FINANCIAL

MANAGEMENT

WHAT IS FINANCE???

YES!!!

MONEY!!!

MANAGEMENT???

ART!!!
OR
SCIENCE!!!

FINANACIAL MANAGEMENT MAY BE DEFINED

AS THE ART & SCIENCE OF MANAGING MONEY.
FINANACIAL MANAGEMENT IS CONCERNED
WITH THE DUTIES OF THE FINANCIAL
MANAGERS IN THE BUSINESS FIRM.

Financial management is concerned with the management decisions that

result in the acquisition and financing of the long term and short term of a
firm
-Phillippatuo
Financial management deals with how the corporation obtains the funds and
how it uses them
-Hoagland
Financial management is the application of the planning and control functions
to the finance functions, financial management involves the application of
general management principles to a particular financial operation
-Howard and Upton
Financial management is the area of business management, devoted to a
judicious use of capital and a careful selection of sources of capital in order to
enable the direction of reaching it goods
-prof Bradley

OBJECTIVES OF FINANCIAL MANAGEMENT

The objective provide a framework for optimum financial decision
making. They are concerned with designing a method of operating the
internal investment and financing of a firm. There are two widely
discussed approaches under this, these are:

Profit Maximization
Wealth Maximization

Profit Maximisation
Profit /EPS maximisation should be undertaken and those that decrease profits or
EPS are to be avoided. Profit is the test of economic efficiency. It leads to efficient
allocation of resources, as resources tend to be directed to uses which in terms of
profitability are the most desirable. Financial management is mainly concerned
with the efficient economic resources namely capital. The main technical flaws of
this criteria are :
Ambiguity
Timing of benefits
Quality of benefits.

The Objectives of profit maximization

By increasing the sales and there by increasing the
revenues.
By reducing the cost of production through efficient use
of the resources.
By making judicious choice of funds.
By minimizing risk

The arguments in favor

a) Profit is the prime motive which contributes to
better and more efficient performance
b) It ensures maximum returns to the shareholder
c) If this object is not there their would not be
any place for competition
d) It plays important role in growth of a business
e) It act as a protection against risk

Wealth Maximisation
Wealth maximisation is also known as Value or Net present
worth maximisation. Its operational features satisfy all the
three requirements of the operational of the financial course of
action namely, exactness, quality of benefits, and the time value
of money. Two important issues related to the value/share price
maximisation are:

Focus on stakeholders ,stakeholders include groups

such as employees, customers, suppliers, creditors,
owners and others who have a direct link to the firm.

EVA (Economic Value Added) EVA is equal to the

after-tax operating profits of a firm less the cost of the
firm to finance investments.

Merits
It helps in future cash flow
It considered the time value of money.
This concept allows the dividend policy of the company
to have its effect of the market value of the equity
shares.
It also contributes to the maximization of other
objectives of financial management.
Cash flows from projects subject to greater risks are
discounted at a higher discount rate

De-merits
It is subjected to the social responsibilities of the firm.
It is also subject to government restrictions.
The objective of wealth maximization is not necessarily
socially desirable.

Other Objectives: Ensuring maximum operational efficiency

through planning, directing and controlling
of the utilization of the funds.
Enforcing financial discipline in the
organization in the use of financial
resources.
Building up of adequate reserves for
financing growth of expansion.
Ensuring a fair return to the shareholders
on their investments.

Importance of financial mgt

Economic growth and development
Improved standard of leaving
Improved health
Allows better financial decision
Creates job
Alleviation of poverty
Promotes our environment

Organisation of Finance Function

Board of Directors
Managing Director /Chairman
Vice President /Director (Finance)/ Chief finance Officer
(CFO)
Treasurer

Financial
planning and
fund-raising
manager

Capital
Expenditure
Manager

Cash
Manager

Controller

Credit
Manager

Foreign
Exchange
Manager

Pension
Fund
Manager

Tax
Manager

Corporate
Accounting
Manager

Cost
Accounting
Manager
Financial
Accounting
Manager

RELATIONSHIP OF FINANCE WITH OTHER

DISCIPLINE
Financial Decision Areas
1.
2.
3.
4.
5.
6.

Investment analysis
Working Capital Management
Sources and cost of funds
Determination of capital structure
Dividend Policy
Analysis of risk and returns

SupportPrimary Disciplines
1.
2.
3.

Support

Resulting in
Shareholder wealth maximization

Accounting
Macroeconomics
Microeconomics

Other Related Disciplines

1.
2.
3.

Marketing
Production
Quantitative methods

FUNCTIONS OF FINANCE
CAPITAL BUDGETING
CAPITAL STRUCTURE
WORKING CAPITAL MAANGEMENT
DIVIDEND POLICY

CAPITAL BUDGETING (INVESTMENT)

Process of planning and managing a firms long-term
investments.
Financial manager identifies investment opportunities
that are worth more to the firm than they cost to acquire.
Size of cash inflow and cash outflows
Time of cash flows
Riskiness of cash flows

CAPITAL STRUCTURE (FINANCING)

Capital Structure is the specific mix of short-term debt, long-term debt and equity.
Raising long-term financing can be expensive, so the different possibilities must
considered carefully.
Sources of financing
Financing fixed assets. (equity, LTD and STD)
Borrow limit
Less expensive sources of fund
Minimization of cost of fund
Time of raising fund

WORKING CAPITAL MANAGEMENT

Working capital refers to the firms short term assets including
inventory and liabilities, such as cash owed to suppliers.
Managing working capital is a day to day activity related to the
firms receipt and disbursement of cash.
Current assets and current liabilities
Level of liquid assets
Sources of short term financing
Credit decision

AGENCY
RELATIONS
HIP

A relation, created either by

express orimplied contractor by
law, whereby one party (called
the principal orconstituent)
delegates thetransactionof
some lawful business or the
authority to do certain acts
for him or in relation to his
rights or property, withmore or
lessdiscretionary power, to
another person (called the agent,
attorney, proxy, or delegate) who
undertakes to manage the affair
and render him an account

AGENCY PROBLEM
A problem in determining
managerial accountability that
arises when delegating authority to
managers
Conflict of interest between the
principal and the agent, or the
shareholder and the manager
Shareholders are at information
disadvantage as compared to the
managers
It takes considerable time to see
the effectiveness of decisions
managers can make
Very difficult to evaluate how well
the agent has performed because

 In theory, managers
should at in the best
interest of the shareholders
In practice, managers may
maximize their own wealth
(in the form o f high salaries
and perks) at the cost of
shareholders
Buy other companies to
expand power, venturing
onto fraud, manipulate
financial figures to optimize

BETWEEN
SHAREHOLDE
RS AND
MANAGERS

RESOLVING
CONFLICTS
Managerial
Compensation
Direct
Intervention By
Shareholders
The Threat of
Firing
The Threat of
Hostile
Takeovers

BETWEEN
SHAREHOLD
ERS AND
CREDITORS

Shareholders through
managers make decisions
for shareholders value
maximization by ignoring
the interest of creditors
Manager may decide to
invest in a risky project. If
the project succeeds, all
the benefits goes to the
shareholders and the
creditors will receive only
the already fixed low rate

RESOLVING
CONFLICTS
Compensating
Creditors for
Increased Risk

Protective Terms
and Conditions
for Creditors