Professional Documents
Culture Documents
Financial Management
-An Introduction
Business Activities
Production
Marketing
Finance
Finance function is the most important of
all business functions.
I. M. Pandey, Financial
Management, 9th ed., Vikas.
Financial Management
Financial Management involves sourcing of funds,
making appropriate investments and promulgating the
best mix of financial and dividends in relation to the value
of the firm.
Financial management is concerned with the managerial
decisions that result in the acquisition and financing of
short term and long term credits for the firm". Here it
deals with the situations that require selection of specific
assets (or combination of assets), the selection of
specific problem of size and growth of an enterprise.
Here the analysis deals with the expected inflows and
outflows of funds and their effect on managerial
objectives
I. M. Pandey, Financial
Management, 9th ed., Vikas.
Modern Approach
(Inside-Outside approach)
The modern approach views finance function in broader
sense.
It includes both raising of funds as well as their effective
utilization under the purview of finance.
Proper utilization of funds was given more importance in
modern approach.
Finance function according to this approach covers
financial planning, raising of funds, allocation of funds,
financial control.
Investment decision
Financing
Dividend decisions
Finance Functions
Investment or Long Term Asset Mix
Decision
Financing or Capital Mix Decision
Dividend or Profit Allocation Decision
Liquidity or Short Term Asset Mix
Decision
I. M. Pandey, Financial
Management, 9th ed., Vikas.
10
Objectives of Financial
Management
Profit maximization (profit after tax)
Shareholders Wealth Maximization
I. M. Pandey, Financial
Management, 9th ed., Vikas.
11
Profit Maximization
Profit earning
is the main aim of every
economic activity. No business can survive
without earning profit. Objective of financial
management is same as the objective of a
company that is to earn profit.
12
Objections to Profit
Maximization
It is Vague
It Ignores the Timing of Returns
It Ignores Risk
Assumes Perfect Competition
In new business environment profit
maximization is regarded as
Unrealistic
Difficult
Inappropriate
Immoral.
I. M. Pandey, Financial
Management, 9th ed., Vikas.
13
Maximizing EPS
Ignores timing and risk of the expected
benefit
Market value is not a function of EPS.
Hence maximizing EPS will not result in
highest price for company's shares
Maximizing EPS implies that the firm
should make no dividend payment so long
as funds can be invested at positive rate of
returnsuch a policy may not always work
I. M. Pandey, Financial
Management, 9th ed., Vikas.
14
Shareholders Wealth
Maximization
15
Risk-return Trade-off
Risk and expected return move in tandem; the
greater the risk, the greater the expected
return.
Financial decisions of the firm are guided by
the risk-return trade-off.
The return and risk relationship:
Return = Risk-free rate +
Risk premium
Risk-free rate is a compensation for time and
risk premium for risk.
I. M. Pandey, Financial
Management, 9th ed., Vikas.
16
Managers Versus
Shareholders Goals
A company has stakeholders such as employees, debtholders, consumers, suppliers, government and society.
Managers may perceive their role as reconciling
conflicting objectives of stakeholders. This stakeholders
view of managers role may compromise with the objective
of SWM.
Managers may pursue their own personal goals at the
cost of shareholders, or may play safe and create
satisfactory wealth for shareholders than the maximum.
Managers may avoid taking high investment and financing
risks that may otherwise be needed to maximize
shareholders wealth. Such satisfying behaviour of
managers will frustrate the objective of SWM as a
normative guide.
I. M. Pandey, Financial
Management, 9th ed., Vikas.
17
18
19
VP of
Finance
I. M. Pandey, Financial
Management, 9th ed., Vikas.
Vice President
Marketing
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VP of Finance
Treasurer
Controller
Capital Budgeting
Cash Management
Credit Management
Dividend Disbursement
Fin Analysis/Planning
Pension Management
Insurance/Risk Mngmt
Tax Analysis/Planning
Cost Accounting
Cost Management
Data Processing
General Ledger
Government Reporting
Internal Control
Preparing Fin Stmts
Preparing Budgets
Preparing Forecasts
I. M. Pandey, Financial
21
placing the
the hands
finance
of top
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(1)
Financial
manager
Firm's
operations
(4a)
Financial
markets
(4b)
(3)
(1) Cash raised from investors
(2) Cash invested in firm
(3) Cash generated by operations
(4a) Cash reinvested
(4b) Cash returned to investors
I. M. Pandey, Financial
Management, 9th ed., Vikas.
23
24
25
Investment
Decision
Financing
Decision
Dividend
Decision
SWM
I. M. Pandey, Financial
Management, 9th ed., Vikas.
26