CHAPTER 1

An Overview of Financial
Management
 Nature of Financial Management
 The goals of Financial Management
 Scope of Financial Management
 Significance of Financial
Management
 Role of Finance in a Business
Organization
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CHAPTER 1
An Overview of Financial
Management
 Forms of Business Organization
 Types of Financial Decisions
 Financial Management Issues of the
New Millenium

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 Nature of Financial
Management
 is a decision making process concerned
with planning, acquiring and utilizing funds
in a manner that achieves firm goals.
 It is also referred to as
 Managerial Finance

 Corporate Finance

 Business Finance

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Nature of Financial
Management
 Financial Management is primarily
responsible with acquisition, financing and
management of assets of business concern
in order to maximize the wealth of the firm
for its owners.
 The basic responsibility of Finance Manager
is to acquire funds needed by the firm and
investing those funds in profitable ventures
that will maximize the firm’s wealth.
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Finance
 it is a body of facts, principles, and
theories relating to raising and using
money by individuals, businesses, and
governments.

-this is the system of creating, circulating and managing money..

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GOALS OF FINANCIAL
MANAGEMENT

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Goals of Financial
Management
 Profit Maximization- This is main objective of fin mgmt. The finance manager
strives to achieve the optimal profit in the short term and long term course of
business. The co. makes a decent profit if the finance manager makes a proper
desicions using the various methods available.
 Wealth Maximization- It means shareholders’ value maximization. Wealth
maximization means earning maximum wealth for shareholders. So, the finance
manager tries to give maximum dividends to shareholders. It means that they
are entitled only to what is left after employees, supplier, creditors with a
legitimate claim are paid their due.
 Proper Mobilization - It means utilizing effectively the sources of finance.
 Increase Efficiency-Financial management tries to increase the efficiency of all
sections of the company. Proper distribution of finance to all departments
increases the efficiency of the entire company.
 Proper Estimation of Total Financial Requirements -He should be able to
compute how much financing is required to start and run the business/ He shall
estimate the fixed and working capital requirements of the company. If not,
there will be a shortage or surplus of finance.
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Goals of Financial
Management
 Proper Utilization of Finance-This can be done by using various financial tools such as
managing receivables, effective payment policy in hand, and better inventory management.
 Maintaining Proper Cash Flow -The financial manager shall ensure that there is a regular
supply of liquidity in the company monitoring closely all the cash inflows and outflows
reducing the instances of underflow and overflow of cash.
 Survival of Company-The company must survive in this competitive business world. Healthy
cash flow improves the chances of survival and success of the company.

 Creating Reserves - The higher the reserves, the better it will be for the company to
overcome uncertainty. It must also keep the profits as reserves.
 Reduce the cost of Capital- This includes risk evaluation, measuring the cost of capital, and
estimating the benefits of a particular project
 Reduce Operating Risks-This can be done by avoiding high-risk allocation of capital for
expansion
 Prepare Capital Structure- This means bringing a proper balance between the different
sources of capital.

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Significance of Financial
Management
 Broad Applicability - The principles of finance are applicable
wherever there is cash flow. The concept of cash flow is one of
the central elements of financial analysis, planning, control, and
resource allocation decisions.
 Reduction of Chances or Failure - A firm having latest
technology, sophisticated machinery, high calibre marketing and
technical experts may still fail unless its finances are managed
on principles of fin.mgmt. The strength of business lies in its
financial discipline.
 Measurement of Return on Investment - anybody who invests
his money will expect to earn a reasonable return on his
investment. Fin mgmt studies the risk-return perception of the
owners and the time value of money.

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 Role of Finance in a Typical
Business Organization
Board of Directors
n

President
n

VP: Sales
n VP: Finance
n n VP: Operations

Treasurer
n nController

nCredit Manager Cost Accounting

n Inventory Manager nFinancial Accounting

Capital Budgeting Director

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 Alternative Forms of Business
Organization
 Sole proprietorship - is an unincorporated business that has just one owner who
pays personal income tax on profits earned from the business. it allows small
business owners to begin a business without taking formal legal action through the
state.
 Partnership -a form of business where two or more people share ownership, as well
as the responsibility for managing the company and the income or losses the
business.
 Corporation- A corporation is a business entity that is owned by its shareholder(s),
who elect a board of directors to oversee the organization's activities. The
corporation is liable for the actions and finances of the business – the shareholders
are not. a legal entity that's separate from its owners. Corporations offer the
strongest protection to its owners from personal liability, but the cost to form a
corporation is higher than other structures.

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Sole proprietorships &
Partnerships
 Advantages
 Ease of formation
 Subject to few regulations
 No corporate income taxes
 Disadvantages
 Difficult to raise capital
 Unlimited liability
 Limited life

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Corporation
 Advantages
 Unlimited life
 Easy transfer of ownership
 Limited liability
 Ease of raising capital
 Disadvantages
 Double taxation
 Cost of set-up and report filing

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Shareholders versus Managers
 Managers are naturally inclined to act in
their own best interests.
 But the following factors affect
managerial behavior:
 Managerial compensation plans
 Direct intervention by shareholders
 The threat of firing
 The threat of takeover

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Factors that affect stock price
 Projected cash flows
to shareholders
 Timing of the cash
flow stream
 Riskiness of the cash
flows

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Factors that Affect the Level
and Riskiness of Cash Flows
 Decisions made by financial managers:
 Investment decisions
 Financing decisions (the relative use of
debt financing)
 Dividend policy decisions
 The external environment

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Types of Financial Desicions
 Investment Decisions- Investment decision refers to selecting and
acquiring the long-term and short-term assets in which funds will be
invested by the business.
 Financing Decisions-the decisions that companies need to take
regarding what proportion of equity and debt capital to have in their
capital structure.
 Dividend Decisions - how much of the company's net profit is to be
distributed to the shareholders and how much of it should be retained
in the business for meeting the investment requirements.

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Financial Management Issues
of the New Millennium
 The effect of
changing
technology
 The globalization
of business

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THE END

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