An Overview of

Financial Management
FINANCIAL MANAGEMENT. FIN3513

1
Learning outcome
01 Define and discuss the
importance of financial
management
02 Explain goals of a business
firm from the finance
perspective
03 List and explain various
types of financial market
04 Describe Malaysia’s financial
system

2
An Overview of
Financial
Management

3
 DEFINITION
Financial management is an area
of financial decision-making,
harmonizing individual motives
and enterprise goals (Weston &
Brigham)

The area of the business

management devoted to the use
of capital and careful selection of
sources of capital in order to
enable a spending unit to move in
the direction of reaching its goals
(J.F.Bradley)

Financial management is the

operational activity of a business
that is responsible for obtaining
and effectively utilizing the funds
necessary for efficient operations
(J.Lmasie)

Financial management is principally concerned with making financial

decisions that affect the value of the firm. It relates to creation and
sustenance of the economic value of the firm. Hence, the decisions is to
be made with the goal of creating the economic value of the firm and
wealth.

The study of financial management will therefore deal with various

financial decisions, for example, what would be the financial implications
in deciding whether to introduce a new product and if so, when would
the new product be introduced, whether there is a requirement to invest
in new machineries to produce the new product and how fund is raised
for the investing in the new machineries.

4
 Assist in financial planning and successful
promotion of an enterprise

Helping in the process of acquiring funds as and

when required at the minimum possible cost

Proper use and allocation of funds as well as

making sound financial decisions

Improving the profitability through strong

financial controls

Importance of Financial Management

Financial management is generally concerned with procurement,

allocation and control of financial resources of a concern. The objectives
of financial management include:
• to ensure regular and adequate supply of fund to back the company’s
acquisition of capital.
• to ensure adequate returns to the shareholders, which will depend
upon the earning capacity, market price of the share and expectations
of the shareholders.
• to ensure that the funds are fully optimized in the best way possible.
• to plan a strategically strong capital structure. The composition of the
company’s capital should be fairly balance between debt and equity.

5
 Financial Managers’ Responsibilities
Financial managers’ main
responsibility used to be
monitoring a company’s
finances
However, in modern
business, financial
managers are required to
do more data analysis and
giving advises on ideas to
maximize company’s
profits

Financial manager is a person who takes care of all the important

financial functions of an organization. His actions directly affect the
profitability, growth and goodwill of the firm.

The role of financial managers include overseeing the following areas:

• Preparation of financial reports
• Implementation of cash management strategies
• Execution of suitable capital raising strategies

6
 Financial Managers’ Responsibilities

Prepare financial statements, business

activity reports and forecasts A

Monitor financial details to ensure that

legal requirements are met B

Review company financial reports and

seek way to reduce costs C B C
Analyze market trends to find
opportunities for expansion D

Help management to make financial

D E
decisions E

Below are the main functions of a financial manager:

1. Raising of funds
In order to meet the obligation of the business, it is important to
have enough cash and liquidity. Funds can be raised by the way of
equity and debt. It is the responsibility of financial managers to
maintain a good balance between these two sources of capital.
2. Allocation of funds
The funds should be allocated in such a manner that they are
optimally used. In order to allocate funds in the best possible
manner the following point must be considered
• The size of the firm and its growth capability
• Status of assets whether they are long-term or short-term
• Mode by which the funds are raised
3. Profit planning
Profit earning is one of the prime functions of any business
organization. Profit earning is important for survival and

7
 sustenance of any organization. Profit planning refers to proper
usage of the profit generated by the firm. Profit arises due to many
factors such as pricing, industry competition, state of the economy,
mechanism of demand and supply, cost and output. A healthy mix
of variable and fixed factors of production can lead to an increase
in the profitability of the firm.
4. Understanding capital markets
Shares of a company are traded on stock exchange and there is a
continuous sale and purchase of securities. Hence a clear
understanding of capital market is an important function of a
financial manager. When securities are traded on stock market
there involves a huge amount of risk involved. Therefore a financial
manger understands and calculates the risk involved in this trading
of shares and debentures.

