Presentation on Financial Management Objectives

Introduction
Definition: The term Financial Management can be defined as the management of flow of funds in a firm. It deals with the financial decision making of a firm.

Finance Functions
Investment Decision: 1. Financial Management provides framework for firms to take the decisions of allocating scare resources among competitive uses. 2. The decision making includes those that creates revenues and profits as well as those that save money. 3. These decisions also called capital budgeting decisions.
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Finance Functions
Financing Decisions: 1. It deals with the financing pattern of the firm. 2. In this the management decides how they should raise resources. 3. The two main sources of finance for any firm are Share holders funds and Borrowed funds.
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Finance Functions
Dividend Decisions: 1. It deals with the appropriation of after tax profits. 2. These profits are available to be distributed among the share holders or can be retained by the firm for reinvestment with in the firm.

Objective or Goal of FM
The most fundamental objective of FM is wealth maximization. The following are the main objectives which leads to wealth maximisation in the long run: 1.The main responsibility of FM to ensure that the funds which have mobilised through various resources must be put to best use leading to value addition.

Objective or Goal of FM
2. To generate higher returns on investment so that then it need not depend on external borrowings, and same time it can reward it share holders in terms of Dividend. 3. To survive means to stay alive. The problem of survival arises due to increased competition, change in consumer behaviour and technology, labour problem and so on.

Objective or Goal of FM
4. To ensure availability of adequate cash flow to meet its working expenses such as payment of raw materials, wages, salaries, etc. A healthy cash flow improves an organisations survival chances. 5. To achieve Break-Even point as early as possible so that it can began to make profits sooner or later in the future.

Objective or Goal of FM
6. To earn minimum profits in the short term to cover up the cost of capital, weather dividend paid or not. It also motivates management to work hard. 7. To ensure proper co-ordination among Finance as well as other departments in the organisation. 8. To bring goodwill for the firm.
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Profit Maximisation V/s Wealth Maximisation

Profit maximisation measures the firms performance by looking at its total profit. It does not consider the risk which the firm may undertake in maximisation of profits. It does not consider the effect of earning per share, dividend paid or any other return to shareholders on their wealth. On the other hand, the wealth maximisation objective considers all future cash flows, dividends, EPS, risk of a decision, etc.
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Profit Maximisation V/s Wealth Maximisation

The firm that wishes to maximise profits may opt to pay no dividends and to reinvest the retained earnings. Whereas a firm wishes to maximise the shareholders wealth may pay regular dividends. Moreover the market price of a share reflects the shareholders expected returns, considering the long term prospects of the firm, reflects the differences in timing of the return, consider the risk and recognise the importance of distribution of returns.
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Profit Maximisation V/s Wealth Maximisation

There for the shareholders wealth as reflected in the market price of share is viewed as a proper goal of financial management. The profit maximisation can be considered as a part of the wealth maximisation strategy.

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ROI and Du Pont analysis

Du Pont is system or tool of financial analysis which enables in visualising the financial data such as Returns on Investment. It is developed in 1919 by a finance executive at E.I. Du Pont de Nemours and Co. of Wilmington, Delaware. The system considers Return on Asset as a major measures of performance along with other factors such as Cost of Goods sold, Selling and Adm. Exp., inventories, Accounts Receivable and Cash.
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ROI and Du Pont analysis

The limitation of the model is that it could not present predictions and conduct monitoring of costs. When the investment turnover (Total Asset turnover) is multiplied by the Net Profit Margin, the Product is known as ROI. It is also known as Du Pont Analysis. This analysis shows that profitability depends not only on the NP Margin but also on how efficiently the firm has used its assets to generate sales.
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ROI and Du Pont analysis

The above analysis can be further extended to identify the Return on shareholders funds. The Return on shareholder funds depends upon the use of debt in financing of total assets.

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Ways of Improving ROI

1. 2. 3. 4. 5. Can be improved by increasing the net profit for the same amount of sale i.e. increase the profit margin. Can be improved by increasing the sales volume for the amount of investment. By reducing the costs, it adds to the total earnings of the profit. By increasing profits through investment in those avenues which are expected to bring an additional revenue by raising the size of firms total revenue. Productivity improvement, expansion, diversification, replacement of wear and tear of old equipments, etc.

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Use of ROI in profit planning and control

The left hand side of the Du Pont chart shows the details underlying the net profit margin ratio. 1. Indicates the areas where cost reduction may be affected to improve the net profit margin. 2. In planning of increasing sales volume or sales price of our products to maximise return on asset. 3. The above will increase the net profit margin, which will in turn increase the return on assets.
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Use of ROI in profit planning and control

The right hand side shows the determinants of total asset turnover ratio. 1. It shows the efficient and effective use of fixed as well as current assets, which affects the total asset turnover ratio. 2. To increase the ratio measures should be taken for optimum utilisation of resources. 3. The above will increase the productivity and result in better sales performance.
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