INTRODUCTION TO FINANCIAL MANAGEMENT.pptx

It is an introduction to financial management.

1. INTRODUCTION TO FINANCIAL MANAGEMENT

2. Introduction Finance is the life blood of business. It is required for the survival, stability and growth of a company. It is required for expansion and diversification of a business. So, a company cannot survive without finance. It requires promotional finance to start the company. It requires long-term finance to purchase fixed assets. It requires development finance for growth, expansion and diversification of business. Corporate finance is the study of sources of finance and how to use the money raise to add maximum value to the shareholders' wealth.

3. DEFINITION OF FINANCIAL MANAGEMENT "Financial management is concerned with raising financial resources and their effective utilization towards achieving the organizational goals." "Financial management is the process of putting the available funds to the best advantage from the long term point of view of business objectives."

4. NATURE OF FINANCIAL MANAGEMENT Financial Activity Raising the Finance Investing the Finance Objective Oriented Types of Finance Relationship with other Departments Requires Proper Planning and Control Managing Finance is an Art and Science Legal Requirements Important Part of Business Management

5. SCOPE OF FINANCIAL MANAGEMENT The finance manager had to be in charge of both raising of funds and allocation of funds. The finance manager takes three major decisions: Investment decision. ii. Financing decision. Dividend decision . Investment decision relates to both long-term investment decision and short-term investment decision. The finance manager must decide when, where and how to acquire funds to meet funds of the firm The finance manager has to decide whether to retain the profits or distribute profits to shareholders.

6. OBJECTIVE OR GOALS OF FINANCIAL MANAGEMENT Profit Maximization Wealth Maximization

7. PROFIT MAXIMIZATION Profit maximization means maximizing the rupee income of a firm. Profit earning is the main aim of every economic activity. No business can survive without earning profit. Profit is a measure of efficiency of a business enterprise. Profit also serve as a protection against risk which enables a business to face risk like fall in prices, competition from other units, adverse govt. polices etc. so the profit maximization is considered as the main objective of business. ADVANTAGES!!! Economic Survival Earning Profit Measurement Standard Social and Economic Welfare LIMITATION!!! Haziness of the concept “Profit” Ignores Time Value of Money Ignores the Risk Ignores Quality

8. WEALTH MAXIMIZATION Wealth maximization is one of the modern approaches. The term wealth means shareholder wealth or the wealth of the persons those who are involved in the business concern. Wealth maximization is also known as value maximization or net present worth maximization. The goal of the finance function is to maximize the wealth of the owners for whom the firm is being carried on. The wealth of corporate owners is measured by the share prices of the stock. While taking decisions, only that action is expected to increase share price should be taken. The market price of shares (excluding impact of speculation) serves as the standard to judge whether financial decisions have been taken and implemented efficiently or not. Therefore, maximization of the market value is considered to be the proper objective and universally accepted concept in the field of business. ADVANTAGES!!! The wealth maximization is based on cash flows and not profits Profit maximization presents a shorter term view as compared to wealth maximization Wealth maximization considers the time value of money The wealth maximization criterion considers the risk and uncertainty factor while considering the discounting rate. The discounting rate reflects both time and risk. Higher the uncertainty, the discounting rate is higher and vice-versa .

9. Financial management is essential for any organization that seeks to manage their finances in an orderly manner. Wealth maximization and profit maximization are two important goals of financial management and are quite different to each other. Profit maximization looks at the shorter term and focuses on making larger profits in the short term, which could be at the expense of long term benefits. Wealth maximization, on the other hand, focuses on the long term and strives at long term value creation . PROFIT MAXIMIZATION VS WEALTH MAXIMIZATION

10. COMPETITORS OF WEALTH MAXIMIZATION

11. Agency Problem Occurs when the goal of the management differs from that of the shareholders. Managers may not necessarily act with the interest of shareholders/ customers/ employees/ creditors. Managers Shareholders Creditors Shareholders This arises to Information Asymmetry among managers and shareholders. Example: TataCorus

12. ROLE OF FINANCE MANAGER A financial manager is a person who takes care of all the important financial functions of an organization. The person in charge should maintain a far sightedness in order to ensure that the funds are utilized in the most efficient manner. His actions directly affect the Profitability, growth and goodwill of the firm Raising of Funds Allocation of Funds Profit Planning Understanding Capital Markets International Financial Decision Risk Management Investment Decision Dividend Decision

13. ALL MANAGERS ARE FINANCIAL MANAGERS • The engineer, who proposes a new plant, shapes the investment policy of the firm The marketing analyst provides inputs in the process of forecasting and planning The purchase manager influences the level of investment in inventories The sales manager has a say in the determination of the receivables policy Departmental managers, in general, are important links in the finance control system of the firm

14. INTER-RELATION As an integral part of overall management, financial management is not a totally independent area. It draws a heavy interest in related disciplines namely Economics, Accounting, Marketing, Production and Quantitative methods . Accounting is an important input in financial decision making The measurement of fund in accounting is based on accrual principle but finance is based on Cash flow. Accounting provides financial data on past, present and future. Financial manager should consider the impact of product development and plan promotion in marketing area since their plan requires capital outlay. Changes in production process may require expenditure which the finance manager must evaluate and provide. Tools and techniques of the analysis developed in the quantitative method disciplines are used to analyze complex financial problems.

15. Investing Decision Financing Decision Dividend Decision Decisions under Financial Management

16. Investment in Short Term & Long Term Projects Short Term Projects - Decisions relating to Working Capital Mgt . - Inventory Management, - Receivables Management, etc. Investing Decision

17. Relates to Capital Budgeting Decisions Techniques: ( i ) Traditional- Payback Period, Accounting Rate of Return (ii) Modern- Net Present value Method, Internal Rate of Return, Profitability Index, etc. Long Term Decision

18. Decision relation to Funding of the Projects Sources - Short Term (trade credit, bank overdraft,etc.) - Long Term (i) Owners Funds ( Equity/Preference Share Capital, Retained Earnings) (ii) External Funds ( Debentures, Long Term Loans, etc.) Financing Decision

19. This decision relates to How much of the Earnings to be DISTRIBUTED AS DIVIDENDS? AND HOW MUCH TO BE KEPT AS RETAINED EARNINGS? Dividend Decision