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Financial Management Finance - Provision of Money at The Time It Is Wanted

Financial management involves planning, raising, controlling, and administering funds used in a business. The key functions of financial management include investment decisions, financing decisions, dividend decisions, and liquidity decisions. The objectives of financial management are typically profit maximization and wealth maximization. Profit maximization aims to generate the highest level of profits but has limitations such as being vague and ignoring risk. Wealth maximization seeks to maximize the net present value of a business by determining the course of action that results in benefits exceeding investment costs.

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29 views

Financial Management Finance - Provision of Money at The Time It Is Wanted

Financial management involves planning, raising, controlling, and administering funds used in a business. The key functions of financial management include investment decisions, financing decisions, dividend decisions, and liquidity decisions. The objectives of financial management are typically profit maximization and wealth maximization. Profit maximization aims to generate the highest level of profits but has limitations such as being vague and ignoring risk. Wealth maximization seeks to maximize the net present value of a business by determining the course of action that results in benefits exceeding investment costs.

Uploaded by

smarmik
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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INTRODUCTION

FINANCIAL MANAGEMENT
Finance – Provision of money at
the time it is wanted
DEFINITION
• “Business finance is that business
activity which is concerned with the
acquisition and conservation of
capital funds in meeting financial
needs and overall objectives of a
business enterprise”.
•
- Wheeler
“Business finance can broadly be defined as the
activity concerned with planning, raising,
controlling and administering of the the funds
used in the business.”

- Guthman & Dougall


• “FM is concerned with the efficient
use of an imp. economic resource,
namely, capital funds.”
• -
Soloman
• “FM is concerned with the managerial decisions
that result in the acquisition and financing of
long-term & short-term credits for the firm. As
such it deals with the situations that require
selection of specific assets (or, combination of
assets), the selection of specific liability (or,
combination of liabilities) as well as the problem
of size & growth of an enterprise. The analysis of
these decisions is based on the expected inflows
and outflows of funds and their effects upon
managerial objectives”.
• - Philippatus
FINANCE FUNCTIONS

• MANAGERIAL/EXECUTIVE
• ROUTINE
Executive Finance
Functions
1. Investment or long-term asset-mix
decision.
2. Financing or capital-mix decision
3.Dividend or profit allocation
decision
4. Liquidity or short-term asset-mix
decision
INVESTMENT DECISION
• -         Investment decision or Capital
Budgeting decision involves the
decision of allocation of capital or
commitment of funds to long-term
assets which yield benefits in future.
• -         Measuring prospective
profitability of new investments.
• Uncertain future, CB involves risk.
INVESTMENT DECISION
• -         Investment proposals would be
evaluated in terms of both expected
return & risk.
• -         Recommitting funds when an
asset becomes less productive or,
non profitable.
INVESTMENT DECISION
• -         Measurement of a standard or,
hurdle rate against which the
expected return of new invt. can be
compared.
- ROR or, opportunity coc (min.
return which suppliers of capital
require).
FINANCING DECISION
• -    It is the second imp. function.
• -     When, where and how to acquire funds.
• -    Central issue – to determine the proportion of
equity & debt.
• -    Mix of debt & equity – capital structure
• - Best financing mix or, optimum capital
structure (mkt. Value of share is maximized).
FINANCING DECISION
• -         Use of debt affects the return & risk of
sh.holder.
• -         A proper balance – risk & return.
• -         When the shareholders’ return is
maximized with min. risk, the market value per
share will be maximized and the firm’s capital
structure would be considered optimum.
• -         Other factors such as control, loan
covenants flexibility, legal aspects etc.
DIVIDEND DECISION
• -         Distribute all profit, or, retain them,
or, distribute a portion & retain the balance.
• -         Impact on the share holders value.
• -         Optimum dividend Policy
• -         If shareholders’ are not indifferent the
firms’ div. Policy, optimum dividend payout
ratio. Z% of dividends distributed to
earnings available to sh.holders.
• Dividend stability, bonus shares and cash
dividends
LIQUIDITY DECISION
• -         Current Asset Mgt.
• -         Safeguarding the firm against the
dangers of illiquidity & insolvency.
• -         Affects firm’s profitability, liquidity
and risk
• -         Conflict < profitability / liquidity >
managing Cash.
• A proper trade-off between Profitability &
Liquidity
ROUTINE FINANCE
FUNCTION
         Supervision of cash receipts and
payments and safeguarding of cash
balances.
         Custody and safeguarding of
securities, insurance policies and other
valuable papers.
         Taking care of the mechanical
details of new outside financing.
• Record keeping and reporting
OBJECTIVES OF FINANCIAL
MANAGEMENT
PROFIT MAXIMISATION
WEALTH MAXIMISATION
Appropriateness of Profit
Maximization
• Rationality
• Economic Natural Selection
• Social Economic Welfare
Limitations Of PM
• vague
• ignores the timing of returns
• ignores risk
WEALTH MAXIMISATION

WM means maximizing the


NPV OF A COURSE OF ACTION.
The NPV of a course of action
is the difference between the
gross PV of the benefits of that
action and the amt. Of invt.
Required to achieve those
benefits
IMPLICATION OF WEALTH
MAXIMISATION :-
 
Suppliers of Loan Capital
Employees
Society
Management

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