Unit 1 FM Finance management finances to better align their financial status

Finance management is the strategic planning and managing of an individual or organization's finances to better align their financial status to their goals and objectives.

1. Unit-1 Financial Management

2. Finance

3. Meaning: Finance is an art and science of managing money. Finance is defined as the management of money and includes activities such as investing, borrowing, lending, budgeting, saving, and forecasting.

4. Finance

5. Financial Management: Meaning: Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.

6. Meaning: Financial management means the efficient and effective management of money ( funds) in such a manner so as to accomplish the objectives of the organisation. In other words, Financial management refers to the part of managerial activity concerned with the procurement and utilization of funds for business purposes.

7. Definition: According to S.N Maheshwari “ Financial Management is concerned with raising financial resources and their effective utilization towards achieving the organisation goals”. According to Joseph and massie “ Financial Management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for effective operation”.

8. Objectives of Financial Management: Profit maximization

9. 2. Wealth maximization:

10. Difference B/W Profit Maximization and Wealth Maximization

11. 3. Proper estimation of total financial requirement

12. 4. Proper Mobilization:

13. 5. Maintaining proper cash flow

14. 6. Proper utilization of finance:

15. 7. Survival of company:

16. 8. Creating reserves

17. 9. Proper coordination

18. 10. Increase efficiency:

19. Advantages of Financial Management 1. Better Decision Making: 2. Transparency: 3. Finance Control: 4. Maximization of Profit and Wealth: 5. Avoids Debts:

20. Disadvantages of Financial Management: Time Consuming Determination of Standards Problems In Recognizing Deviation

21. Finance functions or Finance decisions 1. Investment decision 2. Financing or Capital-mix decision. 3. Dividend or Profit allocation decision.

22. 1. Investment decision: It relates to how the firm’s funds are invested in different assets.

23. Investment decision can be Long term investment decision Short term investment decision

24. Long term investment decision: I nvolves the decision of allocation of capital or commitment of funds to long term assets that would yield benefits in the future

25. Example Making investment in a new machine to replace an existing one Acquiring a new fixed asset Opening a new branch

26. These decisions are very crucial for any business since they affect the earning capacity in the long run The size of the assets, Profitability and competitiveness are all affected by capital budgeting decisions. These decisions normally involve huge amount of investment and are irreversible except at a huge cost A bad capital budgeting decision normally has the capacity to severely damage the financial fortune of a business.

27. Short term investment decision: These are concerned with the decisions about the levels of cash, inventory and receivables. These decisions affect the day today working of the business . These affect the liquidity as well as profitability of the business

28. 2. Financing decision: This decision about the quantum of finance to be raised from various long term sources.

29. It involves identification of various available sources. The main sources of funds for a firm are Shareholders funds Borrowed funds

30. Shareholders fund

31. Borrowed funds:

32. Financial decision involves: A firms decision about the proportion of funds to be raised from either sources. Cost of each sources should be estimated.

33. 3. Dividend Decision: Dividend is the portion of profit which is distributed to shareholders. The decision involved here is how much of the profit earned by company ( after paying tax) is to be distributed to the shareholders and how much should be retained in the business.

34. Treasurer: A treasurer is the person responsible for running the treasury of an organization. The significant core functions of a corporate treasurer include cash and liquidity management, risk management, and corporate finance.

35. The main concern of treasurer Obtaining finance Banking Relationship Investor relationship Short term financing Cash management Credit management Investment and Insurance

36. a)Capital expenditure manager:

37. b) Fund raising manager: Fundraising managers are responsible for overseeing all of the fundraising functions for organizations. They are the driving force behind fundraising efforts. Without their expertise and efforts a company would not have the funds to continue with their work.

38. c)Cash Manager: Cash managers monitor and control the flow of cash in and out of the company to meet business and investment needs. For example, they must project cash flow to determine whether the company will have a shortage or surplus of cash.

39. d) Credit Manager: A credit manager is a person employed by an organization to manage the credit department and make decisions concerning credit limits, acceptable levels of risk, terms of payment and enforcement actions with their customers .

40. Controller: A financial controller, who may also be referred to as a financial comptroller, usually reports to an organization's chief financial officer (CFO). In smaller organizations that do not have CFOs, the controller might be the top financial officer. Most simply, the financial controller is a company’s lead accountant. They oversee accounting activities and ensure that ledgers accurately reflect money coming in and out of the company .

