure.
Proper debt equity mix – maximize share holders
wealth.
Proper balance of Risk and Return
Debt – High Return and High risk
Equity- Low return and Low Risk
Dividend Decision
What is Dividend…?
Dividend Policy consist of Two Options :
Retention or Distribution of Dividend
Goals of FM

Profit Maximization
Profit= Success, Survival and Growth
 Social Obligation
 Economic Obligation
 Reduces Risk
 Bases for all types of Decisions
 Measurement of Success
 Helps in long term existence
Points in favor of Profit Maximization

Measurement of performance
Maximum welfare to the shareholders
Prompt payment to creditors
Bring confidence in expansion and diversification
Attracts the investors
Availability of funds for meeting other requirements
Points Against Profit Maximization
Profit is not a clear term.(Is it accounting profit,
Economic profit, Profit before or after tax, Net profit,
…?)
Encourage Corrupt Practice
Element of Risk is not Considered.
True and fair picture of the organization is not
reflected
Attracts Cut-throat competition
Government intervention
Problems from workers
Wealth Maximization
 Wealth of a firm is related with its market value of the shares.
 Wealth maximization – creating wealth of an organization.
 How do you maximize the wealth….?
 Additional Profits – Share it with equity share holders, Creditors,
Better payment to workers in the form of wages, develop
infrastructure, Create more welfare facility to the society, prompt
payment of taxes to the govt., etc
 Attain self sufficiency and good reputation- Reflect in the market
value of shares in the stock market.
Wo = NPo
Wo=Wealth of the firm
N= Number of shares owned
Po=Price per share in the market
Advantages
Clear term- Benefits can be measured
Achieve the firms objective – Cash inflows and
outflows
Takes care the interest of the stake holders.
Helps in formation of dividend policy
Disadvantages
The objective is not descriptive of what the
firms actually do.
Not socially desirable.
Controversy in the objective of wealth
maximization
If ownership is deferent from management.
FM and Other Business
Functions
Functions of Financial Management
1. Anticipating Financial Needs
2. Acquiring Financial Resources
3. Allocating Funds in Business
4. Administrating the Allocation of Funds
5. Analyzing the Performance of Finance
6. Accounting and Reporting to Management
Financial Planning
Planning….?
LPG – expanding opportunities and changing market
conditions
Strategic Planning(Long-range)- Growth and Survival.
Financial plan is a part of strategic plan
Formulated by financial Managers
Finance functions possible only through well-prepared
financial plan
Meaning and Definition
Estimates ;
The amount of capital required to be raised
Debt equity mix and its forms
Policies bearing on the administering the capital
Definition
“The financial plan of a corporation has two fold aspects:
it refers not only to the capital structure of the
corporation, but also to the financial policies which the
corporation has adopted or intends to adopt ”-
Bourneville J.H.
3 aspects of financial planning

1. Determining financial objective

2. Formulation of financial policies
3. Development of financial procedures
Objectives of Financial Plan
Ensure availability of sufficient funds
Balances risk and costs
Simplicity
Flexibility
Liquidity
Optimum use
Economy
Characteristics of a sound financial plan
Simplicity
Foresight
Flexibility
Liquidity
Economy
Contingencies
Optimum use
Factors affecting Financial Plan
Nature of the industry
Status of the company in the industry – size, age,
goodwill and area of operation.
Attitude of management towards control
Flexibility – Change in condition
Government policy