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FM Unit 1

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13 views2 pages

FM Unit 1

Uploaded by

zulisbabe
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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1.

Overview of Financial Management

Financial management involves planning, organizing, directing, and controlling the financial activities
of a company to achieve financial goals. It focuses on the acquisition, financing, and management of
resources to maximize shareholder value.

2. Financial Environment

The financial environment consists of financial markets, institutions, and instruments. Key
components include:

- Capital Markets: Where long-term securities like stocks and bonds are traded.

- Money Markets: Where short-term debt instruments are traded.

- Financial Institutions: Banks, insurance companies, and investment firms that facilitate the flow of
money.

3. Financial Goal of the Firm

The primary financial goal of a firm is to maximize shareholder wealth by increasing the firm's stock
price over time. Other goals include:

- Ensuring profitability.

- Maintaining liquidity for day-to-day operations.

- Ensuring sustainable growth while managing risk.

4. Role of Financial Manager in the Firm’s Management

A financial manager's role includes:

- Investment Decisions: Identifying which projects or investments the company should undertake.

- Financing Decisions: Deciding on the best mix of debt and equity for financing operations.

- Dividend Decisions: Determining the appropriate payout of earnings to shareholders.

- Risk Management: Managing financial risks associated with interest rates, exchange rates, and
credit risks.

5. Principles and Functions of Financial Management

- Principles:

- Time Value of Money: The value of money changes over time; future cash flows should be
discounted to present value.

- Risk-Return Tradeoff: Higher returns come with higher risks.

- Cash Flow Importance: Cash flow is a key measure of a firm's performance, not just profits.

- Profit vs. Wealth Maximization: While profits are important, wealth maximization focuses on long-
term shareholder value.

- Functions:

- Planning and Forecasting: Budgeting future financial needs.

- Capital Structuring: Deciding the optimal mix of debt and equity.

- Financial Control: Monitoring and controlling the firm's finances through financial reporting and
auditing.

- Resource Allocation: Efficient allocation of financial resources to maximize returns.


6. Operating Conditions of Financial Management at the Company

Effective financial management is influenced by:

- Market Conditions: Fluctuations in interest rates, inflation, and the overall economic climate.

- Regulatory Environment: Legal and taxation policies affect financial decisions.

- Internal Policies: The firm's financial structure, operational efficiency, and leadership.

- Technology and Innovation: Tools like financial software for analysis and reporting.

7. System of Organizational and Informational Support of Financial Management

This system includes:

- Organizational Support: A structured finance department that coordinates investment, financing,


and dividend policies.

- Informational Support: Accurate and timely financial data through internal reports and external
market analysis tools for decision-making.

8. Strategy and Tactics: Methods and Techniques of Financial Management

- Strategy:

- Long-Term: Decisions focusing on the firm's long-term goals like capital investments, mergers, and
acquisitions.

- Growth Strategy: Plans to expand market share, increase revenue streams, and maximize
shareholder wealth.

- Risk Mitigation: Strategic steps to minimize financial risks.

- Tactics:

- Short-Term: Tactics focus on day-to-day management of working capital (cash, receivables,


payables).

- Techniques:

- Financial Ratios: Used to assess liquidity, solvency, and profitability.

- Capital Budgeting: Techniques like Net Present Value (NPV) and Internal Rate of Return (IRR) for
evaluating investments.

- Leverage Management: Balancing debt and equity to optimize financial structure.

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