UNIT-I

Unit I: Nature of Financial Management: Meaning Nature Objectives Scope- Functions of Financial Management Financial forecasting Financial Planning Time Value of Money (NP)

Nature of Financial Management: Meaning:

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise. Nature Scope/Elements 1. Investment decisions includes investment in fixed assets (called as capital budgeting).Investment in current assets are also a part of investment decisions called as working capital decisions. 2. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby. 3. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two: a. Dividend for shareholders- Dividend and the rate of it has to be decided. b. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.

Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be1. To ensure regular and adequate supply of funds to the concern. 2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders. 3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost. 4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved. 5. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.

Functions of Financial Management

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Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise. Determination of capital composition: Once the estimation have been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties. Choice of sources of funds: For additional funds to be procured, a company has many choices likea. Issue of shares and debentures b. Loans to be taken from banks and financial institutions c. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source and period of financing.
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Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible. Disposal of surplus: The net profits decisions have to be made by the finance manager. This can be done in two ways: a. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus. b. Retained profits - The volume has to be decided which will depend upon expansion, innovational, diversification plans of the company. Management of cash: Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintenance of enough stock, purchase of raw materials, etc. Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.

Financial Forecasting:
Financial Forecasting is an integral part of financial planning. It uses past data t estimate the future financial requirements. A financial planning model establishes the relationship between financial variables and targets, and facilities the financial forecasting and planning process. A model makes it easy for the financial managers to prepare financial forecasts. It makes financial forecasting automatic and saves the financial managers time and efforts performing a tedious activity. Financial planning models help in examining the consequences of alternative financial strategies.

A financial planning model has the following three components: Inputs: The model builder starts with the firms current financial statements and the future growth rate, firms growth prospects depend on the market growth rate, firms market share and intensity of composition. The growth objective is determined by the management team consisting of marketing and finance executives. Model: The model defines the relations between financial variables and develops appropriate equations. For example, net working capital and fixed assets investment may be related to sales. As sales change, they may change in direct proportion to sales. Hence the model will specify working capital and fixed assets as ratio of sales. Similarly, given the payout policy of the firm, dividend may be specified as a ratio of profit after tax. Output: Applying the model equations top the inputs, output in the form of projected or proforma financial statements are obtained. The output shows the investment and funds requirement given the sales growth objective and relationships between the financial variables.

Financial Planning:
Financial planning is a systematic approach whereby the financial planner helps the customer to maximize his existing financial resources by utilizing financial tools to achieve his financial goals. Financial planning is simple mathematics. There are 3 major components : Financial Resources (FR) Financial Tools (FT) Financial Goals (FG) When you want to maximize your existing financial resources by using various financial tools to achieve your financial goals, that is financial planning.

Financial Planning: FR + FT = FG In other words, financial planning is the process of meeting your life goals through proper management of your finances. Life goals can include buying a home, saving for your children's education or planning for retirement. It is a process that consists of specific steps that help you to take a big-picture look at where you are financially. Using these steps you can work out where you are now, what you may need in the future and what you must do to reach your goals. The Importance Of Financial Planning Income: To manage income more efficiently. The cash and need analysis and income expenditure budgeting will show the best way possible in managing income. Regardless of the amount of income earned, part of the earning will go for tax payment, expenditure and what's left would be the saving. Thus, proper management of income is necessary in increasing cash flow. Cash flow: To increase cash flow and monitor spending habits and expenses. Financial planning will help in determining what should be done to generate cash flow in order to make investing possible. Tax planning, careful budgeting and prudent spending are aspects that need to be paid attention to in generating cash flow. This will help as part of the cash can be preserved for long term use. Capital To build a long term capital-base and shape your financial future. Once there is an increase in cash flow, it means an increase in capital base too. This allows one to be able to venture into various portfolio investment. With a strong capital base, one can have a wider portfolio of investment. Investment To identify investment opportunities relevant to your financial situation. Financial planning can help in evaluating the best investment

opportunities. A good investment planning can turn goals from dreams into realities. Apart from picking the `right` investment, it shows how to allocate money among different type of investment. This can have a greater effect on investment success.
Family security To provide for your family's financial security with proper coverage through right kind of policies. The good old days when a worker retired with a nice pension seem to be gone now. Today, one need to take charge and plan for the family's future security. How much income should one plan in needing for the family's financial security? In doing these projections, inflation effects must be considered too. This is where financial planning can be of help.

