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Module1 FINMAN

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47 views30 pages

Module1 FINMAN

Uploaded by

blessedwabina03
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
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Financial Management

Lesson 1
Learning Outcome

• At the end of this lesson, you are expected to:


– Describe the nature, goal and basic scope of financial
management.
– Explain briefly the three major types of decisions that the
Finance Manager makes.
– Discuss the importance or significance of financial
management.
– Describe the relationship between Financial Management
and Accounting.
Definition of terms:

• Finance
– art and science of managing money

• Management
– the planning, leading, organizing, and controlling
of human and other resources to achieve
organizational goals effectively and efficiently
What is Financial Management:

• The management of the financial resources of the


company or simply the art and science of managing
the financial resources of the organization.
Goals of Business
1) Profit Maximization?
Maximizing a firm’s earnings after taxes
this goal ignores:

a) TIMING of Returns
(Time Value of Money)
b) UNCERTAINTY of Returns
(Risk)
2) Shareholder Wealth
Maximization?
this is the same as:
a) Maximizing Firm Value
b) Maximizing Stock Price
Scope of Financial Management
• Traditional • Modern approach
• Acquisition, financing, and
management of assets
– Procurement of short-term as well as
• The total funds
long-term funds from financial
institutions.
requirement of the
– Mobilization of funds through firm
financial instruments such as equity
shares, preference shares, • The assets or resources
debentures, bonds, notes, and so
forth to be acquired and
– Compliance with legal and regulatory
provisions relating to funds
• The best pattern of
procurement, use and distribution as
well as coordination of the finance
financing the assets
function with the accounting function.
Financial Management Decisions

• Investment Decision
– What long-term investments or projects should the business
take on?
– Generally, the firm should select only those capital investment
proposals whose net present value is positive and the rate of
return exceeding the marginal cost of capital.
• Financing Decision
– How should we pay for our assets?
– Should we use debt or equity?
• Dividend Decision
1.8
– How do we manage the day-to-day finances of the firm?
Financial Manager
• The top financial manager within a firm is
usually the Chief Financial Officer (CFO)
– Treasurer – oversees cash management, credit
management, capital expenditures and financial
planning
– Controller – oversees taxes, cost accounting,
financial accounting and data processing

1.9
Significance of Financial Management

• Broad Applicability
• Reduction of chances of failure
• Measurement of Return on Investment
Broad Applicability
• The principles of finance are applicable wherever there is cash flow.
• Cash flow is important because the financial health of the firm
depends on its ability to generate sufficient amounts of cash to pay
its employees, suppliers, creditors and owners.

• Financial management is equally applicable to all forms of business


like sole traders, partnerships, and corporations. It is also
applicable to nonprofit organizations like trust, societies,
government organizations, public sectors, and so forth.
•
Reduction of chances of failure

• . The strength of business lies in its financial


discipline.
• Therefore, finance function is treated as primordial
which enables the other functions like production,
marketing, purchase, and personnel to be effective in
the achievement of organizational goal and
objectives.
Measurement of Return on Investment
• Financial management studies the risk-return
perception of the owners and the time value of money.
• It considers the amount of cash flows expected to be
generated for the benefit of owners, the timing of these
cash flows and the risk attached to these cash flows.
• The greater the time and risk associated with the
expected cash flow, the greater is the rate of return
required by the owners.
•
FINANCIAL MANAGEMENT AND ECONOMICS
MICRO MACRO
• Microeconomics deals with the • Macroeconomics looks at the
economic decisions of individuals economy as a whole in which a
and firms. I particular business concern is
• t focuses on the optimal operating operating. Macroeconomics provides
insight into policies by which
strategies based on the economic
economic activity is controlled
data of individuals and firms.
• The government’s fiscal and
• The concept of microeconomics
monetary policies will influence the
helps the finance manager in strategic financial planning of the
decisions like pricing, taxation, d enterprise.
IDENTIFICATION

1. Finance means ________


2. Planning, organizing, leading and controlling are
_______________.
3. __________ deals with past data or records
4. It helps finance manager to make decisions on
pricing
5. The strength of the business lies in its financial
_____________
ESSAY (5 points)

• What is strategy? Why is it important in business?


