FINANCIAL MANAGEMENT AN

OVERVIEW

Prof. Nidhi Bandaru

CONTENTS OF THE CHAPTER

Introduction Difference and Relation between Accounting and Finance Organization of Finance Function Financial Management

Functions Scope Objective

Goal of Financial Management Agency Problem Emerging Role of a Finance Manager

INTRODUCTION

Finance and its functions are concerned with the planning and controlling of the firms financial resources.

AREAS OF FINANCE

Financial Services
Advice and financial products to individuals, businesses and governments within the areas of banking and related institutions. Personal financial planning, investments, real estate, insurance etc.

Managerial/Corporate Finance or Financial Management

Concerned with the duties of the financial managers in the business firm. To manage the financial affairs of any type of business To perform varied tasks such as budgeting, financial forecasting, cash management, credit administration, investment analysis, funds management etc.

RELATION BETWEEN ACCOUNTING AND FINANCE

Accounting is an important input in financial decision making.

Accounting is a sub function of finance. The end-product of accounting constitutes financial statements. The information from these statements and reports assist financial managers:

In assessing the past performances and future directions of the firm In meeting legal obligations, such as payment of taxes etc. Sometimes, financial management and accounting are often not easily distinguishable.

DIFFERENCE BETWEEN ACCOUNTING AND FINANCE

Treatment of funds

Accounting is based on the Accrual Principle System.

A firm may be quite profitable in the accounting sense (sales expenses) but not in a position to meet current obligations. The viewpoint of finance relating to the treatment of funds is based on Cash Flows. This is so because the financial manager is concerned with maintaining solvency.

DIFFERENCE BETWEEN ACCOUNTING AND FINANCE CONTD

Decision Making

The purpose of accounting is collection and presentation of financial data. It provides consistently developed and easily interpreted data on the past, present and future operations of the firm. The financial manager uses such data for financial decision making. But the primary focus of the functions of accountants is on collection and presentation of data while the financial managers major responsibility relates to financial planning, controlling and decision making. Thus finance begins where accounting ends.

ORGANIZATION OF FINANCE FUNCTION

Board of Directors Managing Director/Chairman VP/Director (Finance)/CFO

Treasures

Controller

Capital Expenditure Manager Financial Planning and fundraising manager Cash Manager Credit Manager Foreign Exchange Manager Pension Fund Manager

Tax Manager Cost Accounting Manager Corporate Accounting Manager Financial Accounting Manager

FINANCIAL MANAGEMENT - FUNCTIONS

Functional Approach A Cash Flow Approach A Balance Sheet Approach

FINANCIAL MANAGEMENT - FUNCTIONS FUNCTIONAL APPROACH

Investment Decision Financing Decision

Dividend Decision
Liquidity Decision

INVESTMENT DECISION
(CAPITAL BUDGETING/LONG TERM ASSET MIX DECISION)
Questions to Address What is the optimal firm size? Measured by total rupee value of all assets

What specific assets should be acquired? What should be the amount invested in each of the assets selected?

Asset Selection

Asset Mix

What assets (if any) should be reduced or eliminated? What should be the minimum return, an asset should give? What is the risk (variability in returns) associated with an investment?

FINANCING DECISION
(LONG TERM CAPITAL MIX DECISION/ CAPITAL MIX DECISION )
Questions to Address What specific kind of securities to be issued? What should be the amount raised by issuing each of the securities? What is the cost associated with each component of the capital? Capital Component Structure

Capital Mix

Cost of Capital

What securities (if any) should be retired? What is the overall cost of capital?

DIVIDEND DECISION
(PROFIT DISTRIBUTION DECISION)
Questions to Address What are the earnings available for distribution as dividends?

What is the total size of the investment opportunities on hand?

What are the alternative financing sources other than the current and retained earnings?

LIQUIDITY DECISION
(WORKING CAPITAL DECISION)

The above mentioned are not frequent decisions. Manager is responsible for the day-to-day activities such as . There is a need to manage liquidity to meet the various current liabilities (Creditors, Bank OD, B/R etc.)