Chapter

1. Chapter 1 INTRODUCTION TOFINANCIAL MANAGEMENT

2. Business Finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of business enterprises. INTRODUCTION TOFINANCIAL MANAGEMENT Meaning of Business Finance:

3. INTRODUCTION TOFINANCIAL MANAGEMENT What is Financial Management? • Financial Management is broadly concerned with the acquisition and use of funds by a business firm. Its scope may be defined in terms of the following questions : • How large should the firm be and how fast should it grow? • What should be the composition of the firm’s assets? • What should be the mix of the firm’s financing ? • How should the firm analyze, plan and control its financial affairs?

4. Financial management has emerged as a distinct field of study only in the early part of this century as a result of consolidation movement and formation of large enterprises. Its evolution may be divided into three phases viz., The Traditional phase, The Transitional phase and Modern phase INTRODUCTION TOFINANCIAL MANAGEMENT EVOLUTION OF FINANCIAL MANAGEMENT

5. The traditional approach, which was popular in the early stage, limited the role of financial management to raising and administering of funds needed by the corporate enterprises to meet their financial needs. It deals with the following aspects : Arrangement of funds from financial institutions Arrangement of funds through financial instruments like share, bonds etc/. Looking after the legal and accounting relationship between a corporation and its sources of funds. INTRODUCTION TOFINANCIAL MANAGEMENT Traditional Approach

6. INTRODUCTION TOFINANCIAL MANAGEMENT Main limitations of Traditional Approach • External Approach • Ignored routine problems • Ignored non-corporate enterprise. • Ignored working capital financing • No Emphasis on allocation of funds • Time value of money is not considered

7. According to modern approach the term financial management provides a conceptual and analytical framework for financial decision-making. That means, the finance function covers both acquisition of funds as well as their allocation. The new approach views the term financial management in a broader sense. It is viewed as an integral part of over-all management. INTRODUCTION TOFINANCIAL MANAGEMENT Modern Approach :

8. INTRODUCTION TOFINANCIAL MANAGEMENT Financial management, in the modern sense of the term, divided into four major decisions : Financial Management Investment Decision Financing Decision Dividend Decision Funds Requirement Decision

9. 1. Liquidity: It is ascertained on the basis of three important considerations. a) Forecasting cash flows  i.e., matching the inflows against cash outflows b) Raising funds  i.e., financial manager will have to ascertain the sources from which funds may be raised and the time when these funds are needed. c) Managing the flow of internal funds. INTRODUCTION TOFINANCIAL MANAGEMENT SCOPE AND FUNCTIONS OF FINANCIAL MANAGEMENT

10. 2. Profitability: While ascertaining profitability, the following factors are taken into account. a) Cost control b) Pricing c) Forecasting future profits d) Measuring cost of capital 3. Management: Asset management has assumed an important role in financial management. It includes : (a) the management of long term funds. (b) The management of short term funds. INTRODUCTION TOFINANCIAL MANAGEMENT

11. Determining Financial need Determining Sources of Funds Financial analysis Optimal Capital Structure Cost Volume Profit Analysis Functional Areas Of Financial Management Profit Planning and Control INTRODUCTION TOFINANCIAL MANAGEMENT Functional Areas of Modern Financial Management

12. Fixed Assets Management Project Planning and Evaluation Capital Budgeting Working Capital Management Dividend Policies Acquisition and Mergers Corporate Taxation INTRODUCTION TOFINANCIAL MANAGEMENT Functional Areas of Modern Financial Management

13. Maximization of Profit : “Profit maximization” is a term which denotes the maximum profit to be earned by an organization in a given time period. The profit- maximization goal implies that the investment, financing and dividend policy decision of the enterprise should be oriented to profit maximization. INTRODUCTION TOFINANCIAL MANAGEMENT OBJECTIVE OF FINANCIAL MANAGEMENT :

14. INTRODUCTION TOFINANCIAL MANAGEMENT Merits of the Profit – Maximization: • Best Criterion on Decision-Making:The goal of profit – maximization is regarded as the best criterion of the decision of making as it provides a yard-stick to judge the economic performance of the enterprises. • Efficient allocation of Resources:It leads to efficient allocation of scarce resources as they tend to be diverted to those uses which, in terms of profitability, are the most desirable. • Optimum Utilization:Optimum utilization of available resource is possible. • Maximum Social Welfare

15. Time Factor Ignored it is Vague The Term ‘Maximum’ is also Ambiguous It Ignores Time Value it Ignores the Risk Factor In new business environment profit maximization is regarded as Unrealistic Difficult Inappropriate Immoral. INTRODUCTION TOFINANCIAL MANAGEMENT Drawbacks of Profit maximisation :

16. Ignores timing and risk of the expected benefit. Market value is not a function of EPS. Hence maximizing EPS will not result in highest price for company's shares. Maximizing EPS implies that the firm should make no dividend payment so long as funds can be invested at positive rate of return—such a policy may not always work. INTRODUCTION TOFINANCIAL MANAGEMENT Maximizing return or EPS

17. Maximizes the net present value of a course of action to shareholders. Accounts for the timing and risk of the expected benefits. Benefits are measured in terms of cash flows. Fundamental objective—maximize the market value of the firm’s shares. INTRODUCTION TOFINANCIAL MANAGEMENT Wealth Maximization

18. INTRODUCTION TOFINANCIAL MANAGEMENT Significance of Wealth- Maximization: • The company although it cares more for the economic welfare of the shareholders, it cannot forget the others who directly or indirectly work for the overall development of the company. Thus Wealth- Maximization takes care of • Lenders or creditors • Workers or Employees • Public or Society • Management or Employer

19. Other objective – Ensuring fair return to shareholder, Building up reserves for growth and expansion, ensuring financial discipline in the management INTRODUCTION TOFINANCIAL MANAGEMENT Significance of wealth - Maximization

20. Cost of Capital Capital budgeting appraisal Ratio analysis ABC analysis Funds flow and Cash flow analysis Working capital management Trading on equity INTRODUCTION TOFINANCIAL MANAGEMENT Method of Financial Management/tools

21. Reason for placing the finance functions in the hands of top management Financial decisions are crucial for the survival of the firm. The financial actions determine solvency of the firm Centralisation of the finance functions can result in a number of economies to the firm. INTRODUCTION TOFINANCIAL MANAGEMENT Organisation of the Finance Functions

22. Accounting Budgeting Internal Audit Finance Planning Profit Planning Investment Decisions Economic appraisal. INTRODUCTION TOFINANCIAL MANAGEMENT Functions of The Finance Controller/ Manager :

23. Financial Analysis Financial Decision Financial Planning Financial Control INTRODUCTION TOFINANCIAL MANAGEMENT Financial management – Process :

24. INTRODUCTION TOFINANCIAL MANAGEMENT Thanks