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Financial Management-Intro (WEEK 1)

Financial management involves planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of an organization. The key responsibilities of a financial manager include making investment, financing, and dividend decisions. The objectives of financial management are profit maximization, return maximization and wealth maximization of the organization and its shareholders.

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28 views

Financial Management-Intro (WEEK 1)

Financial management involves planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of an organization. The key responsibilities of a financial manager include making investment, financing, and dividend decisions. The objectives of financial management are profit maximization, return maximization and wealth maximization of the organization and its shareholders.

Uploaded by

Aliza Urtal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Introduction to

Financial Management
CONTENT STANDARD
• The learners demonstrate an
understanding of the definition of
finance, the activities of the financial
manager and financial institutions
and markets.
PERFORMANCE STANDARD
• The learners are able to define finance,
describe who are responsible for financial
management within an organization,
describe the primary activities of the
financial manager, describe how the
financial manager helps in achieving the
goal of the organization, and describe the
role of the financial institutions and market.
LEARNING COMPETENCIES
The learner s…
1. explain the major role of financial management and the
different individuals involved
2. distinguish a financial institution from financial
instrument and financial market
3. enumerate the varied financial institutions and their
corresponding services
4. compare and contrast the varied financial instruments
5. explain the flow of funds within an organization –
through and from the enterprise—and the role of the
financial manager
Financial management is an integrated decision
making process, concerned with acquiring,
managing and financing assets to accomplish
overall goals within a business entity.

Speaking differently, it is concerned with making


decisions relating to investments in long term
assets, working capital, financing of assets and so
on.

Financial management capacity is a cornerstone of


organizational excellence.
Meaning of Financial Management

• Financial management entails planning for the future of


a person or a business enterprise to ensure a positive
cash flow, including the administration and maintenance
of financial assets.

• The primary concern of financial management is the


assessment rather than the techniques of financial
quantification.

• Some experts refer to financial management as the


science of money management.
Components of Financial
Management

The five basic components of the Financial Management


Framework are:

•  Planning and Analysis


• Asset and Liability Management
• Reporting
• Transaction Processing
• Control
Importance of Financial Management
Financial management is concerned with procurement and
utilization of funds in a proper way. It is important because
of the following advantages:

1. Helps in obtaining sufficient funds at a minimum cost.

2. Ensures effective utilization of funds.

3. Tries to generate sufficient profits to finance expansion and


modernization of the enterprise and secure stable growth.

4. Ensures safety of funds through creation of reserves,


re-investment of profits, etc.
Finance function
The finance function relates to three major decisions which
the finance manager has to take:

• Investment decisions

• Finance decisions

• Dividend decisions
Investment decision:

This decision relates to the careful selection of


assets in which funds will be invested by the firm.
It Involves buying, holding, reducing, replacing,
selling & managing assets.

Common questions involving Investments include:


• In what lines of business should the firm engage?
• Should the firm acquire other companies?
• What sort of property, plant, equipment should the
firm hold?
• Should the firm modernise or sell an old
production facility?
Financing decisions:
Financing decisions involve the acquisition of funds needed to
support long-term investments.

• While taking this decision, financial management weighs the


advantages and disadvantages of the different sources of
finance.

• The business can either finance from its shareholder funds


which can be subdivided into equity share capital, preference
share capital and the accumulated profits.

• Borrowings from outsiders include borrowed funds like


debentures and loans from financial institutions.
Dividend decisions:
• This decision relates to the appropriation of profits earned.
The two major alternatives are to retain the profits earned
or to distribute these profits to shareholders.

While declaring dividend, a large number of


considerations are kept in mind such as:

Trend of earnings
Stability in dividends
The trend of share market prices
The requirement of funds for future growth
The cash flow situation
Restrictions under the Companies Act
The tax impact on shareholders etc.
n

Divi
cisio

Investment decision

de
g de

nd d
nc i n

ecisi
Fina

on
Three Legged Tool Analogy: Broad Classification of Decision Activities
Objectives of Financial Management

The objectives or goals of financial management are-

(a) Profit maximization,

(b) Return maximization, and

(c) Wealth maximization.


Objectives of Financial Management

(1)Profit maximization: Maximization of profits is generally


regarded as the main objective of a business enterprise.

(2)Return Maximization: Another goal of financial management is


to safeguard the economic interest of the persons who are
directly or indirectly connected with the company, i.e.,
shareholders, creditors and employees.

(3)Wealth Maximization: Maximization of profits is regarded as


the proper objective of the firm but it is not as inclusive a goal as
that of maximizing its value to its shareholders.
Financial Management levels

Broadly speaking, the process of financial management takes


place at two levels:
• At the individual level, financial management involves tailoring
expenses according to the financial resources of an individual.
From an organizational point of view, the process of financial
management is associated with financial planning and financial
control.

• At the corporate level, the main aim of the process of managing


finances is to achieve the various goals a company sets at a given
point of time.
Financial Planning
Financial planning means deciding in advance how much to
spend, on what to spend, according to the funds at your disposal.
Thus, there are two aspects of financial planning:

How much funds are required to finance current and fixed assets
and future expansion project?
From where will these funds come?

Financial planning takes into consideration the growth,


performance, investments and requirement of funds for the
business for a given period of time.
Capitalization Capital Management
structure of capital
Capitalization

Capital is the basis of all financial decisions and


the term capitalization has been derived from it .

• Capital means the total funds invested in the business and


includes owners’ funds , long term loans and other reserves
which are represented by assets.

• Capitalization is the valuation of this capital and will include


owners funds, borrowed funds, long term loans, reserves and
any surplus earnings.
Three possible situations of Capitalization

Fair capitalization Over Under


capitalization capitalization
‡Business employs
correct amount of Business employs
Business employs
capital more capital than
less capital than
warranted
warranted
Over Capitalisation

There are three main indicators of over capitalization:

i. When the amount of capital invested in the business


exceeds the real value of its assets.

ii. When the earnings are not justified by the amount of


capitalization i.e. a fair return is not realized on capital
employed.

iii. When a business has more net assets than it requires


Under Capitalisation

Under capitalization is the reverse of over


capitalization. A company becomes under capitalized
when :

• The future earnings are under estimated at the time of


promotion.

• Unforeseen increase in earnings


Functions of Financial Management

Functions of financial management can be divided into


two groups:

• Executive (or managerial)functions

• Incidental or routine functions


Executive functions:

These functions involve financial, investment and dividend


decision making.

Executive functions involve the following decisions:

• Financial Forecasting
• Investment decisions
• Managing corporate asset structure
• The management of income
• Management of cash
• Deciding about new sources of finance
• To contact and carry negotiations for new financing
• Analysis and appraisal of financial performance
• Advising the top management
Incidental functions:

They are performed by low level assistants like


accountants, account assistants etc. They include:

• Record keeping and reporting


• Preparation of various financial statements
• Cash planning and its supervision
• Credit management
• Custody and safeguarding different financial securities
etc.
• Providing top management with information on
current and prospective financial conditions of the
business.

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