41. Functions of Controller: Financial accounting Internal audit Taxation Management accounting Budgeting

42. a) Tax Manager: Tax managers are primarily responsible for accurately preparing and filing state and central tax documents. In addition, tax managers develop tax strategies and policies that help the client or business maintain compliance with local and federal tax laws and regulations.

43. b)Corporate accounting manager: The corporate accounting manager reviews the organization's balance sheet reconciliations and major accounts. This includes inventory , taxes and intercompany accounts. He/she ensures timely and accurate reporting of all financial accounting across the organization.

44. c) Cost accounting manager Cost accounting managers assist in decision-making by establishing budgets and tracking costs of various processes and departmental activities. They work on internal documents, rather than financials for public review, so success in this field requires strong general business skills in addition to accounting expertise .

45. Financial accounting Manager: Oversees preparation of business activity reports, financial forecasts, and annual budgets. Oversees the production of periodic financial reports; ensures that the reported results comply with generally accepted accounting principles or financial reporting standards.

46. Functions of Financial Manager: Estimating the Amount of Capital Required: Determining Capital Structure: Choice of Sources of Funds: Procurement of Funds: Utilisation of Funds: Disposal of Profits or Surplus: Management of Cash: Financial Control:

47. Role of finance Manager ( ETCFO) According to Economic times- chief finance officer survey, conducted in 2004 the finance manager or chief financial officer, by whatever name called ,has to wear several hats simultaneously.

48. a) Corporate Governance: Corporate governance includes bringing company systems and processes in line with ethical practices.

49. b) Management information system: The enhancement of shareholders value greatly depends upon the effectiveness of the management information system. The CFO should, Therefore , have regular, timely and precise reports about key financial ratios.

50. c) Treasury and Risk Management: Maximization of shareholders wealth requires a careful treasury and risk management system. Risk can be minimized through a diversified portfolio of products and services.

51. d) Investor relations: Once the value creating processes are in place, the responsibility of communicating them to shareholders, customers and investors also falls on the CFO.

52. e) Capital structure: The survey disclosed that 7% of the CFO’s considered company’s capital structure as their top priority

53. f) Merges and acquisition: In the complex sphere of merges and acquisitions, the CFO plays a very important role.

54. Interface between finance and other areas of Management: Financial Management is an applied field of business administration. Principles developed by the financial Managers from accounting, economics and other fields are applied to the problems of managing finances. Every business activity requires money and hence financial management is closely related with all other areas of management.

55. Financial Management and Cost accounting: Most of the large companies have a separate cost accounting department to monitor expenditures in their operational areas. The cost information is regularly supplied to the management for control purposes. The finance manager is concerned with proper utilization of funds and therefore , he is rightly concerned with operational costs of the firm .

56. Financial Management and Marketing: Marketing is one of the most important areas on which the success or failure of the firm depends to a very great extent. The philosophy and approach to the pricing policy are critical elements in the company’s marketing effort, image and sales level. Determination of the appropriate price for the firm’s products is of important for both to the marketing and financial managers therefore it should be joint decision.

57. Financial Management and Assets Management Assets are resources necessary for conducting the business of the firm. They include both fixed and current assets. Acquisition of assets and their maintenance involve finances and effective utilization of assets also affects the firm’s finances. Hence financial manager is concerned with both acquisition and utilization of the firm’s assets.

58. Financial Management and Personnel Management: Recruitment, training and Placement are the responsibility of the personnel department. However all these requires finance and therefore the decision regarding these aspects cannot be taken by the personnel department in isolation of the finance department.

59. Financial Management and Production department: As we all know in any manufacturing firm, the Production Manager controls a major part of the investment in the form of equipment, materials and men. He should so organize his department that the equipment’s under his control are used most productively, the inventory of work-in-process or unfinished goods and stores and spares is optimized and the idle time and work stoppages are minimized. If the production manager can achieve this, he would be holding the cost of the output under control and thereby help in maximizing profits

60. Financial Management: Science or Art: Financial Management is both science and an art. Off course it is neither a pure science like physics nor an art like Painting, It lies somewhere in between It is science because it consists of certain basic principles and procedures based on various theories propounded by financial experts Viz, Cost of capital theories, capital structure theories etc. It also takes the help of various statistical techniques, econometric models, computer technology etc for taking financial decisions like budgeting decisions, investment decisions, capital structure decisions etc. As a result we can Financial Management is an applied science.

61. Financial Management is also an art Since the application of human judgement and skills also necessary for effective management of finances. Financial decisions can not be wholly derived on the basis of mathematical or computer based packages. A lot of discretion and judgment should be used by the financial manager The application of human judgement in decision making makes the financial management an art besides its having features of science