Financial understanding To get a whole new approach to budgeting and gain control over your financial lifestyle. One can evaluate the level of risk in an investment portfolio or adjust a retirement plan due to changing family circumstances for example. It becomes obvious that financial understanding has been attained when measurable financial goals are set, the effect of each financial decision is understood, the financial situation is periodically evaluated, financial planning is done as soon as possible with realistic expectations and ultimately when one realizes that only he or she is fully in charge of it.
Standard ofliving To maintain your family's present standard of living by maximizing the household insurance portfolio. One can create a personal and family financial plan so that there are clearly defined goals or targets and there is enough savings to get there. For example, one can make sure that there is enough disability coverage to replace any lost income. This can ensure that the family remains financially secure if the head of the family or the bread winner dies. Thus, the family's standard of living doesn't suffer and is maintained.

Savings It used to be called saving for a rainy day. But sudden financial changes can still throw one off the track. An emergency fund for example might be

be ideal. It has to be always very liquid. It means that it should be very easy to convert that fund into cash. Savings bank or money market accounts are examples of investment with high liquidity. This way, a systematic and organized saving and investment plan can be provided to fund children's education and secure a comfortable retirement and on top of that, be ready for any unexpected occurrences. Assets To insure assets accumulation and liability cancellation to leave the maximum amount of wealth to your heirs. In the process of accumulating assets, many fail to realize that it usually comes with a liability package. In order to determine the true worth of any asset, the liabilities need to be settled, or cancelled. Only then, the true value of the assets would be of use and help for the heirs. Otherwise, assets can easily mean unwanted or unexpected financial burden.
Financial security and mastery To assist you and your family to attain the ultimate objective of financial security and mastery. Financial planning will provide directions and meaning to one's financial decisions. It allows an understanding of how financial decisions made can affect other areas of finances. By viewing each financial decision as part of a whole, the short and the long term effects on one's life goals can be considered. This will help in adapting more easily to life changes and feel more secure financially, knowing that financial mastery has been achieved.

The Financial Planning Process:

Setting financial Gathering Relevant Information

Monitoring of Financial Plan

The financial Planning process

Implementati o n of Financial Plan

Analysis of Data Recommendati on of Financial Plan

1. Setting Financial Goals # Financial planner informs client on proper financial goals. # Set out goals relevant to the interest of the client. 2. Gathering Relevant Data # The planner leads the client through the process. # Collect financial information needed to generate a proper financial proposal. # Use the Financial Wizard to enhance the data gathering process. 3. Analysis of Data # The data will tell the financial situation of the client. # Relate the current situation to the financial goals. # Prioritize the financial goals according to current ability and available resources.

4. Recommendation Of Financial Plan # The planner sets out and develops a set of recommendations to help the client achieve financial goals. # Once the client selects the most suitable and agreeable idea, funding will be explored to help implement the financial plan. 5. Implementation Of Financial Plan # The planner will help the client to take action through the most appropriate financial tools. # The client must be motivated to be responsible in going ahead with the plan. Monitoring Of Financial Plan # The financial plan must be constantly reviewed. # From time to time, comparisons must be made between the plan objectives and the original financial goals. # The objectives and the actual performance of the plan might differ over time, thus the planner and client must work hand in hand to ensure that the financial goals are achieved as planned.

Time Value of Money (NP)

Time value of money refers to a concept that money available now is worth more than the same amount in the future because of its potential earning capacity. As time elapse there is cost to using money. The sooner money is received the more valuable it is because it can be invested an earn interest. In financial management, one of the most important concepts is the Time Value of Money (TVM). Time Value of Money concepts helps a manager or investors understand the benefits and the future cash flow to help justify the initial cost of the project or investment. Many of the assets businesses and individuals own are financed with money borrowed from others, so the understanding of TVM is crucial to making good buying decisions. To recognize how annuities affect the time value of money, managers need to consider the factors of interest rate, opportunity costs, future and present values of money, and compounding. Interest Rates and Compounding In most business cases, borrowing money is not ne ...