Financial Management

Financial Management
Finance
- art and science of managing money.
- includes financial service financial instruments
- provision of money at the time when it is needed
Management
- planning, organization, co-ordination and control of human activities and
physical resources for achieving the objectives of an enterprise.
Financial Management
efficient and effective management of money (funds) in such a manner as to
accomplish the objectives of the organization
Nature & Purpose of Financial Management

The retention of profits is a financing decision.
The other side of this decision is that if profits are retained, there is less to pay
out to shareholders as dividends, which might deter investors.
An appropriate balance needs to be struck in addressing the dividend decision.
Retention of Profits = Low Dividend Payout
Low Dividend Payout = higher reinvesting to the company
High DP = Lesser reinvesting to the company
Goals or Objectives of Financial Management

Profit maximisation. (profit after tax)
Wealth maximisation:-W.M. Means to maximise the net present value ( or wealth
)of a course of action.
Helpful to know about any org. status & capacity with which it can work.
Does this mean we should do anything and everything to maximize our wealth?
 Outsourcing
 Off-shoring
 Enron
 Corporate Support to Charities

Forms of Business Organization

 Sole Proprietorship
 Partnership
 Corporation
Sole Proprietorship
Business owned by one person
Advantages: Disadvantages:
 Easiest to start  Limited to life of owner
 Least regulated  Equity capital limited to owner’s
personal wealth
 Single owner keeps all of the profits  Unlimited liability
 Taxed once as personal income  Difficult to sell ownership interest
Partnership
Business owned by two or more persons
Advantages: Disadvantages:
Two or more owners Unlimited liability
More capital available General partnership
Relatively easy to start Limited partnership
Income taxed once as personal income Partnership dissolves when one
partner dies or wishes to sell
Difficult to transfer ownership
Corporation- A legal “person” distinct from owners and a resident of a state

Advantages Disadvantages
Limited liability Separation of ownership and
Unlimited life management (agency problem)
Separation of ownership and Double taxation (income taxed at the
management corporate rate and then dividends
Transfer of ownership is easy taxed at personal rate, while dividends
Easier to raise capital paid are not tax deductible)
Nature & Purpose of Financial Management

Financial control is the function of the financial manager which becomes
relevant for funding which has been raised.
The financial manager makes decisions relating to investment, financing and

dividends. The management of risk must also be considered.
Scope of Financial Management

Covers both acquisition & utilization of funds – efficient and wise allocation of
funds to various uses.
Involves providing solutions for major financial operations of a firm:

Investment decisions
Financing decisions
Dividend policy decisions
Investment decisions
- Relates to the selection of assets (fixed and current assets) in which funds will
be invested by a firm
- Invest in fixed and long-term assets and projects is capital budgeting – volume
of investment, risk and return, cost of capital
- Investment and management of current assets is called working capital
management – management of cash, inventory and receivables, profitability and
liquidity.
Financing decisions
-Financing decisions are concerned with the capital structure decisions of a firm
(proportion of debt and equity).
-Creating proper mix between debt and equity – optimum capital structure.
-Tradeoff between risk and return.
Dividend policy decisions

- Deciding the dividend payout ratio considering the benefit of shareholders and
firm.
- Dividend decision should be analysed in relation to the financing decisions of
the firm.
Duties/ Roles /Responsibilities of a Financial Manager

- Performing Financial Analysis
- Making Investment Decisions
- Making Financial Decisions
Performing Financial Analysis and Planning

- Transforming financing data into form which can be used for decision making
- Determine need for additional (reducing) finance.
Making Investment Decisions

- Determine the mix of current assets and fixed assets to be held by a firm
- Determine the type of asset in each category
- Determining mix of short and long term financing
- In-depth analysis of available financing alternatives, their costs and long term
implication.
Risk Return Trade-Off

- Amount of Return = Amount of Risk Undertaken
- Amt of Loss is more Epochal than Amt of Gain
- Risk Averse Instrument have High Demand Raising the Price and Lowering the
Returns
- Risk Premium is the Higher Return gained over Risk Free Returns
Relationship of Financial Management, Management Accounting and

Financial Accounting
- Financial Management is mainly concerned with making decisions for the
long-term future of the company. It involves making forecasts for the future and
needs much external information.
- Management accounting involves making short-term decisions as to how to

implement the long-term strategy and involves the setting up of a control system
in order to measure how well objectives are being achieved in order that
corrections may be made if necessary.
- Financial accounting is the reporting to stakeholders – primarily shareholders –

of how the company has performed and how well the financial manager and
management accountant are doing their jobs.
Functional Areas of Finance

- Personal Finance
- Corporate Finance
- Public Finance
Personal Finance
Financial Position
Adequate Protection
Tax Planning
Investment and Accumulation Goals
Retirement Planning
Estate Planning
Corporate Finance
Balancing Risk and Profitability
Maximizing Entity’s Wealth and Stock Value
Managing the Working Capital
Measure the Performance Portfolio
Public Finance
Related to Sovereign States & its entities
Identification of Required Expenditure
Source of Entities Revenue
Debt Issuance for Public Works Projects
Elements of Financial Management

Assets
Liability
Equity/Capital
Expenses
Revenue
Assets are the resources which the businesses use to conduct their activities.
An item becomes an asset when you own it or have the right to use it.
Liability are a group of items which are obligations to the business. They arise
when you make a purchase or take a loan for the business.
Equity/Capital- This category includes the value of any investments made in the
organisation, whether through the owners or shareholders. Owner’s equity will
equal anything left from the assets after all liabilities have been paid.
Expenses- are unavoidable events in the business to conduct business

operations. For a period of time, expenses reduce the assets and increase the
liabilities.
Revenue- is what comes when the company sells their products or deliver their
services. Revenue is the income of the business, thus resulting in increasing of
assets and decreasing of liabilities.
Accounting Equation
Assets = Liabilities + Capital/Equity
Assets – Liabilities = Capital/Equity
Revenue – Expenses = Profit
Personal Financial Equation
Income Php xxx
Less : Expenses xxx
Savings Php xxx
Income Php xxx

Less : Savings xxx
Expenses Php xxx

Financial Management

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Financial Management

Nature & Purpose of Financial Management

Goals or Objectives of Financial Management

Forms of Business Organization

Corporation- A legal “person” distinct from owners and a resident of a state

Nature & Purpose of Financial Management

The financial manager makes decisions relating to investment, financing and

Scope of Financial Management

Involves providing solutions for major financial operations of a firm:

Dividend policy decisions

Duties/ Roles /Responsibilities of a Financial Manager

Performing Financial Analysis and Planning

Making Investment Decisions

Risk Return Trade-Off

Relationship of Financial Management, Management Accounting and

- Management accounting involves making short-term decisions as to how to

- Financial accounting is the reporting to stakeholders – primarily shareholders –

Functional Areas of Finance

Elements of Financial Management

Expenses- are unavoidable events in the business to conduct business

Income Php xxx

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