Financial Management

AIRIS JANE M. LLAVE, Ph.D.

Introduction to
Financial
Management
Business Finance
Financial Management and
its Scope and Functions
Types of Finance
Objectives of Financial
Management
The Finance Manager
 “Any kind of business
activity depends on the
finance. Hence, it is called
as lifeblood of business
organization.”
 FINANCE
❖ Finance may be defined as the art and science of managing
money. It includes financial service and financial instruments.
❖ Finance also is referred as the provision of money at the time
when it is needed.

❖ The concept of finance includes capital,

funds, money, and amount. But each
word is having unique meaning. Studying
and understanding the concept of finance
become an important part of the business
concern.
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”
❖ In the words of Parhter and Wert, “Business finance
deals primarily with raising, administering and
disbursing funds by privately owned business units
operating in nonfinancial fields of industry”.
❖ According to the Encyclopedia of Social Sciences,
“Corporation finance deals with the financial problems of
corporate enterprises.
Business Finance
 Arrangement of money
 business activity which is
concerned with the
acquisition and
conservation of capital
funds in meeting financial
needs and overall
objectives of business
enterprises.
 the art and science of
arrangement of finance

SAMPLE FOOTER TEXT 20XX 6

Financial Management
J.F. Bradlery
◦ financial management is
the area of business
management devoted to a
judicious use of capital
and a careful selection of
sources of capital in order
to enable a business firm
to move in the direction of
reaching its goals
Financial Management
 Financial Management
means planning,
organizing, directing and
controlling the financial
activities such as
procurement and
utilization of funds of the
enterprise with the
objective of maximizing
shareholders’ wealth.
“Financial Management is concerned with the acquisition, financing and
management of assets with some overall goal in mind”
Van Horne and Wachowicz
“Financial Management
is the operational activity of
a business that is responsible
for obtaining and effectively
utilizing the funds necessary
for efficient operations.”

Joseph and Massie

Functions of Financial Management

Estimation of capital Determination of Choice of sources of Investment of funds

requirements capital composition funds
Functions of Financial Management

Disposal of surplus Management of cash Financial controls

 SCOPE OF FINANCIAL MANAGEMENT
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.
2. Financial Management and Accounting
○ Accounting records includes the financial
information of the business concern. In the
older periods, both financial management
and accounting are treated as a same
discipline and then it has been merged as
Management Accounting because this part is
very much helpful to finance manager to take
decisions.
3. Financial Management
and Mathematics
○ Modern approaches of the
financial management
applied large number of
mathematical and
statistical tools and
techniques.
4. Financial Management and Production
Management
○ Profit of the concern depends upon the production
performance. Production performance needs
finance, because production department requires
raw material, machinery, wages, operating expenses
etc.
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.
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.
Approaches to Financial Management
limited the role of financial
management to raising and
administering of funds needed by the
corporate enterprises to meet their
financial needs.
Traditional Approach
Modern Approach

views the term financial management

as an integral part of over-all
management.
Traditional Approach
IT DEALS WITH THE FOLLOWING MAIN LIMITATIONS OF TRADITIONAL
ASPECTS : APPROACH
• Arrangement of funds from  External Approach
financial institutions
 Ignored routine problems
• Arrangement of funds through
financial instruments like share,  Ignored non-corporate enterprise.
bonds etc.
 Ignored working capital financing
• Looking after the legal and
accounting relationship  No Emphasis on allocation of funds
between a corporation and its  Time value of money is not
sources of funds.
considered
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.
Financial management, in the modern sense of the term, divided into
four major decisions
Financing Decision
 Here the financial manager has to determine the proportion of
debt and equity in capital structure.
 It should be such which maximizes the shareholders’ wealth.
 The objective is to minimize cost of capital.
 It is a one-time decision and it is non-recurring function.
Investment Decision
• Investment decisions are concerned with investment of financial resources
into long term assets. This investment is
made for expansion, modernization, setting up of new plant, R & D
expenditure, and replacement of old machinery.
• It relates to the selection of assets on which a firm will invest funds.
• Investment decisions are strategic decisions for the company as it involves
investment of funds for long time period but company will start to realize
return from that investment after a long time period.
Dividend Decision
• Here the payment of dividends should be analyzed in
relation to the financial decision of a firm.
• There are two options available in dealing with net profits
of a firm:
1. Whether the firms should distribute dividend or retain the
profits.
2. Proportion of dividend out of total earnings to be distributed.
 Role of a
Financial
Manager
◦ The finance manager is
primarily responsible for
effective utilization of
financial resources of the
company. He has perform
the following roles to fulfill
his responsibilities.
Fund raising
◦ Finance manager has
to decide how much
fund should be raised
from debt market and
how much fund
should be raised from
capital market.
Fund Allocation
◦ Fund allocation deals
with how much funds
should be invested in
long term assets and
how much fund
should be invested in
short term assets.
Profit Planning
◦ Profit planning refers
to the operating
decisions in the areas
of pricing, costs,
volume of output.
Understanding of
Financial Market
◦ A finance manager
should have
complete knowledge
of financial market.
 1.To ensure regular and adequate supply of funds to the concern.

1.To ensure adequate returns to the shareholders and this will depend
upon the earning capacity, market price of the share, expectations of
the shareholders.
Objectives of
Financial To ensure optimum funds utilization

Management To ensure safety on investment, i.e. funds should be

invested in safe ventures.

To plan a sound capital structure so that a balance is

maintained between debt and equity capital.
Scope and Functions of Financial
Management

Liquidity: It is ascertained on the basis of three important considerations.

Raising funds  i.e.,

financial manager will
Forecasting cash flows
have to ascertain the
 i.e., matching the Managing the flow of
sources from which
inflows against cash internal funds.
funds may be raised and
outflows
the time when these
funds are needed.
Scope and Functions of Financial
Management
Profitability: While ascertaining profitability, the following factors are taken
into account.

Forecasting Measuring cost of

Cost control Pricing
future profits capital
Scope and Functions of Financial
Management
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.
Objective of Financial Management
 Maximization of Profit :
 It 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.
Merits of the Drawbacks of
Profit Profit
Maximization: maximization

Best Criterion
on Decision- Vague
Making

Efficient
Ignores Time
allocation of
Value of Money
Resources

Optimum Ignores Quality

Utilization of Benefits

Maximum
Social
Welfare
Objective of Financial Management
 Shareholders Wealth Maximization
• It has been widely accepted by the finance managers, because it
overcomes the limitations of profit maximization.
• Wealth Maximization means maximizing the net wealth of the
company’s shareholders.
• The wealth maximization principle implies that the fundamental
objective of a firm should be to maximize the market value of its
shares.
• The value of the company’s shares is represented by their market
price.
Objective of Financial Management
Shareholders Wealth Maximization
• It considers time value of money, translates cash flows occurring
of different periods into a comparable value of cash flows.
• Hence wealth maximization is considered superior to the profit
maximization.
• Thus in the modern era objective of profit maximization has
shifted to shareholders wealth maximization.
 Financi
al
Analysis

Financial Financi
Financi
al Control Manageme al
Decision
nt Process

Financi
al
Planning
End …