Advance Financial Management notes presentation

Advance Financial Management notes

1. K. Balambal Assistant Professor of Commerce

2. Advance financial management UNIT i

3. Finanacial management Finance is the lifeblood of a business firm. The health of every business concern mainly depends on the efficient handling of finance functions. In simple term, Financial Management may be defined as the management of the finance or funds of a business unit in order to realize the objective of the firm in an efficient manner.

4. Financial function The traditional Approach The modern Approach

5. AIMS OF FINANCE FUNCTION Acquiring sufficient funds : The main aim of finance function is to assess the financial needs of an enterprise and then finding out suitable sources for raising them. If funds are needed for longer periods, then long term sources like share capital, debentures, term loans etc. may be explored. Proper utilization of funds : The effective utilization of funds is more important than raising funds. The returns from their use should be more than their cost. No fund should remain idle. Increasing profitability: To increase profitability, sufficient funds will have to be invested. A proper control should also be exercised. Maximizing firm ’s value : it is generally said that a concern’s value is linked with its profitability. Besides profit, the type of sources used for raising funds, the costs of funds, the condition of money market, the demand for products etc. are some other considerations which influence a firm’s value.

6. Importance of financial management It has been rightly termed as universal lubricant which keeps the enterprise dynamic. No business, whether big, medium or small can be started without an adequate amount of finance. Right from the beginning, i.e conceiving an idea to business, finance is needed to promote or establish the business, acquire fixed assets, make investigation such as market surveys, etc., develop product, keep men and machine at work and encourage management to make progress and create values. Even an existing concern may require further finance for making improvements of expanding the business.

7. Advance financial management Unit I I

8. Time Value of money The time value money(TVM) is the concept that money now is worth more than the identical sum in the future due to its potential earning capacity. This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received. It is also sometimes referred to as present discounted value.

9. risk Risk is defined in financial returns as the chance that an outcome or investment’s actual gains will differ from an expected outcome or return. It includes the possibility of losing some or all of an original investment.

10. return A return also known as a financial return in its simplest terms, is the money made or lost on an investment over some period of time. It can also be expressed as a percentage derived from the ratio of profit to investment.

11. three steps of bond valuation Step-I - Estimate the expected cash flows. Step-II -Determine the appropriate interest rate that should be used to discount the cash flows. Step-III -Calculate the present value of the step i using step ii, i.e., discounting the expected cash flows.

12. Sinking fund A sinking fund is a fund containing money set aside or saved to pay off a debt or bond. A company that issues debt will need to pay that debt off in the future, and the sinking fund helps to soften the hardship of a large outlay of revenue.

13. Advance financial management Unit III

14. Cost of capital Cost of capital refers to the opportunity cost of making a specific investment. It is the rate of return that could have been earned by putting the same money into a different investment with equal risk.

15. Cost of debt Cost of debt is the returns expected by the potential investors of debt securities of a firm. It measures the current cost to the firm of borrowing funds to finance the projects.

16. Combined leverage It is a leverage which refers to high profits due to fixed costs. It includes fixed operating expenses with fixed financial expenses. It indicates leverage benefits and risks which are in fixed quantity. Combined leverage =Operating leverage x Financial leverage

17. Financial Leverage This is the total debt a business acquires to fulfil different financial purposes. In the financial statements, this type of spoof leverage is represented under the list of liabilities. Financial leverage helps you to continue with your investments even if the business does not have enough cash. Equity financing is the most preferred option in this case, as it allows you to raise money without liquidating your ownership.

18. Operating Leverage Operating leverage pertains to the combination of fixed and variable costs associated with delivering products and services. Fixed costs remain consistent, independent of output levels, necessitating payment whether a business is profitable or incurring losses. The assessment of operating leverage involves calculating the ratio between fixed and variable costs. If fixed expenses outweigh variable ones, a business exhibits high operating leverage. While this can enhance returns, excessive reliance on it escalates financial risk.