Presentation of Fundamental of

Financial Management

Presented To:Prof. Vikas Pathak

Presented By:Mona Singh

MBA II Sem
Section- A2

Meaning of Financial
Management
Concerns the acquisition, financing, and management
of assets with some overall goal in mind.
FM is a part of overall management Fm is that is
that managerial activity which is
concerned with the planning & controlling of the
firms financial recourses. It is helpful in taking
important decisions of what is invest and how to
finance for it.
Thus, FM is broadly concerned with acquisition of fund
& its proper utilization. FM is a process
of
managing
the
financial
resources,
including
accounting & financial reporting, budgeting,
collecting accounts receivable , risk management &
insurance for a business. FM at the broadest level
comprises the management of all financial activities
of an organization.

Definition

By S.C. Kuchhal :Financial Management deals with

procurement of fund & their effective
utilization in business.
By Solomon :Financial management is concerned
with the efficient use of an important
economic resources, namely capital
funds.

Two aspect of FM

Procurement of funds.
Effective utilization of funds.

Scope of Financial
Management
scope of FM may be divided

The
into
following two board categories:
Traditional Approach Arrangement
of funds.
Modern Approach Effective

Nature and characteristics of FM

Part of overall management.

Closely related with other disciplines.
Continuous process.
Different from accounting.
Fast growing.
Helpful in decision making.
Wider scope.
Both science and Art.

Objectives of FM

1.
2.

3.
4.

5.
6.

Profit maximization.
Wealth maximization.
Other objective:Provide support for decision making.
Ensure the availability of timely, relevant and
reliable financial and non financial information.
Mange risks.
Use
resources,
efficiently,
effectively
&
economically.
Strengthen accountability.
Provide a supportive control environment.

Significance of FM
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

Essential in all types of organizations.

Related with all departments.
Basis of decisions-making.
Helpful in planning.
Optimum utilization of resources.
Helpful in forecasting.
For better control.
For achieving balance risk and return.
Helpful in taking innovative steps.
For maintaining optimum level of working capital.
Provide timely information.

Functions of Financial Manager

a)
b)

Investment decision:The investment decision are related with

selection of assets in which the funds are to be
invested. The assets may be divided into two
categories:Long term assets.
Short term assets.
What is the optimal firm size?
What specific assets should be acquired?
What assets (if any) should be reduced or
eliminated?

Cont

Financing decision:In finance decision, the financial manager

is required to determine the proportion of
debt and equity. It is known as capital
structure. It is essential to have a proper
balance between debt and equity to ensure
a trade off between risk and return.
What is the best type of financing?
What is the best financing mix?
What is the best dividend policy (e.g.,
dividend-payout ratio)?
How will the funds be physically acquired?

Cont..

Dividend decision:It is a third major financial decision.

The financial manager decide whether
the whole amount of profit should be
distributed or a portion should be
distributed and balance should be
retained. Dividend policies should be
such that maximizes the value of
shares.

Other functions of Financial Manager

Liquidity decision.
Evolution of financial performance.
Supply of funds to all sections of the
organizations.
Liaison with financial institutions.
Interpretation of financial data.
Legal obligations.

Profit Maximization
Maximization of profit is generally considered as an
implied objective of firm. It is generally held that in
case of free competition, businessman not only tries to
achieve his personal interest, but he also satisfies
interest of society. A firm should be guided by the aim
of profit maximization. Those assets and projects
should be selected, which are profitable and
those which are not should be rejected.
Maximizing a firms earnings after taxes.
Problems
Could increase current profits while harming firm
(e.g., defer maintenance, issue common stock to buy
T-bills, etc.).

 Criticisms: It is vague .
It ignores time value of money.
It ignores risk.
Too narrow.
It ignores quality aspect of
benefits.

Maximization of Shareholder
Wealth!
The
objectives of wealth maximization,

as
discussed above, is not only vague but it also
ignores the two basic criteria of financial
management i.e. risk & time value of money. It
also known as value Maximization or Net
Present Value maximization.
Value creation occurs when we maximize the
share price for current shareholders.
Criterion:It
is based on the concept of cash flow
generated by the decision rather than counting
profit. Measuring benefits in terms of cash flow
avoids the ambiguity associated with accounting
profit.

What do mean by Sources of

finance?

Sources of finance means the way where

we are arranging the capital for effectively
run for company.
Finance is said to be the life blood of a
business. Funds are needed to meet the
different
types
of
requirement
like
implementing a new project, expansion,
modernization, etc. The business can not
run effectively if it does not have adequate
finance.

Sources of Finance

According to Period.

