FINANCIAL MANAGEMENT AN INTRODUCTION

FINANCIAL MANAGEMENT DEFINED This is the business management function that is concerned with managing a business’ finances.  It refers to the application of financial management tools and techniques to coordinate all the financial functions in the business. Dr. Rakesh Kumar

Financial Management Management + Finances Is all about managing financial resources optimally in order to achieve desired objective, which is preset. FM Financial department Responsibility of Dr. Rakesh Kumar

Objectives of Finance Maximization of market share. Maximization of ROI. Maximization of profits. Achieving a specific service level. Satisfying all stakeholders to maximum possible extent. Maximization of shareholder’s wealth. Dr. Rakesh Kumar

Functions of a Financial Manager Spearheading the process of capital budgeting Managing the liquidity of the firm. Sourcing and utilization of funds Financial analysis and planning. Taking custody of company’s valuable documents Paying suppliers Monitoring the banking operations Budgeting and forecasting Proper earnings management Dr. Rakesh Kumar

Organization of Financial Department CFO Treasurer Capital budgeting Administer credit Manages cash Obtain finances Controller Taxation Management accounting Internal audit Financial accounting Supervises Main functions are Dr. Rakesh Kumar

Main functions of the department Facilitation of finances. Allocation of finances. Utilization of finances. Control of finances. Dr. Rakesh Kumar

Importance of Proper Financial Management Dr. Rakesh Kumar

Importance of FM Contd… Maximize use of financial resources FM allows you to identify and plan for the use of your financial resources. It provides information for financial decision making. Dr. Rakesh Kumar

Importance of FM Contd… Evaluate new business opportunities FM provides the key information and answer questions of whether to exploit such opportunities or not. That is, entrepreneurs can effectively analyze a business opportunity and determine whether it is worthwhile or not. Dr. Rakesh Kumar

Importance of FM Contd… Measuring business performance FM helps the investor to monitor the progress of their business towards achieving business goals and to take corrective action where necessary. Dr. Rakesh Kumar

Importance of FM Contd… Making sound business decisions The financial information systems provides a wide range of information that can be used to make better decisions. This is done using financial ratios, break even analysis etc. Dr. Rakesh Kumar

Financial Decisions Investment decisions Financing decisions Dividend Decisions Dr. Rakesh Kumar

1. Investment Decision This is also known as the Capital budgeting, and it refers to the decision to invest in long term assets. The assets are expected to be used over a long period of time e.g. when a firm acquires plant and equipment or replaces an old equipment or when you invest in research and development. Dr. Rakesh Kumar

Importance of Capital Budgeting It determines the asset mix and hence the business risk. It involves heavy initial outlays of the business resources. Benefits accrue in future which future is associated with risk and uncertainty. Dr. Rakesh Kumar

Practical Financial Management Problem. Investment appraisal using NPV, IRR, Pay back period. Cost of capital Dr. Rakesh Kumar

Working capital decision This is the decision concerned with the short term assets/resources an organization uses to meet its day to day obligations. Such assets include: Cash reserves of the organization Funds collected from debtors of the organization. Inventories Dr. Rakesh Kumar

2. Financing Decision This is the decision concerned with the sourcing of funds that are utilized under the investment decision. Much management time and effort is devoted to trying to ensure the adequacy of the company's profit flow. However, it is just as important that a company has an adequate flow of funds if it is to remain in business and very much less management time and effort is devoted to this need. Dr. Rakesh Kumar

Financing decision Contd… As companies expand, they require growing amounts of cash to finance acquisitions of fixed assets. They also require growing amounts of cash to finance their growing working capital (net current assets) requirements. Some of this funding requirement will come from INTERNAL sources, whilst some will need to come from EXTERNAL sources. Dr. Rakesh Kumar

3. Dividend Decision The Financial Manager has to decide on what to do with the earnings once they have been realised. There are three options, To declare and pay all dividends to shareholders To retain all the earnings and hence declare and pay no dividends To decide on what proportion to be paid and what to be retained. Dr. Rakesh Kumar

Considerations in dividends payment Internal restrictions that do not favour dividend payment Legal considerations. Level of the firm’s leverage position. Ease of raising additional capital. Will payment of dividends disadvantage the shareholders or investors? The preferences of the majority shareholders. Existence of profitable investment portfolio. The levels of control desired by the shareholders Dr. Rakesh Kumar

THANKS FOR YOUR PATIENCE Dr. Rakesh Kumar ASST. PROF.BUSINESS ADMINISTRATION PGGC-11 ,CHANDIGARH Dr. Rakesh Kumar