Financial Management An Overview

Meaning and Definitions Importance Scope Objectives Finance and other related disciplines

 Finance is the art and science of managing money.

Financial services is concerned with the design and delivery of advice and financial products to individuals, businesses and governments

 Financial management is concerned with the duties of the financial managers in the business firm cash credit funds budgeting investment etc.

According to Solomon, Financial management is concerned with the efficient use of an important economic resource, namely, Capital Funds.

 According to Phillipatus, Financial management is concerned with the managerial decisions that result

in the acquisition and financing of long-term and short-term credits for the firm. As such, it deals with the situations that require the selection of specific assets (or combination of liabilities ) as well as the problem of size and growth of an enterprise.

Importance of Financial Management Finance is the life blood of a business enterprise

Money will multiply only when it is efficiently managed

Bad production management and bad sales management have slain in hundreds, but faulty financial management have slain in thousands. Collins Brooks

 Risk-Return trade-off Financial reconstruction Portfolio management Designing innovative financial instruments Novel ways of rewarding shareholders

Legal compliance
Monitoring share price movement

Searching for Investment opportunities

Facilitating organic growth Enabling inorganic growth

 Objectives of financial management---traditionally, the basic objective of financial management are the maintenance of liquid assets and maximization of the profitability of the firm ---liquid assets means adequate cash in hand to meet its obligation ---A business firm is a profit seeking organisation, profit maximization is important objective of financial management

Scope of Financial Management Traditional approach Modern approach

Traditional approach a) Raising funds b) External reporting c) Institutions and Investments

 Traditional approach:-- arranging funds from financial institutions ---arranging of funds through different financial instruments --looking after the legal and accounting relation between corporation and its sources of funds,

Limitations
Outsider looking in approach Ignored routine problems Ignored noncorporate enterprises Ignored working capital financing No emphasis on allocation of funds Descriptive approach

Modern approach
The main contents of this approach: a) What is the total volume of funds and enterprise should commit? b) What specific assets should an enterprise acquire? c) How should the funds required be financed?

 Modern approach cont --- introduction of capital budgeting techniques ---various pricing models ---valuation models --investment portfolio theories

 Financing decisions:
Estimation of Funds requirement Procurement of funds Planning the capital structure Negotiating with funding agencies

2 main parts
The capital structure theory The capital structure decision

Investment decisions
Capital budgeting Working capital management Cash management Portfolio management Risk management Evaluation of performance through benchmarking

Dividend Policy decision a) Profit allocation b) Framing dividend policy

Subsidiary functions
To ensure supply of funds to all parts of the organization Evaluation of financial performance To negotiate with bankers, financial institutions and other suppliers of credit

To keep track of stock exchange quotations and behaviour of stock market prices

Objectives of Financial Mangement

Basic objectives:
Profit Maximization Wealth Maximisation

Other objectives:
Ensuring fair return to shareholders Building up reserves for growth & expansion Ensuring maximum operational efficiency by efficient and effective utilisation of finances Ensuring financial discipline in the organisation

Profit Maximisation Vs.Wealth Maximisation

Profit /EPS Maximisation Decision criterion

Profit : As a owner-oriented concept, it refers to the amount and share of national income which is paid to the owners of business i.e. those who supply equity capital.
Profitability refers to a situation where output exceeds input, value created by the use of resoures is more than the total of the input. It signifies economic efficiency.

 Actions that increase profits/EPS should be undertaken and those that decrease profits/EPS are to be avoided

It implies that the investment , financing and dividend policy decisions of a firm should be oriented to maximisation of profits/EPS

Rationale behind profit maximisation

Profit is a test of economic efficiency It provides a yardstick

Leads to efficient allocation of resources

Ensures maximum social welfare invisible hand

Objections to Profit maximisation

Assumes perfect competition Developed in 19th century Ambiguity It ignores the timing of returns It ignores risk- uncertain return implies risk Ignores the quality of benefits certainity implies quality

 Objectives of different stakeholders may conflict Unrealistic, inappropriate, immoral Produce goods wasteful, inequality of income and wealth Correct market imperfections and promote competition

Wealth maximisation decision criterion

Value maximisation or net present worth maximisation Value of an asset should be viewed in terms of the benefits it can produce. The worth of the course of action in terms of the benefits-cost of undertaking it. Based on the concept of cash flows than the accounting concept

Considers both quantity and quality dimensions of benefits

Incorporates the time value of money

 Implications of WM quality dimension,time dimension of expected benefit Suppliers of loan capital Employees Society Management

 Wealth Maximization:Value maximization or net present worth maximization -maximizing the NPV of a course of action

 Net present value or wealth of a course of action is the difference between the present value of its benefits and the present value of its costs. Fundamental objective of a firm is to maximize the market value of its shares

Liquidity Vs. Profitability

Liquidity: adequate cash to pay for its bills, unexpected large purchases, meet emergencies at all times Profitability funds to be used to get highest return When one increases other decreses Higher inventories-profitability Liberal credit policy profitability Higher risk and higher return are related Higher the risk-liquidity is affected Forecast the cash flows and analyse the various sources of funds, Risk and return should be optimised or risk return trade off. market value of the companys shares would be maximum

Finance and related disciplines

Finance and economicsFinance and accounting Financial management and Financial management and Financial management and Financial management and management Financial management and

cost accounting Marketing assets management Personnel strategic management