Module 1

Introduction to Financial Management

Classification
 Public Finance
 Deals with requirements, receipts &
disbursements of funds incase of Govt
institutions.
 Private Finance
 Incase of an individual, profit seeking
org & non-profit org
 Classified as : Personal, Business
finance & finance of NPO
Meaning of Business Finance
 Finance of Business activities
 Finance is provisioning of money at the
time when it is required
 Business – production & distribution
activities carried out for satisfying human
needs
 Classified as
 Proprietary finance
 Partnership finance
 Corporate finance/Financial Mgt
Financial Management
 Process of raising, providing &
administering of all funds to be used in a
corporate enterprise
 Also called as corporate/business finance
 Refers to that part of the management
activity which is concerned with the
planning and controlling of firm’s financial
resources
Evolution
 Initial stages : sourcing & financing
 1930 – economic recession raising funds from banks
& other FI’s were tough
 Hence gained importance of planning & ctrling sound
finl str of firm was needed
 Post worldwar – Need for finl str & capital budgeting
was felt
 Today’s modern phase – various theories sharpe’s
CAPM & Black & scholes pricing models are developed.
 Emergence of financial engineering – design develop
& implemention of innovative finl instruments and
optimal models/solutions to the finance problems
Importance
 Financial planning
 Acquisition of funds
 Proper use & allocation of funds
 Taking sound finl decisions
 Improvising profitability
 Improvising wealth of the investors & the nation
 Promoting & mobilising individual & corporate savings
Finance function
 Discuss the importance
Approaches:
 Traditional
 Narrow scope
 Includes only sourcing of funds & not allocation
 Does not focus on day to day finl problems – this is
done by somewhere & by someone in the org
 Modern
 More broader scope
 Includes both raising & utilising finance
 Also covers finl planning, raising, utilising & finl
controlling
Objectives of Finance function
 Acquiring sufficient funds
 Proper utilisation of funds
 Increase profitability
 Maximize firm’s wealth
Scope of Finance function
 Estimating finl requirements
 Deciding capital structure
 Selecting a source of finance
 Selecting a pattern of investments
 Proper cash mgt
 Implementing finl controls
 Proper use of surpluses
Relationship of finance with other
business functions
 Purchase function
 Production
 Distribution
 Accounting
 Personnel
 R&D
Objectives of Finl Mgt
 Profit maximisation
 Wealth Maximisation
Arguments for Profit maximisation
For :
 It should be the definite objective
 Economic conditions do not remain
same – hence retained earnings is
important
 Profits are only source for growth &
devp
Contd…
Against
 Very vague term
 It ignores time value of money
 Risk factor is not considered
 Effect of dividend on share value is
ignored
Arguments for Shareholders wealth
For:
 Long term view
 Indicator of firm’s condition
 Report card of its progress
Against
 Not clear about what to be done
 Other claimers are ignored
 Faces difficulty when ownership & mgt
separates in case of large org
 Financial Decisions

1. Investment Decision:
Decision which is related to the selection of assets, composition of business risk
Classification : Financial
Short term : Working capital mgt Decisions
Long term : capital budgeting
2. Financing Decision:
Investment Financing Dividend
Determination of proportion of debt and equity in
Decision capital structure,
Decision how to finance
Decision
new assets, optimum capital structure
3. Dividend Decision:
•Its part of profit to be distributed to shareholde
•It involves determination of portion of EPS to be declared as dividend per share.
Inter-relation among Financial
Decisions

• Investment and Financing decision

• Financing and Dividend decision
• Dividend and Investment decision
 Board of Directors

Organisation of Finance Managing Director

Function
Vice-President Vice-President Vice-President
Operations Finance Sales

Treasurer Controller

Capital
Data Processing
Cash Cost
Budgeting Manager
Management Accounting
Manager

Commercial Banking
Credit
and Investment
Management Tax Manager
Banking Financial
Accounting
Manager

Fund raising
Portfolio
Manager Financial
Manager Internal Audit
Statements
Preparation
Inventory
Preparing
Manager
Budgets
Who is a controller and treasurer?
Controller:
 The controller or Chief Accounting Officer is responsible
for the maintenance of adequate internal control and
 for the preparation of accounting records and financial
statements such specialized activities
 as budgeting, tax planning and preparation of tax
returns are usually placed under the controller's
jurisdiction.
 Treasurer:
 The Treasurers has custody of the company funds and is
generally responsible for planning and controlling
the company cash position.
 The treasurer's department also has responsibility for
relations with the company's financial institutions and
major creditors.