FINANCIAL MANAGEMENT

Meaning of Financial Management

Financial deals with all resources in terms of money Management deals with using people to get things done to achieve organizational goals Financial Management is a system which provides information to ensure effective decision making regarding the raising and investing of funds or money

Decisional Areas of Financial Management

Financing decisions Investment decisions Dividend policy Working Capital Management

Importance of FM
Provides knowledge about various sources of finance their related or associated costs interest rates alternative investment opportunities government fiscal policies tax laws and obligations determination of business and environmental risks overall assessment of returns

Application of Financial Management

Financial management is applied in all types of activities that involves the use of money or funds

Purpose of Financial Management

To help management determine and assign costs to various sources of funds To determine the overall returns on various investment opportunities To determine risk associated with an investment To provide info. for management planning and expansion Helps management in evaluation Provide info. for management decision Assess and select the best investment opportunities To minimize operational risk

Relationship with other Subjects

Financial Accounting Management Accounting Economics Law Taxation Quantitative Techniques

Management Objectives and Role of Financial Managers

Management Objectives 4 major objectives Growth (Profit maximization)

Risk reduction Efficiency Personal aspirations (Prestige)

Functions of Financial Managers

Evaluate and control of capital projects and risk of the firm Planning and allocation of funds Evaluation of financing alternatives available to the firm Strategy for acquisition and mergers Raises funds at the right time Ensure that funds are secured with the lowest cost possible Funds are used in the most efficient and effective manner

Economic Environment

Objectives of Macroeconomic policy

Infrastructure Living standards Full employment Maintain price stability and avoid price hikes Promote development (GDP, GNP) Ensure BOP equilibrium Ensure equitable distribution of national income and wealth

Problems of macroeconomic Policy

This is as a result of conflict between the objectives

Conflict between full employment and price stability Rapid economic growth (persistence increase in level of import) and balance of payment

Macroeconomic Policy, implication to business

Macroeconomic Policy, implication to business

Macroeconomic policies affect businesses in two ways: Level of aggregate demand Cost of business operations

Aggregate Demand

It is the total demand of goods and services within the economy. It is used in the determination of: Unemployment Rate of inflation

Cost of Business
Changes in exchange rate (have direct relation to price of imported goods) Fiscal policy on the use of tax (fiscal policy is the manipulation of the govt. budget in order to influence the level of activity in the economy) Monetary policy on changes in interest rate Cost of servicing debts

Factors influencing business financing decisions

Availability of funds Cost of finance (share price falls as interest rate increases) Level of consumer demand Level of inflation Level of exchange rates

Financial Intermediation and Credit Creation

Financial Intermediation

Process of bringing borrowers and investors of funds together

Examples of Intermediaries
Savings banks Investment banks or merchant bank that are designed for special purpose (advice, provide finance, foreign trade) Clearing banks provides immediate clear mechanism Pension funds provides pension on retirement Insurance companies

Continued
Investment trust and unit trust (Data bank) Building society HFC Finance companies finance house leasing house factoring companies

Credit Creation

The process for creating credit in a modern banking system

Sources of finance

Sources of finance open to business

Equity (Ordinary) or Preference Shares Debt It can also be in the long or short term

Raising equity finance

There are three main sources of equity finance Internally generated Fresh issues of shares ( methods used in issuing shares, place, offer for sale etc.) Right issue

Debt
Debenture Leasing contract between a lessor and a lessee for the hire of a particular asset Bank overdraft Debtor finance Trade credit

Comparing debt and equity

Cheapness (it is generally less risky) Flexibility (it can be borrowed, repaid and re-borrowed) Retention of control (it creates rights and obligation on both sides)