FINANCIAL MANAGEMENT - ITS MEANING ,SCOPE & objectives.

Shareholder wealth maximization Introduction ‘FM’ may be defined as the art & science of managing money. FM is concerned with the duties of the financial managers in the business firm. Relationship of financial management and other supportive disciplines is: Financial Decision Areas Primary Disciplines Accounting Macroeconomics Microeconomics Support Investment analysis Working Capital Management Sources and cost of funds Determination of capital structure Dividend Policy Analysis of risk and returns Support Other Related Disciplines Marketing Production Quantitative methods Resulting in Shareholder wealth maximization

Scope of Financial Management Scope of FM is divided for the purpose of exposition into two broad categories : The Traditional Approach The Modern Approach

The traditional approach Evolved during the 1920’s and 1930’s known as ‘Corporation Finance’. The field of study dealing with finance as encompassing three related aspects of raising and administering resources from outside. The institutional arrangement in the form of financial institutions which comprise the organisation of the capital market. The financial instruments through which funds are raised from the Capital markets and the related aspects of practices and the procedural aspects of capital markets. The legal and accounting relationship between a firm and its sources of funds.

Limitations of Traditional Approach : The traditional approach was, in other words, the outsider –looking approach. The limitation was that internal decision making (i.e. insider –looking –out ) was completely ignored. Related to procurement of funds and financing problems by corporate enterprise, i.e. confined only to a segment of the industrial enterprise as the non-corporate organisation lay outside its scope. The treatment in traditional approach was built too closely around episodic events such as incorporation, promotion, merger, consolidation, reorganisation and so on which hampered day –to –day financial problems of the company did not receive much attention. The traditional treatment was found to have a lacuna to the extent that the focus was only on long term financing and ignored that issues involved in the working capital management. It ignored the central issues of financial management such as the cost of capital funds to the enterprise, financial standards of performance, and so on.

THE MODERN APPROACH The modern approach views FM in a broad sense and provides a analytical and conceptual framework for financial decision making. The principal contents of modern approach are How large should an enterprise be, how fast it should grow. In what form should it hold assets. What should be the composition of its liabilities.

Functions of Finance under Modern Approach Financial Management in the modern sense of the firm can be broken down into three major decisions as functions of finance. These are : The investment decision The financing decision The dividend decision

Organisation of Finance Function Board of Directors Managing Director /Chairman Vice President /Director (Finance)/ Chief finance Officer (CFO) Treasurer Controller Financial planning and fund-raising manager Tax Manager Cash Manager Credit Manager Foreign Exchange Manager Cost Accounting Manager Financial Accounting Manager Pension Fund Manager Capital Expenditure Manager Corporate Accounting Manager

The Investment Decision The investment decision relates to the selection of assets in which funds will be invested by a firm. The assets which can be acquired fall into two broad categories Long term assets (which yield return over a period over a time in future.) –Capital Budgeting. Short term or current assets (convertible into cash usually within one year.) –Working Capital Management.

Capital Budgeting Capital budgeting is the most crucial financial decision of the firm. It refers to selection of an asset or investment proposal or course of action whose benefits are likely to be available in future over the lifetime of the project. The main elements of capital budgeting are: Choice of the new assets out of the alternatives available or relocation of the capital when an existing asset fails to justify the funds committed. Capital budgeting decision is the analysis of risk and uncertainty. The concept and measurement of cost of capital.

Working Capital Management (wcm) WCM is concerned with the management of current assets. The key strategies and considerations in ensuring a tradeoff between profitability and liquidity is one of the major dimensions of WCM. The management of working capital has two basic ingredients: An overview of working capital management as a whole Efficient management of the individual current assets such as cash, receivables and inventory.

The Financing Decision The investment decision is broadly concerned with the assets–mix or the composition of the assets of the firm. A capital structure with a reasonable proportion of debt and equity capital is called the Optimal Capital Structure. The two aspects of financing decision are : The of capital structure theory The capital structure decision

The Dividend Decision The dividend should be analysed in relation to the financing decision of the firm. Two alternatives are available in dealing with the profits of a firm: They can be distributed to the shareholders in the form of the dividends They can be retained in the business itself. The decision as to which course should be followed depends largely on the significant dividend decision, the dividend –pay –out ratio, i.e. what proportion of net profits should be paid out to the shareholders.

OBJECTIVES OF FINANCIAL MANAGEMENT The objective provide a framework for optimum financial decision making. They are concerned with designing a method of operating the internal investment and financing of a firm.there are two widely discussed approaches under this, these are: Profit Maximisation Wealth Maximisation

Profit Maximisation Ambiguity Timing of benefits Quality of benefits. Profit /EPS maximisation should be undertaken and those that decrease profits or EPS are to be avoided. Profit is the test of economic efficiency. It leads to efficient allocation of resources, as resources tend to be directed to uses which in terms of profitability are the most desirable. Financial management is mainly concerned with the efficient economic resources namely capital. The main technical flaws of this criteria are : Ambiguity Timing of benefits Quality of benefits.

Wealth Maximisation Wealth maximisation is also known as Value or Net present worth maximisation. Its operational features satisfy all the three requirements of the operational of the financial course of action namely, exactness, quality of benefits, and the time value of money. Two important issues related to the value/share price maximisation are: Focus on stakeholders ,stakeholders include groups such as employees, customers, suppliers, creditors, owners and others who have a direct link to the firm. EVA (Economic Value Added) –EVA is equal to the after-tax operating profits of a firm less the cost of the firm to finance investments.

CASE STUDY : Reliance INDUSTRIES LTD. Reliance is an industry that contributes to the economic and social need of India and attaining global leadership in all its major initiatives. Pursuing this vision strategy of Reliance for the next few years will be: Reinforcing competitive advantage of existing business through new capacities and synergistic acquisitions Scaling sizeable opportunities in petroleum exploration and production Forward integrating into retailing transportation fuels and creating new customer experiences Building the BSES acquisitions, now Reliance Energy to a major electricity utility Addressing the significant information's and communications market opportunity in India and in the world Leveraging its strong balance sheet, cash flows, managerial capacities to create value by adding new capacities, acquisitions and turnaround of under performing assets. Developing strategic alliances in technology and product market domains with global majors Fostering new higher education institutions for knowledge and sharing. Leveraging its formidable strengths beyond Indian borders. Reliance is driven by his vision and continues to pursue a trajectory of growth, productivity and global leadership.