FINANCIAL MANAGEMENT- BASIC CONCEPT Financial Management is that managerial activity which is concerned with the planning and controlling of firm’s financial resources. BUSINESS FUNCTIONS OF A FIRM Three basic functions of any business enterprise are: Production Marketing Finance

BASIC BUSINESS FUNCTION PRODUCTION MARKETING TO BRIDGE THE TIME GAP FINANCE

What is Financial Management? Financial Management is basically the application of general management principles to the areas of financial decision making. Financial Management, thus, is concerned with the answering of the following basic questions: Where to invest? i.e. Investment Decision From where to raise fund? i.e. Financing Decision How much of the earnings to be retained and how much to be distributed? i.e. Dividend Decision to manage liquidity? i.e. Working Capital Management.

Wealth of a company = f(I,F,D,W) Thus, Wealth of a company = f(I,F,D,W) KEY ELEMENTS OF FINANCIAL MANAGEMENT: Planning Reporting Resource Allocation Managing performance & Resources

BASIC FUNCTIONS OF FINANCIAL MANAGEMENT Basic functions of Financial Management are : Investment Decision Financing Decision Dividend Decision Liquidity Decision

OBJECTIVES OF FINANCIAL MANAGEMENT Objectives of Financial Management are two-fold which runs also with some contradiction. Thus basic objectives are Profit Maximisation Wealth Maximisation PROFIT MAXIMISATION: profit maximisation implies maximising the rupee income of the firm. The arguments run in favour of profit maximisation are: Resources are efficiently utilised. It is an appropriate measure of firm’s performance. It serves interest of society to some extent.

Objections against Profit Maximisation Though primarily profit maximisation is considered as objectives of the Financial Management, but it runs with the following objections: The concept of profit is vague The concept does not consider Time value of money. It ignores risk and uncertainty attached. It assumes perfect competition.

WEALTH MAXIMISATION Since the criteria of profit maximisation runs with some ambiguities, hence wealth maximisation is considered as primary objective of Financial Management. By wealth maximisation we mean maximisation of the NET PRESENT VALUE of a course of action i.e. investment. Thus, A1 A2 An Wealth(W) = + + ---------- + - C0 (1+k) (1+k)2 (1+k)n

Thus,The wealth of owners of a company is reflected by the market value of company’s shares in the long run. Therefore, Owner’s Wealth = Market price of the share x No of Shares

Time value of money If an individual behaves rationally, he would not value the opportunity to receive a specific amount of money now equally with the opportunity to have the same amount at some future date. Thus, time value of money refers to an individual’s preference for possession of a given amount of cash now rather than the same amount at some future time. Simply, the relationship that exists between present value and future value of money is Value of money = Value of money + Time Value of money receivable at receivable at future present

Reasons for considering Time Value of Money Investment opportunity Preference for consumption Risk