Introduction to Financial

Management
Prof. Ravichandran
 Introduction
Financial Management is an essential part of
the economic and non economic activities
which leads to decide the efficient
procurement and utilization of finance with
profitable manner.
In the olden days the subject Financial
Management was a part of accountancy with
the traditional approaches
 Introduction

Financial Management has become a vital part

of the business concern and they are
concentrating more in the field of Financial
Management.

Financial Management also developed as

corporate finance, business finance, financial
economics, financial mathematics and financial
engineering.
 Finance & its importance
Business concern needs finance to meet their
requirements in the economic world.
Any kind of business activity depends on the
finance. Hence, Finance is called as lifeblood of
business organization.
In the modern world, all the activities are
concerned with the economic activities and very
particular to earning profit through any venture
or activities.
The entire business activities are directly related
with making profit
 Meaning of Finance
Finance may be called as capital, investment, fund etc., but
each term is having different meanings and unique
characters.
Increasing the profit is the main aim of any kind of
economic activity
MEANING OF FINANCE:
Finance may be defined as the art and science of managing
money.
It includes financial services and financial instruments.
Finance also is referred as the provision of money at the
time when it is needed.
Finance function is the procurement of funds and their
effective utilization in business concern(s).
 Definition of Finance
According to Khan and Jain, Finance is the art and
science of managing money.
Financial Management According to Oxford dictionary,
the word finance connotes management of money
Websters Ninth New Collegiate Dictionary defines
finance as the Science on study of the management of
funds and the management of fund as the system that
includes the circulation of money, the granting of
credit, the making of investments, and the provision of
banking facilities.
DEFINITION OF BUSINESS FINANCE
According to the Wheeler, Business finance is
that business activity which concerns with the
acquisition and conversation of capital funds in
meeting financial needs and overall objectives of
a business enterprise.
According to the Guthumann and Dougall,
Business finance can broadly be defined as the
activity concerned with planning, raising,
controlling, administering of the funds used in the
business.
 Corporate finance ?
Corporate finance is concerned with
budgeting,
financial forecasting,
cash management,
credit administration,
investment analysis and
fund procurement
of the business concern and the business concern
needs to adopt modern technology and application
suitable to the global environment.
 TYPES OF FINANCE
Finance can be classified into two major parts:
1. Private Finance, which includes the
Individual, Firms, Business or Corporate
Financial activities to meet the requirements.
2. Public Finance which concerns with revenue
and disbursement of Government such as
Central Government, State Government and
Semi-Government Financial matters.
Types of Finance
 DEFINITION OF FINANCIAL
MANAGEMENT
Solomon, It is concerned with the efficient use
of an important economic resource namely,
capital funds.
S.C. Kuchal is that Financial Management deals
with procurement of funds and their effective
utilization in the business.
Joshep and Massie : Financial management is
the operational activity of a business that is
responsible for obtaining and effectively utilizing
the funds necessary for efficient operations
Who Practises Financial Management?
Business firms Firms, Partnerships,
companies
Corporations,
Govt.,
Public societies Charitable organisations
Banks
Individuals
 SCOPE OF FINANCIAL MANAGEMENT
Financial management covers wide area with
multidimensional approaches.
The following are the important scope of financial
management.
1. Financial Management and Economics
2. Financial Management and Accounting
3. Financial Management or Mathematics
4. Financial Management and Production Management
5. Financial Management and Marketing
6. Financial Management and Human Resource
Scope of Financial Management contd.
1. Financial Management and Economics
Economic concepts like micro and
macroeconomics are directly applied with the
financial management approaches.
Investment decisions, micro and macro
environmental factors are closely associated with
the functions of financial manager
FM uses the economic equations like money
value discount factor, economic order quantity
etc.
Scope of Financial Management contd
2. Financial Management and Accounting
Accounting records includes the financial
information of the business concern. Hence,
we can easily understand the relationship
between the financial management and
accounting.
But nowadays financial management and
accounting discipline are separate and
interrelated.
Scope of Financial Management contd
3. Financial Management or Mathematics Modern approaches of the
financial management applied large number of mathematical and
statistical tools and techniques. They are also called as econometrics.
Eg.-
Economic order quantity,
discount factor,
time value of money, present value of money,
cost of capital,
capital structure theories,
dividend theories,
ratio analysis and
working capital analysis
Scope of Financial Management contd
5. Financial Management and Marketing
Produced goods are sold in the market with
innovative and modern approaches.
For this, the marketing department needs
finance to meet their requirements.
The financial manager or finance department
is responsible to allocate the adequate finance
to the marketing department.
Scope of Financial Management contd.
6. Financial Management and Human Resource
Financial management is also related with human
resource department, which provides manpower
to all the functional areas of the management.
Financial manager should carefully evaluate the
requirement of manpower to each department
and allocate the finance to the human resource
department as wages, salary, remuneration,
commission, bonus, pension and other monetary
benefits to the human resource department.
 The Four Basic Areas of Finance
Traditionally, financial topics are grouped into
four main areas:
1. Corporate finance
2. Investments
3. Financial institutions
4. International finance
 1. Corporate Finance
Corporate finance is the area of finance dealing
with the sources of funding and the capital structure of
corporations,
the actions that managers take to increase the value of
the firm to the shareholders, and
the tools and analysis used to allocate financial
resources.
 2. Finance - Investments
Investments area deals with financial assets such as stocks
and bonds.
Some of the more important questions include:
What determines the price of a financial asset such as a
share of stock?
What are the potential risks and rewards associated with
investing in financial assets?
