Introduction to financial management

What is Finance, Approaches to finance function, Traditional approach, Modern approach, Limitations Of Traditional Approach, Profit maximization approach, Wealth Maximisation approach,

1. Introduction to Financial Management

2. What is Finance ? Finance means money Finance describes the management, creation and study of money, banking, credit, investment, assets & liabilities that make up the financial systems As per traditional approach it means procurement of funds As per modern approach it means procurement & efficient utilization of funds

3. Approaches to finance function Traditional approach Modern approach

4. Traditional Approach Financial management was considered as corporation finance According to this approach ,the scope of finance is restricted to “ procurement of funds by corporates to meet their financial needs Also states the legal & accounting relationship between business and sources of finance

5. Limitations Of Traditional Approach The approach is confined to ‘procurement of funds’ only Ignores efficient utilization of funds It fails to consider an important aspect i.e. allocation of funds It fails to consider the problems involved in working capital management It neglected the issues relating to allocation and management of funds and failed to make financial decisions

6. Modern approach The modern approach is an analytical way of looking into financial problems of the firm According to this approach, the finance covers both acquisition of funds as well as allocation of funds to various uses It’s also concerned with the efficient utilization of funds

7. Main Components Financial planning Determination of cost of capital Capital budgeting Working capital management Management of income

8. Profit maximization approach A firm should undertake all those activities which add to the profit and eliminate all other which reduce its profit. It is generally short term. Acts as motivator which helps the business organisation in becoming more efficient. Return on capital employed is considered the best measurement of profit. It makes allocation of resources to profitable and desired areas.

9. Criticism of profit maximization approach Ambiguity Ignores time value of money Risk factor in income receivable in future.

10. Wealth Maximisation approach It is also known as value maximization approach The finance manager must take decisions which increase net present value of the firm. Increase in NPV = increase in value of the firm. Increase in value of the firm= increase in market price of equity shares.

11. Functions of Financial Management Financial planning Financial Decision Investing Decision Dividend Decision Liquidity Decision

12. Financial Institution They are the intermediaries who facilitate smooth functioning of the financial system by making investors and borrowers Meet They mobilize savings of the surplus units and allocate them in productive activities promising a better Rate of Return Financial Institutions are also termed as Financial Intermediaries

13. Type of Financial Institutions Organized sector Commercial banks Co-operative banks Foreign banks Unorganized sector Indigenous bankers Money lenders

14. Role of Financial Institutions Provide funds Infrastructure facilities Promotional activities Development of Backward areas Employment Generation

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