Intorduction to Financial Management

Mrs.Priyanka Gohil
IBMR, Ahmedabad
 Importance of Finance
o “Money is an arm or a leg, you either use it
or lose it.”
o The Sanskrit saying “arthah sachivah”,
which means “finance reigns supreme”.
o “Money brings more money, only when it is
properly managed”.
o “Finance is the backbone of every business.”

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 If you are planning to start your own business.

What capital investments should you make?

How will you raise money to pay for the proposed capital
investments?

How will you handle the day-to-day financial activities

like collecting your receivables and paying your
suppliers?
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 Definition

“Financial Management is the operational activity of a business

that is responsible for obtaining and effectively
utilizing the funds necessary for efficient operations.”
-Joseph & Massie

Financial Management includes- Anticipating Financial needs, Acquiring Financial

4 resources and Allocating Funds in Business (i.e., Three A’s of financial management)
 Framework of Financial Management

Management of Long term Funds: Management of Long- Term Assets

Capital structure Capital Budgeting
Cost of capital
Sources of Long-term Funds Operational leverage
Financial Leverage
Dividend policy Risk Analysis

Financial Management

Working Capital Management

Management of short-Term Assets:

Management of Short term funds
Receivable Management
Management of short-term
Inventory Management
Liabilities like creditors, bank
Cash Management
Overdrafts, Bills payable, short-term
Principles of working capital
Loans. Principles of working capital
Management
5 Management, Working capital Policy
Working capital policy
 Goals of Financial Management

1. Profit Maximization
2. Wealth Maximization

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 Profit Maximization

Profit is considered to be the main driving force in business.

It is one of the dominant goals or objectives of the firm.
Profit = Total revenue – Total cost
Profit maximization objective is justified on a number of
grounds.
1. The firm exists for earning profits. Therefore, there is
nothing wrong if this driving force is set as an objective.
2. The efficiency of the firm is measured in terms of its
capacity to earn profit.
3. Profit maximizing firm will be in a better position to extend
its market share.

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 Profit maximization as an objective or goal of the
firm suffers from a number of limitations.
1. Time value of money
2. Risk
3. Cash flows.

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 Wealth Maximization

o Financial management centers around the core

concept of ‘Value’.
o Creating wealth for shareholders by increasing the
value of their investment in the business is the
primary goal of financial management

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 Important

Share holder
Value

Function of financial management

Business and economic environment

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 o The market price takes into account the present and
expected earnings or cash flows per share. The
timing, duration, and the risks of these earnings or
cash flows.
o The market takes into account the projects in hand,
dividend policy of the company, and all the other
factors that have a bearing on the price of the share of
the company.

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 Finance Function

Financial Decisions

Investment Decisions Liquidity Management Financing Decisions Dividend Decisions

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 Investment Decision
The investment decision relates to the selection of assets in
which funds will be invested.

The assets which

can be acquired Long term assets (Capital budgeting)
fall into two broad
groups
Short-term or current assets (working capital
Management)

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 o Investment decisions are also known as Capital
Budgeting Decisions.
o Dividend policy formulation requires the decision
of the management as to how much of the profits
earned will be paid as dividend.

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 Financing Decision
The financing decision covers two interrelated aspects:
1. Capital structure theory
One dimension of the financing decision whether there is an
optimum capital structure? And in what proportion should
funds be raised to maximise the return to the shareholders?
2. Capital structure decision
The second aspect of the financing decision is the
determination of an appropriate capital structure.
o Maximization of net wealth of the shareholders.

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 Dividend Policy Decision
Two alternatives are available in dealing with the
profits of a firm:
1. They can be distributed to the shareholders in the
form of dividends.
2. They can be retained in the business itself.

The decision as to what will be the dividend pay out ratio,

that is, what proportion of net profits should be paid out to the shareholders.

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 The following need adequate consideration in deciding
on dividend policy.

1. Preferences of share holders- Do they want cash

dividend or Capital gains?
2. Current financial requirements of the company.
3. Legal constraints on paying dividends.
4. Striking an optimum balance between desires of
share holders and the company’s funds
requirements.

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 Liquidity Decision

Liquidity decisions are concerned with the current assets management.

There should be trade of between profitability and liquidity.

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 Interface between Finance and
other Business Functions

Finance and Accounting

Finance and Marketing

Finance and Production (Operations)

Finance and HR

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 Finance and Accounting
 Accounting and finance are closely related:
o Financial accounting uses the historical
accounting information for decision making
o Ex. For calculating Return on Investment,
EPS and various ratios for financial analysis
the data base will be accounting information.

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 Finance and Marketing
Many marketing decisions have financial implications.
o Selection of channels of distribution
o Deciding an advertisement policy
o Remunerating the salesmen
o Credit terms extended to customers.
o Product promotion and advertisement policies.
o Investment in inventory
o Marketing cost analysis (Function of finance manager)

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 Finance and Production (Operations)

Finance and operations management are closely related.

o Decisions on plant layout
o technology selection
o production/ operations, process plant size
o Flow of input material in the production
o operation process
All are operations management decisions but their formulation
and execution cannot be done unless evaluated from the
financial angle.

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 Finance and HR

o Organizational productivity depends upon its

man power.
o The value of human resources plays an
important role in valuing a firm.

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Thank You