FINANCIAL

MANAGEMENT
 INTRODUCTION:
• Finance is the life blood and nerve center of a business, just as
circulation of blood is essential in the human body for maintaining
life; finance is very essential for smooth running of the business.
• Finance plays a significant role in all types of businesses whether it
is big, medium or small.
• Without finance one cannot start up business or survive. In order to
setup a business enterprise finance is needed which can be obtained
from various sources such as bank loan, venture capital, own funds,
investors funds, etc.
CLASSIFICATION OF FINANCE:
• 1. Public Finance:
• 2. Personal Finance:
• 3. Corporate Finance:
 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 a business enterprise.
• In other words, it refers to the process of raining, providing and administering
of money used in a business concern.
• Thus Financial Management is all about 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.
 SCOPE/ELEMENTS:
• 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.
• 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.
• Dividend decision - The finance manager has to take decision with regards
to the net profit distribution. Net profits are generally divided into two:
i. Dividend for shareholders- Dividend and the rate of it has to be decided.
ii. 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
• I. Profit Maximization:
• A business is set up with the main aim of earning huge profits. Hence, it is the
most important objective of financial management.
• The finance manager is responsible to achieve optimal profit in the short run
and long run of the business.
• The manager must be focused on earning more and more profit. For this
purpose, he/she should properly use various methods and tools available.
• ➢ Aim is to earn the profits.
• ➢ Its the parameter of the biz operation
• ➢ It reduces the risk of the biz concern &
• ➢ main source of finance.
OBJECTIVES OF FINANCIAL MANAGEMENT
• II. Wealth Maximization:
• Shareholders are the actual owners of the company. Hence, the company must
focus on maximizing the value or wealth of shareholders.
• The finance manager should try to distribute maximum dividends among the
shareholders to keep them happy and to improve the goodwill of the company
in the financial market.
• The declaration of dividend and payout policy is decided with the help of
financial management. A proper dividend policy related to the declaration of
dividends or retaining the company's profit for future growth and development
is part of dividend decisions.
OBJECTIVES OF FINANCIAL MANAGEMENT
• II. Wealth Maximization:
• But this is based on the performance of the company and the amount of profit
earned. Better performance means a higher value of shares in the financial
market. In nutshell, the finance manager focuses on maximizing the value of
shareholders.
• ➢ It provides efficient allocation of resources
• ➢ To ensure economic interest of the society
• ➢ It is superior to the Profit Maximization
OBJECTIVES OF FINANCIAL MANAGEMENT
• 3. Maintenance of Liquidity
• With the help of proper financial management, the manager can easily monitor
the regular supply of liquidity in the company.
• But it is not as easy as it sounds. To maintain the proper cash flow, the manager
must keep an eye over all the inflows and outflows of money to reduce the risk
of underflow and overflow of cash.
• The finance manager is responsible to maintain an optimal level of liquidity in
the organization. Healthy cash flow means a higher possibility of survival and
success of the business.
• Because it helps the business to deal with uncertainty, timely payment of dues,
getting cash discounts, making day-to-day payments without delays, etc.
OBJECTIVES OF FINANCIAL MANAGEMENT
• 4. Proper Estimation of Financial Requirements
• Financial management also helps the finance manager in estimating the proper
financial needs of the company.
• This means the estimations related to the requirement of capital to start or run a
business, the need for fixed and working capital of the company, etc., can be
done with effective management of finance.
• If this management will not be present in the company then there will be a
higher possibility of having a shortage or surplus of finance.
• For this estimation, a financial manager checks various factors like the
technology used by the organization, the number of employees working, the
scale of operations, and the legal requirements of the company to run its
business.
OBJECTIVES OF FINANCIAL MANAGEMENT
• 5. Proper Mobilization
• Financial management helps in the effective utilization of sources of finance. It
means without wasting them and getting the maximum benefit from the
available resources.
• The finance manager is responsible for managing the different sources of funds
such as shares, debentures, bonds, loans, etc.
• So, after estimating the financial requirements, the manager must decide which
source of the funds he/she should use to avail the maximum benefit.
OBJECTIVES OF FINANCIAL MANAGEMENT
• 6. Proper Utilization of Financial Resources
• With proper financial management, the organization can make optimum
utilization of financial resources.
• To achieve this, a financial manager has various tools that he/she can use. They
include managing receivables, better management of inventory, and effective
payment policy in hand.
• This will not only save the finance of the organization but will also reduce the
wastage of other resources
OBJECTIVES OF FINANCIAL MANAGEMENT
• 7. Improved Efficiency
• Financial management is also beneficial in increasing the efficiency of all
sections and departments of the organization.
• If the finance is effectively distributed to all the departments then they will
work efficiently.
• It will support the company to achieve its targets easily which will be further
helpful for the growth of the entire company.
OBJECTIVES OF FINANCIAL MANAGEMENT
• 8. Meeting Financial Commitments with Creditors
• Financial management is helpful in the timely payment of dues to the creditors.
The financial manager can list out the creditors, their due amount, and due date
from the financial accounts and can make their payments on time.
• This will increase the goodwill of the company in the market and creditors will
also provide the goods to the company on credit without having any problem.
• So, if there will be strong management of finance then the company will be able
to meet the financial commitments with creditors easily.
OBJECTIVES OF FINANCIAL MANAGEMENT
• 9. Creating Reserves
• The business environment is full of uncertainty such as sudden changes in
customers' preferences, climate change, natural calamity, change in technology,
etc.
• To overcome such unplanned issues, the company should have a sufficient
amount in the form of reserves. The company can create reserves over the year
by having an optimal dividend payout policy.
• The company should also keep some part of profits in the form of reserves. The
reserves are not only helpful in dealing with unwanted situations but also to
expand the business and face contingencies in the future.
• This benefit can only be taken if the company has effective management of
finance.
OBJECTIVES OF FINANCIAL MANAGEMENT
• 10. Decreases the Cost of Capital
• This objective includes measuring the cost of capital, risk evaluation, and
calculating the approximate profits out of a particular project.
• Financial managers are responsible for the effective investments of available
funds in the current or fixed assets to get the maximum benefits or ROI.
FUNCTIONS OF FINANCIAL MANAGEMENT
• Determine the Capital Requirement: The first function of a
financial manager is to estimate the total capital required by the
business to fulfil its mission and objectives. The amount of capital
required is determined by several factors, including the size of the
business, expected profits, company programmes, and policies.