7
 Organizational Structure
Board of Directors

Chief Executive
Officer (CEO)

Other Departments Other Departments

Controller
Treasurer
(Accounts Manager)

Credit Capital Financial Tax

Inventory Cost
Manager Budgeting Accountant Accountant
Manager Accountant
Manager

At the top of the finance area, there is typically the Chief Financial
Officer (CFO) who serves under the company’s Chief Executive Officer
(CEO). The CFO is responsible for participating, overseeing and managing
the tasks of corporate strategic and financial planning and controlling the
company’s cash flows. The CFO is primarily more involved in determining
the firm’s financial policy and undertaking corporate planning. The CFO is
assisted by the Treasurer and Accounts Manager.

The treasurer generally looks after the firm’s financial activities including:
• Undertaking capital budgeting and making capital expenditure
decisions
• Perform financial planning
• Sourcing and raising funds
• Performing cash and credit management
• Performing risk management activities

8
The Accounts Manager, on the other hand, is responsible to the
followings:
• Produce regular financial statements
• Perform cost and management accounting roles
• Comply with taxation requirements

8
 Goals of a Firm

01 Maximize 02 Social
shareholders’ responsibility
wealth

A strategy to maximize Company should be ready

company’s profit will then to give something back to
lead to a higher dividend the society as it will also
paid to the shareholders as increase the reputation of
well as increasing the value the company’s business
of the share price

Taken from a point of view of shareholders, wealth must be seen by

shareholders as being a position to purchase, consume and enjoy more
products and services that yield them the necessary return. To be in this
position of having greater wealth, shareholders would aim for greater
quantities of cash in their hands. To have more ‘cash in hand’
shareholders desire either more dividends or capital gains from rising
share prices. However, as different shareholders have different
preferences as to dividends versus capital gains, a more preferred
approach towards deciding whether shareholder’s wealth is increased or
decreased because of good or bad decisions by finance managers, is to
evaluate based on the effect of a decision on the value of the firm.

9
Financial market is the institution that deals
in financial assets and credit instruments like
currency, cheques and bonds. It also
facilitates the flow of funds in order to
finance investments by corporations,
governments and individuals.

Financial institutions are the key players in

the financial markets as they perform the
function of intermediation and thus
determine the flow of funds.

Financial regulators perform the role of

monitoring and regulating the participants in
the financial system.

10
 Types of Financial Market
Primary market Secondary market

Money market Capital market

Physical asset
Financial asset
Private market
Public market
Spot market

Future market

The roles of financial markets include:

• Facilitation of savings by individuals by allowing them to consume
less today and be able to be in a position to consume more in the
future.
• Provision of a platform to raise financing by the users of finance.
• Provision of a channel whereby demand for and supply of funds can
interact and arrive at a suitable market price for funds.
• Provision of financial services that allow participants to work out and
balance their risk tolerance and expected returns.

11
 FINANCIAL
M A R K E T When a financial instrument is first
issued, it is sold in the primary market.

A secondary market is such in which

financial instruments are resold among
investors. No new capital is raised by
the issuer of the security, in fact, trading
takes place among investors.

Primary market is used when firms first issue securities for funds. Firms
engage in two types of primary market activities; public offerings and
private placements. Public offerings relate to the issue of debt and equity
securities to the public at large. Firms would have to publish prospectus
and advertise in national newspapers, calling for subscriptions for the
securities by the public.

A secondary market is one whereby the holder of a security sells the

security concerned to another investor. Secondary markets provide the
means for transferring ownership of a security debt.

12
 FINANCIAL
M A R K E T Money market is the sector of the
financial market that includes financial
instruments that have a maturity date.

Capital market is the sector of the

financial market where long-term
financial instruments are issued.

