Financial

Management

Meaning of Finance:
Arrangement and Management of
funds required for organization
It is blood of organization
Art and Science of Managing Money

What is Financial
Management?
1.Concerns the acquisition,
financing, and management of
assets with some overall goal in
mind.
2.Procurement of Finance and its
Effective utilization for
achievement of common goal

Differences Between
Accounting and Finance
Financial accounting involves recording and
classifying financial information.
Completion of accounting cycle
Compilation of financial statements
Managerial accounting applies tools to
financial information to generate new
information.
Ratio analysis
Breakeven analysis

Differences Between
Accounting and Finance
Financial management involves a
number of different areas such as:
Stock valuation
Bond valuation
Asset diversification
Property appraisal and valuation
Working capital management

What Is Financial
Management?

Financial management is used to help make

three major decisions:
1. Which assets should we invest in?
2. How will we pay for these assets?
3. What should we do with the earnings generated
by the assets?

These are called the investment, financing, and

dividend decisions.

Decision in Financial Management

1.Investment Decision
2.Financing Decision
3.Asset Management Decision

1.Investment
Decisions
Most important of the three
decisions.
What is the optimal firm size?
What specific assets should be
acquired?
What assets (if any) should be
reduced or eliminated?

2. Financing
Decisions
Determine how the assets (LHS of
balance sheet) will be financed (RHS
of balance sheet).
What is the best type of financing?
What is the best financing mix?
What is the best dividend policy
How will the funds be physically
acquired?

3. Asset Management
Decisions
How do we manage existing assets
efficiently?
Financial Manager has varying degrees
of operating responsibility over assets.
Greater emphasis on current asset
management than fixed asset
management.

3.Asset Management
Decisions
1.Capital budgeting
What long-term investments or
projects should the business take on?
2. Capital structure
How should we pay for our assets?
Should we use debt or equity?
3.Working capital management
How do we manage the day-to-day
finances of the firm?
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Role of Finance Manager

Overall financial Planning & control

Raising of funds by different sources
Selection of fixed assets
Any other individual financial event

Goals or Objectives of Financial

Management
1.Profit Maximization
Profit is barometer of progress
Maximizing a firms earnings
after taxes.
Effective utilization of firms
resources
Interest of stakeholders cannot
bye ignored

2.Maximization of Shareholder
Wealth!
Financial decision will be taken such a
way that shareholders can get highest
returns
Combination of return and increase of
share price
Shares are traded in capital market
hence true value can analysed
Market price of share shows all future
benefits flows from firm to investors

Function of Financial
Manager
1.
2.
3.
4.
5.

Forecasting of financial needs

Acquiring the capital
Investment Decision
Cash Management
Interrelation with other
departments

Modern Approaches of Financial

Management
1.The investment decision:
Allocation of capital. It has to show the funds can be invested in
assets which would yield benefit in future

The financial decision

Acquisition of finance.
3. The dividend policy decision
2.

The determination of the percentage of profit earned

by the enterprise which is paid to the shareholders
4.The funds requirement decision
Current assets to have liquidity in the business.
Investment of funds in current assets reduces the
profitability of the firm

Financial Mgt. & Other

Areas
1. FM & Production Dept.:
Production facilities,
Skilled labour,
Production cycle,
Finished Goods,
Capacity utilization
Safety devices
All decisions have financial implications
therefore these are evaluated in light
objective of maximization of shareholders
wealth

2.FM & Material Dept.:

Procurement
Storage
Maintenance
Supply
Neighter Excess nor Shortage of material
Financial manger & Material manager think
about
EOQ, Safety level, Danger level of stock, store
personnel requirement

3.FM & Personnel Dept.:

Recruitment
Training & placement
Manpower management
Welfare of employee and their family
Different Decisions need to be taken.
out of some are compulsory under
Legislative
Personal Dept with Finance Manger
has to prepare Incentive schemes,
pay scale, training program,

4.FM & Marketing Dept.:

Marketing plans
Discounts and offers
Advertisement budget
Credit and Cash Sales policies

Key Strategies of FM
1. Preparation of Vision Statement
Statement about the companys values, purpose,
and future direction
2. Preparation of Mission Statement
Target customers and markets; main products and
services; geographic domain; core
technologies; commitment to survival, growth.
3.Analysis:
An analysis of the firms business trends, external
opportunities, internal resources.
4. Strategy Formulation:
To formulate a long-term strategy
5.Strategy Implementation and
Management

The Modern Corporation

Modern Corporation
Shareholders

Management

There exists a SEPARATION between

owners and managers.

Role of Management
Management acts as an agent
for the owners (shareholders)
of the firm.
An agent is an individual
authorized by another person,
called the principal, to act in the
latters behalf.

Board of Directors
Typical responsibilities:
Set company-wide policy;
Advise the CEO and other senior executives;
Hire, fire, and set the compensation of the
CEO;
Review and approve strategy, significant
investments, and acquisitions; and
Oversee operating plans, capital budgets,
and financial reports to common
shareholders.

Organization of the
Financial Management
Function
Board of Directors
President
(Chief Executive Officer)
Vice President
Operations

VP of
Finance

Vice President
Marketing

Organization of the
Financial Management
Function

VP of Finance
Treasurer

Controller

Capital Budgeting
Cash Management
Credit Management
Dividend Disbursement
Fin Analysis/Planning
Pension Management
Insurance/Risk Mngmt
Tax Analysis/Planning

Cost Accounting
Cost Management
Data Processing
General Ledger
Government Reporting
Internal Control
Preparing Fin Stmts
Preparing Budgets
Preparing Forecasts