Introduction To Financial Management

Excel Books FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat Chapter-1 FINANCIAL MANAGEMENT, Dr.
RATNESH CHATURVEDI
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1
Chapter
INTRODUCTION TO
FINANCIAL MANAGEMENT
Excel Books FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat Chapter-1 FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI
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Meaning of Business Finance:
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 business enterprises.
INTRODUCTION TO
FINANCIAL
MANAGEMENT
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What is Financial Management?
Financial Management is broadly concerned with
the acquisition and use of funds by a business firm.
Its scope may be defined in terms of the following
questions :
How large should the firm be and how fast should it grow?
What should be the composition of the firms assets?
What should be the mix of the firms financing ?
How should the firm analyze, plan and control its financial
affairs?
INTRODUCTION TO
FINANCIAL
MANAGEMENT
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EVOLUTION OF FINANCIAL
MANAGEMENT

Financial management has emerged as a distinct field
of study only in the early part of this century as a result
of consolidation movement and formation of large
enterprises. Its evolution may be divided into three
phases viz.,
The Traditional phase,
The Transitional phase and
Modern phase
INTRODUCTION TO
FINANCIAL
MANAGEMENT
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Traditional Approach
The traditional approach, which was popular in the early
stage, limited the role of financial management to raising
and administering of funds needed by the corporate
enterprises to meet their financial needs. It deals with the
following aspects :
Arrangement of funds from financial institutions
Arrangement of funds through financial
instruments like share, bonds etc/.
Looking after the legal and accounting
relationship between a corporation and its
sources of funds.
INTRODUCTION TO
FINANCIAL
MANAGEMENT
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Main limitations of Traditional Approach
External Approach
Ignored routine problems
Ignored non-corporate enterprise.
Ignored working capital financing
No Emphasis on allocation of funds
Time value of money is not considered
INTRODUCTION TO
FINANCIAL
MANAGEMENT
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INTRODUCTION TO
FINANCIAL
MANAGEMENT
Modern Approach :
According to modern approach the term financial
management provides a conceptual and analytical
framework for financial decision-making. That
means, the finance function covers both
acquisition of funds as well as their allocation.
The new approach views the term financial
management in a broader sense. It is viewed as
an integral part of over-all management.
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INTRODUCTION TO
FINANCIAL
MANAGEMENT
Financial management, in the modern sense of
the term, divided into four major decisions :
Financial
Management
Investment
Decision
Dividend
Decision
Financing
Decision
Funds
Requirement
Decision
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SCOPE AND FUNCTIONS OF FINANCIAL
MANAGEMENT
INTRODUCTION TO
FINANCIAL
MANAGEMENT
1. Liquidity: It is ascertained on the basis of three important
considerations.
a) Forecasting cash flows i.e., matching the
inflows against cash outflows
b) Raising funds i.e., financial manager will have
to ascertain the sources from which funds may be
raised and the time when these funds are needed.
c) Managing the flow of internal funds.

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INTRODUCTION TO
FINANCIAL
MANAGEMENT
2. Profitability: While ascertaining profitability, the following
factors are taken into account.
a) Cost control
b) Pricing
c) Forecasting future profits
d) Measuring cost of capital

3. Management: Asset management has assumed an
important role in financial management. It includes : (a)
the management of long term funds. (b) The management
of short term funds.
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Functional Areas of Modern Financial
Management
Determining Financial need
Determining Sources of Funds
Financial analysis
Optimal Capital Structure
Cost Volume Profit Analysis
Functional Areas
Of Financial
Management
Profit Planning and Control
INTRODUCTION TO
FINANCIAL
MANAGEMENT
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Functional Areas of Modern Financial
Management
Fixed Assets Management
Project Planning and Evaluation
Capital Budgeting
Working Capital Management
Dividend Policies
Acquisition and Mergers
Corporate Taxation
INTRODUCTION TO
FINANCIAL
MANAGEMENT
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OBJECTIVE OF FINANCIAL MANAGEMENT :
Maximization of Profit : Profit maximization is a
term which denotes the maximum profit to be
earned by an organization in a given time period.
The profit- maximization goal implies that the
investment, financing and dividend policy decision
of the enterprise should be oriented to profit
maximization.
INTRODUCTION TO
FINANCIAL
MANAGEMENT
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Merits of the Profit Maximization:
Best Criterion on Decision-Making: The goal of profit
maximization is regarded as the best criterion of the
decision of making as it provides a yard-stick to judge the
economic performance of the enterprises.
Efficient allocation of Resources: It leads to efficient
allocation of scarce resources as they tend to be diverted
to those uses which, in terms of profitability, are the most
desirable.
Optimum Utilization: Optimum utilization of available
resource is possible.
Maximum Social Welfare
INTRODUCTION TO
FINANCIAL
MANAGEMENT
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Drawbacks of Profit maximisation :
Time Factor Ignored
it is Vague
The Term Maximum is also Ambiguous
It Ignores Time Value
it Ignores the Risk Factor
In new business environment profit maximization is regarded as
Unrealistic
Difficult
Inappropriate
Immoral.

INTRODUCTION TO
FINANCIAL
MANAGEMENT
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Maximizing return or EPS
Ignores timing and risk of the expected benefit.
Market value is not a function of EPS. Hence
maximizing EPS will not result in highest price for
company's shares.
Maximizing EPS implies that the firm should make no
dividend payment so long as funds can be invested at
positive rate of returnsuch a policy may not always
work.

INTRODUCTION TO
FINANCIAL
MANAGEMENT
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Wealth Maximization
Maximizes the net present value of a course of action
to shareholders.
Accounts for the timing and risk of the expected
benefits.
Benefits are measured in terms of cash flows.
Fundamental objectivemaximize the market value
of the firms shares.

INTRODUCTION TO
FINANCIAL
MANAGEMENT
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Significance of Wealth- Maximization:
The company although it cares more for the economic welfare of
the shareholders, it cannot forget the others who directly or
indirectly work for the overall development of the company. Thus
Wealth- Maximization takes care of
Lenders or creditors
Workers or Employees
Public or Society
Management or Employer
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FINANCIAL
MANAGEMENT
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Significance of wealth - Maximization
Other objective Ensuring fair return to shareholder,
Building up reserves for growth and expansion,
ensuring financial discipline in the management
INTRODUCTION TO
FINANCIAL
MANAGEMENT
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Method of Financial Management/tools
Cost of Capital
Capital budgeting appraisal
Ratio analysis
ABC analysis
Funds flow and Cash flow analysis
Working capital management
Trading on equity
INTRODUCTION TO
FINANCIAL
MANAGEMENT
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Organisation of the Finance Functions
Reason for placing the finance functions in the hands of
top management
Financial decisions are crucial for the survival of the
firm.
The financial actions determine solvency of the firm
Centralisation of the finance functions can result in a
number of economies to the firm.

INTRODUCTION TO
FINANCIAL
MANAGEMENT
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Functions of The Finance Controller/ Manager :
Accounting
Budgeting
Internal Audit
Finance Planning
Profit Planning
Investment Decisions
Economic appraisal.
INTRODUCTION TO
FINANCIAL
MANAGEMENT
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Financial management Process :
Financial Analysis
Financial Decision
Financial Planning
Financial Control

INTRODUCTION TO
FINANCIAL
MANAGEMENT
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INTRODUCTION TO
FINANCIAL
MANAGEMENT

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Excel Books FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat Chapter-1 FINANCIAL MANAGEMENT, Dr.

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