Chapter - 1

Financial Management

Business Activities
Production

Marketing
Finance

FINANCIAL DECISIONS INA FIRM

1.Capital Budgeting 2. Capital Structure 3.Working capital 4.Dividend Decisions

Finance Functions
Investment or Long Term Asset Mix Decision Financing or Capital Mix Decision

Dividend or Profit Allocation Decision

Liquidity or Short Term Asset Mix Decision

Finance Managers Role

Raising of Funds
Allocation of Funds Profit Planning

Understanding Capital Markets

CHANGING ROLE OF THE FINANCE MANAGER

Investment Planning

Financial structure
Mergers, acquisition& restructuring Working capital management Performance Management Risk management Investor relations

Financial Goals
Profit maximization (profit after tax)

Maximizing Earnings per Share

Shareholders Wealth Maximization

Profit Maximization
Maximizing the Rupee Income of Firm Resources are efficiently utilized Appropriate measure of firm performance Serves interest of society also

Objections to Profit Maximization

It is Vague It Ignores the Timing of Returns It Ignores Risk Assumes Perfect Competition In new business environment profit maximization is regarded as

Unrealistic Difficult Inappropriate Immoral.

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Maximizing EPS
Ignores timing and risk of the expected benefit Market value is not a function of EPS. Hence

maximizing EPS will not result in highest price for company's shares Maximizing EPS implies that the firm should make no dividend payment so long as funds can be invested at positive rate of return such a policy may not always work

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Shareholders Wealth Maximization

Maximizes the net present value of a course

of action to shareholders. Accounts for the timing and risk of the expected benefits. Benefits are measured in terms of cash flows. Fundamental objectivemaximize the market value of the firms shares.

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Risk-return Trade-off
Risk and expected return move in tandem;

the greater the risk, the greater the expected return. Financial decisions of the firm are guided by the risk-return trade-off. The return and risk relationship: Return = Risk-free rate + Risk premium Risk-free rate is a compensation for time and risk premium for risk.
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 A company has stakeholders such as employees, debt-

Managers Versus Shareholders Goals

holders, consumers, suppliers, government and society. Managers may perceive their role as reconciling conflicting objectives of stakeholders. This stakeholders view of managers role may compromise with the objective of SWM. Managers may pursue their own personal goals at the cost of shareholders, or may play safe and create satisfactory wealth for shareholders than the maximum. Managers may avoid taking high investment and financing risks that may otherwise be needed to maximize shareholders wealth. Such satisfying behaviour of managers will frustrate the objective of SWM as a normative guide.

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Financial Goals and Firms Mission and Objectives

Firms primary objective is maximizing the welfare of

owners, but, in operational terms, they focus on the satisfaction of its customers through the production of goods and services needed by them Firms state their vision, mission and values in broad terms Wealth maximization is more appropriately a decision criterion, rather than an objective or a goal. Goals or objectives are missions or basic purposes of a firms existence

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Financial Goals and Firms Mission and Objectives

The shareholders wealth maximization is the

second-level criterion ensuring that the decision meets the minimum standard of the economic performance. In the final decision-making, the judgement of management plays the crucial role. The wealth maximization criterion would simply indicate whether an action is economically viable or not.

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Organisation of the Finance Functions

Reason for placing the finance functions in

the hands of top management

Financial decisions are crucial for the survival of the firm. The financial actions determine solvency of the firm Centralisation of the finance functions can result in a number of economies to the firm.

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Status and Duties of Finance Executives

The exact organisation structure for financial

management will differ across firms. The financial officer may be known as the financial manager in some organisations, while in others as the vice-president of finance or the director of finance or the financial controller.

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Role of Treasurer and Controller

Two more officersthe treasurer and the

controllermay be appointed under the direct supervision of CFO to assist him or her. The treasurers function is to raise and manage company funds while the controller oversees whether funds are correctly applied.

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FINANCIAL ENVIROMENT
Financial environment can be defined as the markets which are

created because of the trading of financial securities. There are some buyers and some sellers which create financial markets and a financial environment is developed like banks, financial institutions etc.

Financial environment facilitates raising of capital by creating capital markets, result in transfer of risk in the derivatives market and accomplishes international trade through currency markets.

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FINANCIAL ENVIROMENT
Financial environment in an economy deals with the

monetary transactions which are based on money, time and risk.

Financial environment can be further classified into

financial markets which collectively constitute this environment. These financial markets include Bond market, Forex market, Stock Equities market, Money market, Commodity market, Cash market, Derivatives market, Over the counter market and Real estate market.
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FINANCIAL ENVIROMENT
These markets act as a platform for the buyers and the

sellers to interact in the financial environment.

The buyers and sellers of the financial markets are

known as Market participants. These participants include investors, speculators and institutional investors. There are certain regulatory authorities (both private and government) who determine some policies and rules which are applicable in a financial environment.

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FINANCIAL ENVIROMENT OF A COMPANY

Financial environment of a company refers to all the financial

institutions and financial market around the company that affects the working of the company as a whole. The financial environment has a number of factors. It includes the financial institutions, government, individuals and firms around the business. Firms use their financial markets to keep their savings as

property. It is extremely important for the monetary markets.

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FINANCIAL ENVIROMENT
Basically Financial environment is very important to carry out

monetary dealings in the economy. For example, all industries, businesses, companies and trades are based on the financial system of an economy. Even the government requires a financial environment to operate the state activities. Financial environment is very important to regulate money in the economy, which is also the basic purpose of the financial environment.

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FINANCIAL ENVIROMENT
On the basis of this aim financial intermediaries, get the money from the people who do not want to keep it idle and in return give them a return on their investment. The same money is give to the borrowers who are the businesses and the companies and who want to operate their businesses from this money. So, without creating these financial environment, no business is possible. Short term securities which are used for raising funds are also the main instruments of these markets. Therefore, for the regulation of money in the economy, financial markets are very important.

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