LESSON 2
Strategic Financial Management
• Strategic planning is long-range in scope and has its focus on the
organization as a whole
• . The strategic financial planning involves financial planning,
financial forecasting, provision of finance and formulation of
finance policies which should lead the firm’s survival and
success.
• The responsibility of a finance manager is to provide a bases and
information for strategic positioning of the firm in the industry.
The firm’s strategic financial planning should be able to meet the
challenges and competition, and it would lead to firm’s failure or
success.
OBJECTIVES OF THE CORPORATION
• SHORT AND MEDIUM-TERM
– Maximization of return on capital employed or
return on investment
– Growth in earnings per share and price/earnings
ratio through maximization of net income or profit
and adoption of optimum level of leverage
– Minimization of finance charges
– Efficient procurement and utilization of short-term,
medium-term, and long-term funds
OBJECTIVES OF THE CORPORATION

• LONG-TERM
•
– Growth in the market value of the equity shares
through maximization of the firm’s market share
and sustained growth in dividend to shareholders
– Survival and sustained growth of the firm
CONFLICTING OBJECTIVES

• The owner’s perspective which hold that the only


appropriate goal is to maximize shareholder or
owner’s wealth, and;
• The stakeholder’s perspective which emphasizes
social responsibility over profitability (stakeholders
include not only the owners and shareholders, but
also include the business’s customers, employees
and local commitments).
WEALTH MAXIMIZATION
• The wealth maximization goal is advocated on the following grounds:
•
• It considers the risk and time value of money
• It considers all future cash flow, dividends and earnings per share
• It suggest the regular and consistent dividend payments to the
shareholders
• The financial decisions are taken with a view to improve the capital
appreciation of the share price
• Maximization of firm’s value is reflected in the market price of share since
it depends on shareholder’s expectations regarding profitability, long-run
prospects, timing difference of returns, risk distribution of returns of the
firm
RESPONSIBILITIES

• INVESTING
• The investing function deals with managing the
firm’s assets. Because the firm has numerous
alternative uses of funds, the financial manager
strives to allocate funds wisely within the firm.
INVESTING
– Evaluation and selection of capital investment proposal
– Determination of the total amount of funds that a firm can commit for
investment
– Prioritization of investment alternatives
– Funds allocation and its rationing
– Determination of the levels of investments in working capital(i.e.
inventory, receivables, cash, marketable securities and its management)
– Determination of fixed assets to be acquired
– Asset replacement decision
– Purchase or lease decisions
– Restructuring reorganization mergers and acquisition
– Securities analysis and portfolio management
FINANCING

• The finance manager is concerned with the ways in


which in the firm obtains and manages the financing
it needs to support its investments.
• The financing objective asserts that the mix of debt
and equity chosen to finance investments should
maximize the value of investments made.
FINANCING
– Determination of the financing pattern of short-term, medium-term and long-term
funds requirements
•
– Determination of the best capital structure or mixture of debt and equity financing
•
– Procurement of funds through the issuance of financial instruments such as equity
shares, preference shares, bonds, long-term funds requirement
•
– Arrangement with bankers, suppliers, and creditors for its working capital,
medium-term and other long-term funds requirement
•
– Evaluation of alternative sources of funds
•
OPERATING

• This third responsibility area of the finance manager


concerns working capital management. The term
working capital refers to a firm short-term asset (I.e.,
inventory, receivables, cash, and short-term
investments) and its short-term liabilities (i.e,.
accounts payable, short-term loans).
OPERATING
– The level of cash, securities and inventory that should be kept on
hand
– The credit policy (I.e., should the firm sell on credit? If so, what
terms should be extended?)
– Source of short-term financing (i.e,. if the firm would borrow in
the short-term, how and where should it borrow?)
– Financing purchases of goods (i.e,. should the firm purchase its
raw materials or merchandise on credit or should it borrow in
the short-term and pay cash?)
•
•

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