Long term sources, viz. shares, debenture, long-term loans, etc

Short term sources, viz. advances from commercial banks,

public deposits, advances from customer and trade creditors etc.
II.
According to Ownership.

Own capital, viz. share capital, retained earning and surpluses

etc.

Borrowed capital, viz. debenture, public deposits and loan etc.

III. According to source of Generation.

Internal sources, viz. retained earning and depreciation fund etc.

External sources, viz. securities such as share and debenture,

loan, etc.
I.

Short-Term Sources of Finance

Trade Credit:
It is an informal arrangement between the buyer and
seller. There is no legal instrument or document for
granting trade credit. It is popularly known as Sundry
Creditor or Accounts payable.
Bnak Finance:
Banks are the main institutional sources of working capital
finance in India. Bank finance is available in different
forms. Bank do not provide 100% of the credit limit. They
deduct margin money to ensure security. For example, if
the margin requirement is 20%, bank will give only 80%
of the value of assets kept as security.

Types of bank finance:

Cash credit
Overdraft
Purchasing/discounting of the bill
Letter of credit
Working Capital Loan
Commercial Paper:
A commercial paper is a short-term
Promissory
Note issued by a company,
negotiable by endorsement and delivery, issued
at such discount on face value as may be
determined by the issuing company.
Accrued Expenses and Deferred income:
In addition to trade credit, accrued expenses
and differed income are other spontaneous

Accrued expenses are more automatic source

since by definition they permit the firm to
receive services before paying for them.

Long-Term Sources of
Capital market is one of the most important sources
Finance
of long-term financing.
It includes a wide variety of
financial instrument including shares and
debentures which facilitate flow of funds from
surplus units to deficit unites.
Types of capital
Equity Share Capital:
The amount of raised by the issue of equity
shares is known as equity share capital. Types of
share capital as follows:
Authorized Share Capital

Preference Share:
The amount of share capital which is raised by the
issue of preference shares is called preference share
capital.
Types of Preference shares:
Cumulative preference shares
Non cumulative preference shares
Participating preference shares
Non participating preference shares
Redeemable preference shares
Irredeemable preference shares
Convertible preference shares
Non convertible preference shares
Debentures :
A company has authority, if permitted by
memorandum and article of association, to invite
members of general public to contribute to its loan

The loan capital can be raised by a company by the

issue of an instrument called Debenture.
Types of Debentures
Secured or Mortgage Debentures
Redeemable Debentures
Simple or Naked Debentures
Perpetual Debentures
Registered Debentures
Bearer Debentures
On the basis of convertibility-Non-Convertible Debentures
-Fully-Convertible Debentures
-Partly-Convertible Debentures
Retained Earnings:
At time of distribution of profit company has
retained some amount of profit and re invest in
business its called retained earning.

Meaning of Budget
Budget is a numeric representation of the
managers plan for specified period of time.
It is commonly used by business firms,
government agencies, non profit making
organization and even households.
Definition
By Brown and Howard:a budget is a predetermined statement of
management policy during a given period
which provides a standard for comparisons
with the results actually achieved.

Classification
budgets
On
basis
time

the
of

1. Long
term
2. Short
term
3. Current
4. Rolling

of

On the basis
of function
1. Sales
2. Production
3. Cost
production
4. Purchase
5. Capital
Expenditure
6. Cash
7. Personnel
8. Research
9. Master

On the basis
of flexibility
1. Flexible
2. fixed
of

Cash Budget
Cash budget is an estimate of cash receipt
and payments. It is prepared after preparing
all other functional budget because financial
requirements of all the budgets are taken
into consideration for preparing cash budget.
Definition
By Guthmen and Dougal:Cash budgets is an estimated of cash receipts
and disbursement for a future period of
time.

Flexible Budget
A flexible budget is prepared form a range, i.g.
for more than one level of activity. Thus, a
flexible budget might be developed that would
apply to range of production, say 5000 to 10000
units. Under this approach, if actual production
slips to 8000 units from a projected 10000 units,
the manager can use it to determine budgeted
cost at 8000 units of output.
A budget which by recognizing the difference
between fixed, variables and semi variable
costs, is designed to change in relation to the
level of activity attained.

Zero Base budgeting

Zero base budgeting, as the name suggests,

examines or reviews a program or function
from a scratch. The technique suggests
that an origination should not only make
decision about proposed new programs, but
should also review the appropriateness of
the existing programs from time to time.
Such a review should be done of such
responsibility centers where the proportion
of costs is relatively high. No activity or
expense is allowed simply because it
was being allowed or done in the past.