• Establish the Capital Structure: After estimating the required

capital, the structure must be determined. Short-term and long-term
equity is used in the structure. It will also determine how much
capital the company must own and how much must be raised from
outside sources, such as IPOs (Initial Public Offerings), and so on.
FUNCTIONS OF FINANCIAL MANAGEMENT
• Determine the Funding Sources: The next financial management
function is to determine where the capital will come from. The
company may decide to take out bank loans, approach investors for
capital in exchange for equity, or hold an IPO to raise funds from the
public in exchange for shares. The source of funds is chosen and
ranked based on the benefits and limitations of each source.

• Fund Investment: Another function of financial management is

deciding how to allocate funds to profitable ventures. The financial
manager must calculate the risk and expected return for each
investment. The investment methods must also be chosen so that there
is minimal loss of funds and maximum profit optimisation.
FUNCTIONS OF FINANCIAL MANAGEMENT
• Implement Financial Controls: Controls can take the form of
financial forecasting, cost analysis, ratio analysis, profit distribution
methods, and so on. This information can assist the financial manager
in making future financial decisions for the company.

• Work on Capital Budgeting: Capital budgeting refers to decisions

made regarding the purchase of assets, the construction of new
facilities, and the investment in stocks or bonds. Prior to making a
significant capital investment, organisations must first identify
opportunities and challenges.
FUNCTIONS OF FINANCIAL MANAGEMENT
• Mergers and Acquisitions: They both are one method of business
growth. Buying new or existing businesses that align with the buyer
company's mission and goals is referred to as an acquisition. A merger
occurs when two current companies combine to form a new company.
One of the responsibilities of a financial manager is to assist in the
merger and acquisition decision by carefully examining the financials
and securities of each company.
ROLES OF FINANCIAL MANAGEMENT
• Financial Planning: The planning of financial activities and
resources in the organisation plays a critical role in financial
management. To that end, they use available data to understand the
establishment's needs and priorities, as well as the overall economic
situation, and create plans and budgets for the same.

• Utilising and Allocating Financial Resources: Financial

management makes sure that all of an organisation's financial
resources are utilised, invested, and managed profitably, sustainably,
and feasibly over the long term. Due to the intense competition that
exists among businesses, finance directors must make sure that the
money they own is being used as efficiently as possible.
ROLES OF FINANCIAL MANAGEMENT
• Financial Reporting: Financial management keeps track of all relevant
financial reports for the company and uses this information as a database
for forecasting and planning financial activities. For all organisations,
reporting is a crucial task. It provides information about the company's
performance and financial position. This is typically carried out on a
quarterly or annual basis.

