Fundamental of financial

management
By Prof. Divya Gupta
Transitional phase
Began around early 1940s. Though the
approach was similar to the traditional
approach, greater focus was on day-to-
day activities of financial manager.
Focus was on working capital
management
In the areas of fund analysis, planning and
control
Three Most Important Activities of a
business firm:
Production
Marketing
Finance
A firm secures whatever capital it needs
and employs it (finance activity) in
activities, which generate returns on
invested capital (production & marketing
activities).
Modern phase
The central concern is considered to be a
rational matching of funds to their uses so
as to maximize the shareholders wealth.
The approach of financial management
became more analytical and quantitative
Types of Assets
Real Assets
1.Tangible assets
2.Intangible assets
Financial Assets
Financial decision in a firm
Long term asset mix or investment
decision
Capital mix or financing decision
Profit allocation or dividend decision
Short term asset mix or liquidity decision
Investment Decision
A firms investment decision involve capital
expenditure.
A capital budgeting decision involves the
decision of allocation of funds to long term
assets that would yield benefits in the future.
Two important aspects of investment decision
are
1.Evaluation of prospective profitability of new
investments
2.Measurement of cut-off rate against that the
prospective returns of new investments could be
compared.
Financing Decision
Financing decision is the second
important to be performed by the finance
manager.
The mix of debt and equity is known as
the firms capital structure.
Optimum capital structure.
Dividend Decision
Profit distribution approach
Dividend payout ratio
Optimum dividend policy
Bonus shares
Liquidity decision
A conflict exists between profitability and
liquidity while managing current assets.
Goals of financial management
The goal is profit maximization Vs Wealth
maximization.
The maximization of wealth of equity
shareholders , as reflected in the market
value of the equity, appears to be the
most appropriate goal of financial
management
Shareholder orientation in India
Most companies in India paid a lip service
to the goal of shareholders wealth
maximization
They showed sporadic concern to the
shareholders, mainly when they
approached capital market for raising
capital market
Fundamental principle of financial
management
Any decision will lead to a question: will
the decision raise the market value of the
firm
SWM - It means maximizing the NPV of a
course of action to shareholders.
NPV= PV (Future cash benefits)- PV(initial
cash flow)
Need for a valuation approach
Risk Return Trade-off
Fig.
Capital Budgeting Decision
Capital structure Decision
Dividend Decision
WCM Decision
Risk
Return
MV of
Firm
Organization of Finance function
There are, however, many tasks of
financial management and allied areas-
like accounting-which are specialized in
nature and which are attended to by
specialists
These tasks and their typical distribution
between the two key financial officers of
the firm, the treasurer, and the controller.
Functions of Treasurer
Obtaining finance
Banking relationships
Cash management
Credit administration
Capital budgeting
Functions of Controller
Financial accounting
Internal auditing
Taxation
Management accounting and control
The CFO supervises the work of treasurer
and the controller
Emerging role of financial manager in
India
Until 1990 the financial manager in India
functioned in a highly regulated market and
enjoyed very little latitude in designing key
financial policies. But it has changed now.
The complexities of the environment have
been changed in many ways
Cont..
The important changes have been as
follows.
1.Considerable expansion became possible
due to the relaxation in industrial licensing
2.Freedom has been given to the
companies in designing and pricing the
securities issued by them.
Cont..
The system of cash credit has been
replaced by a WC loans.
Stable and administrative interest rate
have given way to volatile market
determined interest rate. Exchange rate
also is market determined.
cont
The scope of FDI has expanded
considerably and foreign portfolio
investment assumed great significance.
Investors have become more discerning,
demanding and assertive.
The pace of mergers acquisition, and
restructuring has intensified.
Derivatives instruments such as options
and futures have been introduced.
The challenge areas
The changes have made the job of a financial manager
more complex.. The key challenge areas are
1. Investment planning
2. Financial structure
3. Mergers, acquisitions, and restructuring
4. WCM
5. Performance management
6. Risk management
7. Corporate governance
8. Investor relations
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