Financial Management

Meaning and Need of financial

Management

Objectives of the session

Introduction to financial management as a subject,

understanding its scope and utilization for decision making

process to increase shareholders wealth.

Introduction
FM is that managerial activity which is
concerned with planning and controlling of the
firms financial resources.
FM is an area of financial decision making,
harmonizing individual motives and enterprise
goals

Aim of financial management

Acquiring sufficient funds
Long gestation period- owners capital
Reduction of tax- debt
Requirements of funds for a project- debentures

Proper utilization of funds

returns> cost
No ideal funds

Increasing profitability
Maximizing firms value

Objective of financial
management cont
Wealth maximization
Positives
Long term survival of the business
Increase in EPS
Considers risk factor and time value of money

Negatives
Not descriptive
Social acceptability is questioned
Shareholders wealth vs. wealth of firm

Scope of financial
management
Estimating financial requirements
Deciding capital structure
Selecting a source of finance
Selecting a pattern of investment (FA & WC)
Proper cash management (cash budget/report)
Implementing financial controls(cost, return,
BEP, audit)
Proper use of surplus(expansion, dividends,
reinvesting)

Functional areas of financial

management
Determining financial needs
Selecting the sources of funds
Financial analysis and interpretation
Cost- volume profit analysis
Capital budgeting
Working capital management
Profit planning and control
Dividend policy

Financial decisions
Three types:
Investment decisions or long term asset-mix
Capital budgeting decision- profitability of new
investment, expected risk and return

Financing decisions or capital-mix

Capital structure- control, flexibility, legal aspects,
loan covenants

Dividend decisions or profit allocation

Optimum dividend policy

Liquidity decisions or short term asset-mix

Profitability- liquidity trade-off

Factors affecting financial

decisions
Internal
Nature and size of business
Expected return , cost and risk
Composition of assets
Conditions of debt agreement
Working capital requirement
Liquidity position
Age of the firm
Trend of margin

Factors affecting financial

decisions cont..
External
State of economy
Structure of capital and money markets
Requirement of investors
Government policy
Taxation policy
Lending policy of financial institutions

Financial management process

Financial
planning and
control

feedback

Financial
decisions
1.Investment
decisions
2.financing
decisions
3.Dividend
decisions

Risk and return

characteristics
of the firm

Market price of
share

Shareholder
wealth

Functions of financial
manager
Not limited to preparing reports, raising funds
and maintaining records
Funds raising
Funds allocation
Decide about the expenditures and determine
the demand for capital for these expenditures
How large should be an enterprise and how fast it
should grow?
In what form should it hold its assets?
How should the funds required to be raised?

Functions of financial
manager cont.
Profit planning
Decisions in the areas of cost, pricing volume of
output and firms selection of product lines
Cost structure to develop actions plans for the
future

Understanding capital market

Operations of capital market
Evaluation by investors