Introduction to Financial Management

Prof. Ritesh Kumar Dubey BBA Sec B

Definition
Financial Management entails planning for the future for a person or a business enterprise to ensure a positive cash flow. It includes the administration and maintenance of financial assets. Besides, financial management covers the process of identifying and managing risk.

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FM - I / BBA - B / Prof. R.K.Dubey

Accounting
Accounting is concerned with the recording of transaction in a systematic manner. As such, it is concerned with recording the business event in a monetary form whether the cash is involved or not at the time of recording the business transaction.

Accounting functionalities involve:

Recording of transactions (Online transactions, Journal vouchers) Checking the prime books (Cash book, Journals and Bank book) Generating financial statements (P&L and B/S).
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An Example:

Consider a situation where a firm has bought material for 50,000 on 01.01.2011. This amount is to be paid after 30 days from the date of purchase to the supplier on 31.01.2011. In this though money is not spent on 01.01.2011, the transaction is recorded in the books of accounts.

7/27/2011

FM - I / BBA - B / Prof. R.K.Dubey

Finance
Finance is concerned with raising of funds to meet the various cash flow needs of the organization. Finance functions starts from gathering the cash flow information from the accounting records and also prepare projections of cash flow. Finance activities are concerned with preparing budgets and compare the same with the actual results for finding variances. Here, the sources and application of funds are prepared for both the budgets and actual scenarios.

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FM - I / BBA - B / Prof. R.K.Dubey

Finance functionalities involve

1. 2. 3. 4. Bank co-ordination Sourcing and Application of funds Preparing Budgets and MIS and EIS reporting.

Finance activities will encompass through the Accounting and Operations aspects of an organization. Finance is often considered as the backbone of an organization as it is interrelated to all the departments and functions of the organization.
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Evolution
Early 1900s - emphasis was on the legal aspects of mergers, the formation of new firms, and the various types of securities firms could issue to raise capital. During the depressions of the 1930s - emphasis shifted to bankruptcy and reorganization, to corporate liquidity, and to the regulation of security markets Developments in Financial Management. During the 1940s and early 1950s finance continued to be taught as a descriptive, institutional subject, viewed more from the standpoint of an outsider rather than from that of a manager Late 1950s focus shifted to managerial decisions regarding the choice of assets and liabilities with the goal of maximizing the value of the firm 1990s to date focus on value maximization continued but two trends have become increasingly important: the globalization of business and the increased use of information technology

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FM - I / BBA - B / Prof. R.K.Dubey

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

7/27/2011

FM - I / BBA - B / Prof. R.K.Dubey

Financial Goals
Profit maximization (profit after tax) Maximizing Earnings per Share Shareholders Wealth Maximization

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FM - I / BBA - B / Prof. R.K.Dubey

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

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FM - I / BBA - B / Prof. R.K.Dubey

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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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FM - I / BBA - B / Prof. R.K.Dubey

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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 returnsuch a policy may not always work

7/27/2011

FM - I / BBA - B / Prof. R.K.Dubey

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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 riskreturn 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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Managers Vs. Shareholders Goals

A company has stakeholders such as employees, debtholders, 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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FM - I / BBA - B / Prof. R.K.Dubey

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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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FM - I / BBA - B / Prof. R.K.Dubey

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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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FM - I / BBA - B / Prof. R.K.Dubey

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Role of Treasurer and Controller

Two more officersthe treasurer and the controller may 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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FM - I / BBA - B / Prof. R.K.Dubey

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What else you want to know?

Finance Interface Environment of Corporate Finance

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FM - I / BBA - B / Prof. R.K.Dubey

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Q&A

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FM - I / BBA - B / Prof. R.K.Dubey

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