Financial Management

FINANCIAL MANAGEMENT
AN OVERVIEW
GOALS OF THE FIRM
• Maximizing the owners’ wealth
• Maximizing shareholders’ wealth
• Maximizing the price per share

• Market price of a share serves as a
barometer for business performance
• It indicates how well management is doing
on behalf of its’ shareholders
DEFINITION
• Financial Management is broadly

concerned with the acquisition(investment),
financing and management of assets by a
business firm
OBJECTIVES OF FINANCIAL
MANAGEMENT
Maximize owners' wealth
Market value of equity

SCOPE
• How large should the firm be?

• How fast should the firm grow?
• What should be the composition of the firms’
assets?
• What should be the mix of the firms’ financing?
• How should the firm analyse, plan and control its
financial affairs?
KEY ACTIVITIES OF FINANCIAL
MANAGEMENT
Financial Analysis, Planning and Control

Balance Sheet
Management Long Term Fixed Assets Management

of Financing of the
the Firm’s Firm’s Asset
Financial Short Term Current Structure
Structure Financing Assets
RISK RETURN TRADE OFF
Capital Budgeting
Decisions
Return
Capital Structure
Decisions
Market Value of
the Firm
Dividend
Decisions
Risk
Working Capital
Decisions
FINANCE AND ECONOMICS
• Macro Economics
– Necessary for understanding the environment in
which the firm operates
•Growth rate of economy, tax environment, availability
of funds, rate of inflation, terms on which the firm can
raise finances
• Micro Economics
– Helpful in sharpening the tools of decision
making
•Principle of marginal analysis is applicable to decision making
FINANCE AND ACCOUNTING
• Score Keeping vs. Value Maximising
• Accrual Method vs. Cash Flow Method
• Certainty vs. Uncertainty

Sole proprietorship Partnership Corporation
Decision-making is The general partners are Distinct legal entity
simple decision-makers. Limited liability
Can be set up easily & The owners (the partners) The business enterprise has a
inexpensively divide income according to life in perpetuity
The owner receives all partnership agreement.
Access to additional funds
income from business. Income is taxed once. through the sale of new share
Income is taxed at only Set up with ease of stock.
one level (that of the Income is distributed
owner). Few government according to proportionate
regulations ownership.
Subject to few
regulations The separation of ownership
Unlimited liability. Unlimited liability for each and decision-making.
partner.
Limited life of the
proprietorship A limited life of Double taxation on income
partnership.
The business has limited
access to additional Limited access to
funds. additional funds.
Private Company Public Company
Minimum 2 persons Minimum 7 persons

Maximum Shareholders 50 Maximum Shareholders –unlimited
Public subscription not allowed Public subscription allowed
Restricted rights to transfer shares Free transfer of shares
Promoters enjoy unchallenged Firm can raise substantial funds

control over the firm
Firms ability to raise capital is Cumbersome procedure for

limited Formation
• Public Company is the most appropriate
form of organisation as
– Limited liability
– Enormous growth potential
– Free and easy transferability of shares
REGULATORY FRAMEWORK
• Industrial Policy of 1991
• Companies Act 1956
• Securities and Exchange Board of India

Guidelines 1992
TAXES
Direct Taxes Indirect Taxes
Impact and incidence Impact and incidence

of the tax is on the of the tax is on
same person different persons
Income Tax Excise Duty

Wealth Tax Sales Tax
Gift Tax Customs duty
THE FINANCIAL SYSTEM
Financial Institutions
Commercial Banks
Insurance Companies
Mutual Funds
Provident Funds
Non Banking Financial
Institutions
Suppliers of Funds Demanders of Funds

Individuals Individuals
Businesses Businesses
Governments Governments
Financial Markets
Money Market
Capital Market
Transferring Capital
• Direct Transfer of Funds
saver
firm
saver
Cash
firm
saver
Cash
firm
saver
Securities
Commercial Banks
Insurance Companies
Mutual Funds
Provident Funds
Institutions

Funds
Businesses Private Placement Businesses
Governments Securities Governments
Financial Markets
Money Market
Capital Market
• Indirect Transfer using a Financial Intermediary
Rs.
saver
saver financial
intermediary
Funds
saver financial
intermediary
Funds
saver financial
intermediary firm
Funds Funds
saver financial
intermediary firm
Funds Funds
saver financial
intermediary firm
Firm
Securities
Funds Funds
saver financial
intermediary firm
Intermediary Firm
Securities Securities
Funds Funds
Commercial Banks
Insurance Companies
Deposits/shares
Mutual Funds Loans
Provident Funds
Institutions

Funds
Financial Markets
Money Market
Capital Market
• Indirect Transfer using Investment Banker
saver
saver
investment
banker
Funds
saver
investment
banker
Funds
saver
investment
banker firm
Funds Funds
saver
investment
banker firm
Funds Funds
saver
investment
banker firm
Securities
Funds Funds
saver
investment
banker firm
Securities Securities
Funds Funds
Commercial Banks
Insurance Companies
Deposits/shares
Mutual Funds Loans
Provident Funds
Institutions

Funds
Funds Financial Markets Funds
Money Market
Securities Capital Market Securities
Funds Funds
Commercial Banks
Insurance Companies
Deposits/shares
Mutual Funds Loans
Provident Funds
Institutions
Funds Securities

Funds
Funds Financial Markets Funds

Money Market
Securities Capital Market Securities
INTEREST RATES
• Regulated
• Rates on deposits with commercial banks are subject to
ceiling
• Rates chargeable by commercial banks and financial
institutions are subject to floors
• Rates payable on small savings are fixed by the
government
Growth Trends in the Indian
Financial System
• Impressive growth post 1950 era
• Emergence of wide array of Financial
Institutions
• Introduction of a variety of financial
schemes and instruments to mobilise
savings
• Remarkable growth in money markets
• Deregulation in recent years

Financial Management

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FINANCIAL MANAGEMENT

• Maximizing the owners’ wealth

• Maximizing shareholders’ wealth

• Maximizing the price per share

• Financial Management is broadly

Maximize owners' wealth

Market value of equity

• How large should the firm be?

Financial Analysis, Planning and Control

Management Long Term Fixed Assets Management

• Score Keeping vs. Value Maximising

• Accrual Method vs. Cash Flow Method

• Certainty vs. Uncertainty

Minimum 2 persons Minimum 7 persons

Promoters enjoy unchallenged Firm can raise substantial funds

Firms ability to raise capital is Cumbersome procedure for

• Industrial Policy of 1991

• Companies Act 1956

• Securities and Exchange Board of India

Direct Taxes Indirect Taxes

Impact and incidence Impact and incidence

Income Tax Excise Duty

Suppliers of Funds Demanders of Funds

Suppliers of Funds Demanders of Funds

Suppliers of Funds Demanders of Funds

Suppliers of Funds Demanders of Funds

Funds Financial Markets Funds

Suppliers of Funds Demanders of Funds

Funds Financial Markets Funds

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