1. Introduction to financial management
FINANCE is defined as the provision of money at time when it is required
It may be defined as the art and science of managing money.
Finance
Public finance
Private finance

2. Definition
Financial management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources.
Financial management is concerned with the acquisition, financing and management of assets with some over all goal in mind (J.C.Vanhorne)

3. Areas of financial management
Investment
analysis
Sources &
Uses of
funds
Working
Capital
management
Financing
decision
Wealth
maximization
Financial
management
Determination
Of capital
structure
Optimum
Utilization
Of resources
Dividend
policy
Analysis of
Risk & return
Areas of financial management

4. Financial Management Decisions
Investment Decision (Capital budgeting)
What long-term investments or projects should the business take on?
Financing Decision (Capital structure)
Where to raise funds?
Should we use debt or equity?
What should be the proportions?
Liquidity Decision
How do we manage the day-to-day finances of the firm?
Management of Cash inflows and outflows
Dividend decision

5. Scope of financial management
Estimating financial requirement
Deciding capital structure
Selecting source of finance
Selecting pattern of investment
Proper cash management
Implementing financial controls
Proper use of surpluses

6. Estimating financial requirement:
Short term and long run financial requirements of his business.
Amount required for purchasing fixed assets as well as needs of funds for working capital
Deciding capital structure:
Proportion of different securities for raising funds.
Deciding debt equity ratio

7. Selecting a pattern of investment:
Selection of an investment pattern is related to the use of funds.
Decisions has to be taken as to which assets are to be purchased.
Funds will be spends first on fixed assets and then for working capital
Selecting a source of finance:
Various sources from which finance may be raised include : share capital, debenture, financial institution, commercial banks, public deposits etc

8. Proper cash management:
Assess various cash needs at different times and then make arrangements for arranging cash.
Cash may be required to purchase raw material, make payment to creditors, meet day to day expenses.
Implementing financial controls:
Return on investment, budgetary control, ratio analysis, break-even analysis, cost control, ratio analysis etc.
Proper use of surpluses:
Judicious use of surpluses is essential for expansion and Diversification plans
Protecting the interest of share holders.

9. Forms of Organization Three major forms in India Sole proprietorship
Partnership
Limited Company
Public Limited
Private Limited

10. Relationship of finance with other functional areas
R&D
Purchase
Production
Distribution
Personnel
Accounting
Marketing

11. Organisation of Financial Functions
CAPEX Manager
Board of Directors
MD/Chairman
Treasurer
Controller
Cash Manager
Financial Plan. Mgr
Credit Manager
FOREX Manager
Pension fund Mgr
Tax Manager
Corp. A/C Mgr
Cost A/C Mgr
Fin. A/C Mgr

12. Emerging Role of Finance Manager in India
Post-liberalization – Complex & Demanding
The Key challenges:
Financial Structure
FOREX management
Treasury Operation
Investor communication
Management control &
Investment Planning

13. Emerging role……
Modifications in the Industries Development (Regulations) Act.
Abolition of MRTP Act and its replacement by the Competition Act.
Enactment of Liberalized FEMA Act.
Capital Issues (Control) Act – SEBI Act
IRDA Act
Emergence of the capital market at the center stage
Highly articulate and sophisticated money market

14. Emerging role….
Globalisation, convertibility of rupee, FII, Indian Foreign Investment etc.
Market-determined interest rate, emergence of innovative financial instruments
Mutual fund, credit rating and other financial services
Sophisticated credit risk management
Access to Euro issue, ADRs
Privatization/disinvestment of PSUs

15. Financial Goal
Investment and financing decisions are unavoidable and continuous
The firm must have a goal
Profit maximisation
Wealth maximisation

16. Profit maximisation Buyers’ market – demand command prices
Higher profit opportunities attract firms to produce customer driven products – Competition
Does the market driven pricing serve the society?
Invisible hand principle – Adam Smith
Profit maximisation implies that a firm either produces maximum output for a given amount of input, or uses minimum input for producing a given output.
Profit maximisation – maximising efficiency

17. Objections to Profit Maxn
It assumes perfect competition
It was developed in 19th century – Sole traders
Now-a-days divorce between management and ownership
Stakeholders also include customer, employees, govt., and society at large – Profit maximisation is unrealistic, inappropriate and immoral.
True competitive pricing is unrealistic in modern
It is vague, Ignores timing of return and Ignores risk

18. Profit Max…..
Profit? Short or Long term, EBIT or PAT, Total profit or EPS etc..
Time Value of Money
Uncertainty of returns
Maximising PAT: Not in the interest of owners
Maximising EPS: Ignores timing and risk

19. Wealth maximisation
Maximising Net Present Value of the future benefits (in terms of future cash flows)
Negative NPV should be rejected
Takes care of the timing of the risk and return
In investment and financing cash flow is important not accounting profit.
Wealth maximisation – Maximising utility of their consumption over time
The wealth created by the companies is reflected in the market prices of the shares

20. WM….. Ultimate objective is to maximise wealth
Stock prices serves as the firm’s performance indicated
Finance Manager:
How much should a particular share be worth?
What factors responsible?
Generally depend upon risk-return trade off

21. An Overview of Financial Management
Wealth maximisation
Financial Decisions
Investment
Liquidity (WCM)
Financing
Dividend
Risk-Return trade off
An Overview of Financial Management

22. Agency Problem Separation of Ownership and management
Shareholders hardly exercise any control/ influence on management
Managers should act in the best interest of shareholders
Managers may maximise their own wealth at the cost of shareholders
May not take any risk and play safe deviating from the SWM objective

23. ‘Satisficing’ behaviour of the managers becomes obstacle in the SWM
Company is a complex organisation consisting of multiple stakeholders.
The stakeholders’ view of the managers may prove compromising on SWM objective
The management’s success depends upon the fulfillment of the objectives of all the stakeholders
In the long run the wealth is maximised if interest of all the stakeholders are taken care of.

24. Agency Cost Conflict between shareholders’ and managers’ goal
This conflict is known as “Agency Problem”
Agency problem results into agency cost.
Agency cost – is less than optimum value of the share in the market because of the actions of the managers
The agency problem vanish when the managers own the company.
‘Stock options’ to managers may reduce the cost.

25. Terms
Equity: Equity Shares- Shares represent ownership rights to their holders. (A small fraction of the owners’ fund in the firm).
Public Issue: Invitation to public by a company to invest in its shares
Right Issue: Issue of additional new shares to the existing shareholders
Bonus Issue: Issue of new shares to the existing shareholders in lieu of dividend

26. Dividend: The share of profit given to the shareholders
Preference Share: Given preference at the time of distribution of dividend and capital repayment. Fixed rate of dividend is given.
Debt: Borrowed funds, - Term loan, Bond, Debentures etc.
Term Loan: Long-term loans from banks/FIs
Bonds/Debentures: A certificate acknowledging the amount of money lent by a bondholder to the company. (Bond: Issued by govt. or PSUs; Debentures: Issued by private companies)

27. Summary Finance Areas of finance Scope of finance
Interface with other departments
Organisation of the Finance Function
Emerging role of a Finance manager in India
Financial goal
Agency Problem