What is the best mixture of the different types of financial
assets to hold?
Investments area
Portfolio Management
Security Analysis
 Financial Institutions
Banks, Insurance, Investment related Financial
institutions like Mutual Funds companies,
Non- Banking Financial Companies,
Cooperative Societies
 International Finance
International finance generally involve
international aspects of either corporate
finance, investments, or financial institutions.
Foreign Currency Management
Trade related financial instruments
Foreign Currency exposure & risk
management
CFO (Chief Financial Manager)
 Financial Management Decisions
1/ Capital Budgeting
2/ Capital Structure
3/ Working Capital Management
 Capital Budgeting ?
The process of planning and managing a firms long-
term investments is called capital
budgeting.
In capital budgeting, the financial manager tries to
identify investment opportunities that are worth
more to the firm than they cost to acquire.
Loosely speaking, this means that the value of the
cash flow generated by an asset exceeds the cost of
that asset.
 Capital Structure
A firms capital structure (or financial structure) refers
to the specific mixture of long-term debt and equity
the firm uses to finance its operations.
The financial manager has two concerns in this area.
First: How much should the firm borrow?
Second: What are the least expensive sources of
funds for the firm?
In addition to deciding on the financing mix,
the financial manager has to decide exactly how and
where to raise the money
 Working Capital Management
The term working capital refers to a firms short-
term assets, such as inventory, and its short-term
liabilities, such as money owed to suppliers.
Managing the firms working capital is a day-to-
day activity that ensures the firm has sufficient
resources to continue its operations and avoid
costly interruptions.
This involves a number of activities related to
the firms receipt and disbursement of cash
 FORMS OF BUSINESS ORGANIZATION
Sole Proprietorship - A business owned by a
single individual
Partnership - A business formed by two or
more individuals or entities.
Companies - A business created as a distinct
legal entity owned by one or more individuals
or entities.
 Two key concepts in financial
management
Two key concepts which lay the foundation of
this subject.
The two key concepts are:
i. Risk and return.
ii. Time value of money.
 Two key concepts in financial
management contd.
Risk and return
Financial markets seem to reward investors of
riskier investments with a higher return.
Time value of money
Money (i.e. cash) has different values over time.
Holders of money can either spend a sum of
money now or delay their consumption by
investing the money in different investment
opportunities until it is required .
Understand Present Value /Future Value of
money.
 OBJECTIVES (Goals) OF FINANCIAL
MANAGEMENT
Effective procurement and efficient use of
finance lead to proper utilization of the
finance by the business concern. It is the
essential part of the financial manager.
Hence, the financial manager must determine
the basic objectives of the financial
management.
1. Profit maximization
2. Wealth maximization
 Profit Maximization
Main aim of any kind of economic activity is
earning profit.
A business concern is also functioning mainly
for the purpose of earning profit. Profit is the
measuring techniques to understand the
business efficiency of the concern.
Profit maximization is also the traditional and
narrow approach, which aims at, maximizes
the profit of the concern.
 Profit maximization
Profit maximization consists of the following
important features.
1. Profit maximization is also called as cashing per
share maximization. It leads to maximize the
business operation for profit maximization.
2. Ultimate aim of the business concern is earning
profit, hence, it considers all the possible ways to
increase the profitability of the concern.
 Profit maximization contd.
3. Profit is the parameter of measuring the
efficiency of the business concern. So it shows
the entire position of the business concern.
4. Profit maximization objectives help to
reduce the risk of the business.
Drawbacks of Profit Maximization
(i) It is vague: In this objective, profit is not defined
precisely or correctly. It creates some unnecessary opinion
regarding earning habits of the business concern.
(ii) It ignores the time value of money: Profit maximization
does not consider the time value of money or the net
present value of the cash inflow. It leads certain differences
between the actual cash inflow and net present cash flow
during a particular period.
(iii) It ignores risk: Profit maximization does not consider
risk of the business concern.
Risks may be internal or external which will affect the
overall operation of the business concern
 Wealth Maximization
Wealth maximization is one of the modern
approaches, which involves latest innovations
and improvements in the field of the business
concern.
The term wealth means shareholders wealth or
the wealth of the persons those who are involved
in the business concern
Wealth maximization is also known as value
maximization or net present worth maximization.
This objective is an universally accepted concept
in the field of business
 Favourable Arguments for Wealth
Maximization
1. Wealth maximization is superior to the profit maximization
because the main aim of the business concern under this concept
is to improve the value or wealth of the shareholders.
2. Wealth maximization considers the comparison of the value to
cost associated with the business concern.
3. Total value detected from the total cost incurred for the business
operation. It provides exact value of the business concern.
4. Wealth maximization considers both time and risk of the business
concern.
5. Wealth maximization provides efficient allocation of resources.
6. It ensures the economic interest of the society.
 FUNCTIONS OF FINANCE MANAGER
1. Forecasting Financial Requirements
2. Acquiring Necessary Capital
3. Investment Decision
4. Cash Management
5. Interrelation with Other Departments
 IMPORTANCE OF FINANCIAL
MANAGEMENT
1. Financial Planning
2. Acquisition of Funds
3. Proper Use of Funds
4. Financial Decision
5. Improve Profitability
6. Increase the Value of the Firm
7. Promoting Savings
Environment of Corporate Finance
Corporate Investment and financing decisions are
circumscribed by govt. regulatory framework.
The important elements of framework are :
Industrial Policy
Industrial licensing provisions & procedure
Regulation of Foreign collaboration and investment
Foreign Exchange Management Act
Monopolies and Restrictive trade practice act
Companies act
SEBI
 Model Questions
1. What is finance? Define business finance.
2. Explain the types of finance.
3. Discuss the objectives of financial management.
4. Critically evaluate various approaches to the
financial management.
5. Explain the scope of financial management.
6. Discuss the role of financial manager.
7. Explain the importance of financial management.
8. Discuss Wealth Maximization and Profit
Maximization