Introduction

Introduction to Financial Management

Topics Covered: Emergence of Financial Management Finance Functions Goals/Objectives of Financial Management Functions of Finance Manager Agency Problem Organization for Finance Function

Knowledge Required
Stakeholders and Shareholders Profit and variants of profits Shares and debentures and its basic characteristics

Emergence of Financial Management

Traditional Phase (1890-1940) Transitional Phase (1940-1950) Modern Phase (1950-)

Finance Functions
Finance Functions

Long -Term

ShortTerm

Investment

Financing

Dividend

Liquidity

Investment
It relates to the selection of assets in which funds will be invested by a firm Important points: The evaluation of the prospective profitability of new investment The measurement of a cut-off rate against which the prospective new investment could be compared (opportunity cost of capital)

Financing
It concerns from where and how to acquire finances It also helps in deciding the Optimum capital structure Use of debt increases returns to shareholders and increases risk also

Dividend
Amount of profit distributed to the shareholders is known as dividend Issues: Distribute 100% profits Retain 100% profits Distribute a part and retain the remaining profit Dividend payout ratio = Dividend/Net Profit Retention Ratio= Net Profit-Dividend/ Net Profit

Liquidity
Total of liquid assets which can be converted in cash within one year Profitability V/s Risk (Illiquidity)
Profitability High Liquidity Risk (Illiquidity)

Less High

Less High

Low Liquidity

GOALS/ objectives
Financial Goals
Target Market Share Maintaining Financial Liquidity & Solvency Profit Maximization Wealth Maximization

Non Financial Goals

Increase Employee Satisfaction Social Objective Quality service to consumers

Objectives of Financial Management

Profit Maximization Wealth Maximization

Profit Maximization
Critism Ambiguity Time Value of money Timing of benefits

Wealth Maximization
It is also known as value maximization or NPV. It is universally acceptable operational decision of FM Based on cash flow principle Principle of Value additivity Time value of money

Risk- Return Relationship

Functions of a finance Manager

Forecasting & Planning Analyzing & Evaluating the investment activities Coordination and control Understanding the finance market Risk Management Performance Management

Agency Problem
Managers are the agents of shareholders and shareholders are the principal. Agency Cost: Monitoring Expenses Bonding Expenses Structuring Expenses
Stock Option Performance Plans

Opportunity Cost

Organization of Finance Function

Board of Directors

CEO

VP (Operations)

VP (Finance)/CFO

VP (Marketing)

Treasurer /Accounting & auditing

Controller/Finance Decision Making

Organization of Finance Function

Treasurer

Cash Manager

Credit Manager

Capital Budgeting Manager

Financial Planning Manager

FOREX Manager

Organization of Finance Function

Controller

Accounting Manager

Taxation Manager

Cost Accounting Manager

Data Processing Manager

Planning & Budgeting Manager