• Management of Risk: A company that practises sound financial

management is best prepared to anticipate risks, implement mitigation
strategies, and deal with emergencies and unforeseen risks. There are risks
in every business. For example, sales can suddenly decline due to market
conditions, taxes could be made heavier by government policies etc., or
internal problems like equipment failures cause problems for businesses.
Depending on how serious they are, risks must be identified, evaluated,
and action plans must be developed.
ROLE OF A FINANCIAL MANAGER
• A financial manger is a person who takes care of all the important
financial functions of an organization. The person in charge should
maintain a far sightedness in order to ensure that the funds are utilized
in the most efficient manner. His/Her actions directly affect the
Profitability, growth and goodwill of the firm.
• Raising of Funds
In order to meet the obligation of the business it is important to have
enough cash and liquidity. A firm can raise funds by the way of equity
and debt.
It is the responsibility of a financial manager to decide the ratio
between debt and equity. It is important to maintain a good balance
between equity and debt.
ROLE OF A FINANCIAL MANAGER
• Allocation of Funds
Once the funds are raised through different channels the next important
function is to allocate the funds.
The funds should be allocated in such a manner that they are optimally
used. In order to allocate funds in the best possible manner the
following point must be considered
• The size of the firm and its growth capability
• Status of assets whether they are long-term or short-term
• Mode by which the funds are raised
These financial decisions directly and indirectly influence other
managerial activities. Hence formation of a good asset mix and proper
allocation of funds is one of the most important activity
ROLE OF A FINANCIAL MANAGER
• Profit Planning
Profit earning is one of the prime functions of any business organization. Profit
earning is important for survival and sustenance of any organization. Profit
planning refers to proper usage of the profit generated by the firm.
Profit arises due to many factors such as pricing, industry competition, state of the
economy, mechanism of demand and supply, cost and output. A healthy mix of
variable and fixed factors of production can lead to an increase in the profitability
of the firm.
Fixed costs are incurred by the use of fixed factors of production such as land and
machinery. In order to maintain a tandem it is important to continuously value the
depreciation cost of fixed cost of production.
An opportunity cost must be calculated in order to replace those factors of
production which has gone thrown wear and tear. If this is not noted then these
fixed cost can cause huge fluctuations in profit.
ROLE OF A FINANCIAL MANAGER
• Understanding Capital Markets
Shares of a company are traded on stock exchange and there is a continuous
sale and purchase of securities. Hence a clear understanding of capital
market is an important function of a financial manager.
When securities are traded on stock market there involves a huge amount of
risk involved. Therefore a financial manger understands and calculates the
risk involved in this trading of shares and debentures.
Its on the discretion of a financial manager as to how to distribute the
profits. Many investors do not like the firm to distribute the profits amongst
share holders as dividend instead invest in the business itself to enhance
growth.
The practices of a financial manager directly impact the operation in capital
market.
COST OF CAPITAL:
• MEANING OF COST OF CAPITAL :

• It is the rate of return that could have been earned by putting the same
money into a different investment with equal risk. Thus, the cost of
capital is the rate of return required to persuade the investor to make a
given investment.
CLASSIFICATION OF COST OF
CAPITAL:
• 1. Explicit and Implicit cost
• 2. Average and Marginal Cost
• 3. Historical and Future Cost
• 4. Specific and Combined Cost
COMPUTATION OF COST OF
COPITAL:
• I. Measurement of specific cost
• ➢ Cost of Equity
• ➢ Cost of Debt
• ➢ Cost of Preference Share
• ➢ Cost of Retained earnings

• II. Measurement of overall cost of capital Or Weighted Average Cost

of Capital (WACC)
Assumptions of Cost of Capital:
• Assumptions are closely associated while calculating and measuring the
Cost of Capital.
• There are 3 assumptions:
• 1. It is not a cost as such. It is merely a hurdle rate (minimum rate of return).
• 2. It is minimum rate of return.
• 3. It consists of 3 important risks
• ✓ Zero risk Level
• ✓ Business risk
• ✓ Financial risk
Therefore there is no single method for calculation of cost of equity.
PROBLEMS: