Financial Management
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Concept of Financial management, Objectives of Financial Management, decisions,significance and limitations of Financial management
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Financial Management
- 1. FINANCIAL MANAGEMENT D R . S H A I FA L I M AT H U R
- 5. INTRODUCTION • Finance is a broad term that describes two related activities- Finance is defined as the management of money and includes activities such as investing, borrowing, lending, budgeting, saving, and forecasting. “Finance may be defined as the position of money at the time it is wanted”…According to F.W. Paish Dr. Shaifali Mathur Money Management Process of acquiring Fund
- 6. AREAS OF FINANCE Public finance deals with the transactions relating to public expenditure, revenue and Deals with procurement and management of funds needed for business activities. Related to capital formation and meets the financial requirements of the economy. The study of flows of funds between individuals and organizations across It deals with acquisition of funds, its utilization, management and control. Dr. Shaifali Mathur Institutional Finance
- 8. OBJECTIVES OF FINANCIAL MANAGEMENT • The Process of decision making by a finance manager must be goal oriented one. He must have a specific goal in mind as he plans future course of action. Dr. Shaifali Mathur
- 9. Dr. Shaifali Mathur Profit Maximization A business firm is profit-seeking organization. Under this approach, actions that increases profits should be undertaken and those that decreases profits should be avoided. In specific operational terms, as applicable to financial management, the profit maximization criterion implies that the investment, financing and dividend policy decisions of a firm should be oriented to the maximization of profits. Earlier the only aim of sole proprietor then was to enhance his individual wealth and personal power, which could easily be satisfied by the profit maximization objective. Profit maximization fails to serve as an operational criterion for maximizing the owners’ economic welfare. It suffers from the following limitations : It is vague It ignores timings
- 10. • Professor Ezra Soloman has suggested the adoption of wealth maximization as the best criterion for the financial decision making. This objective is generally expressed in terms of maximisation of the value of a share of a firm. • Wealth maximisation means maximizing the ’net present value’(or wealth) of a course of action. A financial action which has a positive net present value creates wealth and, and therefore, is desirable. On the other hand, a financial action resulting in negative net present value should be rejected. Between a number of desirable mutually exclusive projects the one with the highest net present value should be adopted. • The wealth maximisation criterion is based on the concept of cash flows generated by the decision rather than accounting profit which is the basis of the measurement of benefits in case of the profit maximisation criterion. Benefits Measuring benefits in terms of cash flows avoids the ambiguity associated with accounting profits. It considers both the quantity and quality dimensions of benefits. it also incorporates the time value of money. It analyses risk and uncertainity Dr. Shaifali Mathur Wealth Maximization
- 11. Dr. Shaifali Mathur Goals Objectives Advantages Disadvantages Profit maximization Large amount of profits 1. Easy to calculate Profits. 2. Easy to determine the link between financial decisions and profits 1.Emphasizes the short term. 2. Ignores risk or uncertainty 3. Ignores the timing of returns 4. Requires immediate resources Wealth Maximization Highest market value of common stocks 1. Emphasizes the long term . 2. Recognizes Risk and Uncertainty 3. Recognizes the timing of returns. 4. Considers return 1. Offer no clear relationship between financial decisions and stock price. 2. Can lead to management anxiety and frustration. Comparison
- 12. Dr. Shaifali Mathur Decision Areas of Financial Management InvestmentDecisions The investment decision is relates to selection of asset in which fund will be invested by the firm. @This include capital budgeting decisions and Working capital management decisions. @The decision relates to the careful selection of assets in which funds will be invested by the firms. The firm puts its funds in procuring fixed assets and FinancingDecision A firm’s capital structure or financing decision is concerned with obtaining funds to meet firm’s long term investment requirements through specific mixture of long- term debt and equity. Under this function the Finance Manager is to involve the following decisions: @Capitalization Decision @ Cost of Capital Dividend @Dividend decisions deals with appropriations of after tax profits. The finance manager has to decide whether the firm should distribute all profits or retain them, or distribute a portion and retain the balance. The decision regarding the amount of profits to
- 13. Dr. Shaifali Mathur Questions 1. Financial Management is mainly concern with-----------------. a) All aspects of acquiring and utilizing financial resources for firms activities. b) Arrangement of Funds c) Efficient management of every business d) Profit maximization Answer 2. The primary goal of Financial management is----------------------. a) To maximize the return b) To maximize risk c) To maximize the wealth of the owners d) To maximize profits Answer 3. Corporate restructuring decisions of financial management are related with which of the following ? a) Investment decisions b) Financing decisions c) Dividend decisions d) All of the above Answer
- 14. Dr. Shaifali Mathur Scope/Functions of Financial Management Functions Primary Financial Planning Financial Control Allocation of Funds Acquisitio n of Funds Distribution of Funds Subsidiary Liquidity Profitabilit y Evaluation of Financial Performance Co-ordination with other Departments Incidental/ Routine Clerical or routine nature required for the execution of decision taking by the executives
- 15. Dr. Shaifali Mathur Formulation of organizational objectivesFinancial Planning • Formulation of financial policies • Making adjustments and readjustments- preplanning for removing defects and ineffectiveness Financial progress is evaluated from time to time and corrective measures are taken in case of deviations. Steps involves areFinancial Control • I Developing standard of performance. • II Comparing actual performance with these standards. Ensure adequate supply of funds from the right source at the cost and right time to meet firm’s funding needs.Acquisition of Funds •The funds can be raise from various sources such as equity shares ,preference shares , loans,etc. •Sources of funds depends upon - •@Cost of capital •@Nature of cost (fixed/variable ) •@Duration of funds Effective distribution of acquired fundsAllocation of Funds •Involve investments in current assets /short term asset. •Consequences insufficient allocation should be considered. Distribution of net profit after tax among shareholders.Distribution of Funds •Involve dividend decisions. Primary Functions
- 16. Dr. Shaifali Mathur Liquidity Subsidiary Functions Enable the firm in paying its obligations in time and meeting day to day needs. Profitability function Finance manager tries to maximize the profits of the firm so that value of the firm may increase Evaluation of Financial performance Coordination with other Departments Evaluation of financial performance of the firm to facilitate changes to be made in future policies and plans by pointing out the errors committed. Success of a firm depends on the coordination with other departments . There should be uniformity in decisions taken by the different departments
- 17. Dr. Shaifali Mathur Proper custody and safeguard of valuable papers Incidental and routine functions Supervision of Cash receipts and payments Maintenance of accounts and preparation of reports Administrati on of Internal Audit Establishing financial public relations Compliance with government regulaions The chief Financial executive /controller is mainly responsible for taking decisions regarding execution/ administrative finance functions
- 18. Dr. Shaifali Mathur Significance of Financial Management Determinant of Business success Optimal utilization of Resources Measurement of performance Basis of Planning, coordination and control Focal point of decision making Limitations of Financial Management Based on Accounting records Lack of knowledge of related subjects Lack of Objectivity Expensive or Uneconomical Evolutionary stage
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- More and more businesses are reducing management jobs and squeezing together the various layers of the corporate pyramid. This is being done to reduce costs and boost productivity. As a result, the responsibilities of the remaining management positions are being broadened. Developing cross-functional capabilities will be the rule, not the exception. Thus, a mastery of basic financial management skills is key ingredient that will be required in the work place of your not too distant future. 3. Almost every firm, government agency, and organization has one or more financial managers who oversee the preparation of financial reports, direct investment activities, and implement cash management strategies. As computers are increasingly used to record and organize data, many financial managers are spending more time developing strategies and implementing the long-term goals of their organization. 4. The duties of financial managers vary with their specific titles, which include controller, treasurer or finance officer, credit manager, cash manager, and risk and insurance manager. Controllers direct the preparation of financial reports that summarize and forecast the organization’s financial position, such as income statements, balance sheets, and analyses of future earnings or expenses. 5. Regulatory authorities also in charge of preparing special reports require controllers. Often, controllers oversee the accounting, audit, and budget departments. Treasurers and finance officers direct the organization’s financial goals, objectives, and budgets. They oversee the investment of funds and manage associated risks, supervise cash management activities, execute capital-raising strategies to support a firm’s expansion, and deal with mergers and acquisitions. 6
- . Credit managers oversee the firm’s issuance of credit. They establish credit-rating criteria, determine credit ceilings, and monitor the collections of past-due accounts. Managers specializing in international finance develop financial and accounting systems for the banking transactions of multinational organizations. 7. Cash managers monitor and control the flow of cash receipts and disbursements to meet the business and investment needs of the firm. 8. Financial institutions, such as commercial banks, savings and loan associations, credit unions, and mortgage and finance companies, employ additional financial managers who oversee various functions, such as lending, trusts, mortgages, and investments, or programs, including sales, operations, or electronic financial services. 9. Branch managers of financial institutions administer and manage all of the functions of a branch office, which may include hiring personnel, approving loans and lines of credit, establishing a rapport with the community to attract business, and assisting customers with account problems. Financial managers who work for financial institutions must keep abreast of the rapidly growing array of financial services and products.
- Study of how money is managed how money is managed and the process of acquiring funds. Finance not only includes the act of making money available, but also includes its administration and control of money ( how well are we managing the funds.).
- It is vague : It does not clarify what exactly does it mean. For example, which profits are to be maximised, short-term or long-run, rate of profit or the amount of profit ? It ignores timings : The concept of profit maximisation does not help in making a choice between projects giving different benefits spread over a period of time. The fact that a rupee received today is more valuable than a rupee received later, is ignored. It ignores risk : The streams of benefits may posses different degree of certainty. Two firms may have same total expected earnings, but if the earnings of one firm fluctuate considerably as compared to other, it will be more risky. Possibly owners of the firm would prefer smaller but certain profits to a potentially large but less certain stream of benefits. It ignores interest of workers, consumers, government and public in general.
- The assets which can be acquired fall into two broad groups : (i) long term assets which yield a return over a period of time in future, (ii) short-term or current assets defined as those assets which in normal course of business are convertible into cash usually within a year. Financing decisions Capitalization- finance manager has to decide the funds requirements for fixed assets and WC purposes and also to identify different sources available to raise such funds. COC: Finance manger has to assess individual cost . Capital structure: depending upon advantages and disadvantages of debt component, the finance manager s/d determinethe degree pr level of gearing i.e. adding debt into the capital structure.