Money markets are the markets for debt securities that will be repaid in
the short term, usually within one year. It usually relates to a group of
loosely-connected markets, in particular dealer markets. Companies
could lend when they have surplus cash (e.g. invest in Certificate of
Deposits, Commercial Paper, Treasury Securities etc.) and borrow when
they are short of money.

Capital markets are the markets for long-term debt and equity, which
will be repaid after more than one year. Examples of long-term debt
listed under capital markets are bonds, debentures, long-term bank
borrowings, leasing, hire purchase and loan stocks.

13
 FINANCIAL
M A R K E T Physical asset is a type tangible asset
with physical properties.

Financial asset is an intangible asset

which are expected to provide future
benefits in the form of a claim to future
cash.

Physical assets, also known as tangible assets, are items of value that
have a real material presence. They include things like property, plant,
and equipment as well as inventories. Physical assets are recorded as
either fixed or current, where depreciation and impairment may alter
their accounting treatment.

A financial asset is a liquid asset that gets its value from a contractual
right or ownership claim. Cash, stocks, bonds, mutual funds, and bank
deposits are all are examples of financial assets. Unlike physical assets,
financial assets do not necessarily have inherent physical worth or even a
physical form. Rather, their value reflects factors of supply and demand
in the marketplace in which they trade, as well as the degree of risk they
carry.

14
 FINANCIAL
M A R K E T Spot market is the market for the
immediate purchase and sale of a
financial instrument.

In contrast, some financial instruments

are contracts that specify that the
contract holder has either the obligation
of the choice to buy or sell at some
future dates. This type of market is
known as future market.

The spot market is where financial instruments, such as commodities,

currencies and securities, are traded for immediate delivery. Delivery is
the exchange of cash for the financial instrument. Exchanges and over-
the-counter (OTC) markets may provide spot trading and future trading.

A future market is an auction market in which participants buy and sell

commodity and futures contracts for delivery on a specified future date.
Futures are exchange-traded derivatives contracts that lock in future
delivery of a commodity or security at a price set today. Examples of
future markets are the Kuala Lumpur Composite Index (KLCI), Hang Seng
Index (Hong Kong) and Nasdaq 100 Index (United States of America).

15
 FINANCIAL
M A R K E T Private market includes securities
which are sold directly to investors and
are not registered with the securities
exchange commission.

Public market offering of new issues

typically involves the use of an
investment bank in a process.

A private market is a sale of stock shares or bonds to pre-selected

investors and institutions rather than on the open market. It is an
alternative to an initial public offering (IPO) for a company seeking to
raise capital for expansion. Investors invited to participate in private
placement programs include wealthy individual investors, banks and
other financial institutions, mutual funds, insurance companies,
and pension funds.

Public market refers to anything that can be accessed by any person or

group in the general population. In the context of investment and
finance, the term is most commonly used to describe securities that are
available on an exchange or an over-the-counter market, and the
population who trades those securities.

16
 Financial Institution
Banking system Non-banking system
• Bank Negara Malaysia. • Provident and pension funds
• Banking institutions • Insurance and takaful companies
• Commercial bank • Development finance institutions
• Finance companies • National savings bank
• Merchant banks • Cooperative societies
• Islamic banks

• Others
• Unit trusts
• Others • Pilgrim fund board
• Discount house • Housing credit institutions
• Representative offices of • Leasing companies factoring
foreign banks • Credit Guarantee Corporation
• Cagamas Berhad

The function of financial institution is to bring together a pool of money

from the general public, make advances and earn an income from these
advances. This function of borrowing money from one source to give it to
another company that needs funding, investment or resources is known
as financial intermediation. This function is done by entities besides
banks, such as investment banks, hedge funds, private equit;y funds,
mutual funds and insurance companies.

The reasons financial intermediaries exist are:

• Enterprises or individuals which need the money hold better
information about their own financial condition and prospects than
the people or organizations that have the money to lend.
• The costs to match potential creditors and potential debtors without
services of a specialized third party are prohibitive.

17
THANK YOU

18