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Introduction
Introduction to Financial Management
Topics Covered:-•Emergence of Financial Management•Finance Functions•Goals/Objectives of Financial
Management•Functions of Finance Manager•Agency Problem•Organization for Finance Function
Knowledge Required•Stakeholders and Shareholders•Profit and variants of profits•Shares and debentures and its basic characteristics
Emergence of Financial Management
•Traditional Phase (1890-1940)•Transitional Phase (1940-1950)•Modern Phase (1950-till now)
Definition
•James C Van Horne defined financial management as “concerned with the acquisition, financing and management of assets with some overall goal in mind”
•Weston and Brigham defined the term financial management as “an area of financial decision-making, harmonizing individual motives and enterprise goals”
Finance Functions
Finance Functions
Long -Term
Investment Financing Dividend
Short- Term
Liquidity
Investment
It relates to the selection of assets in which funds will be invested by a firm
Important points:-•The evaluation of the prospective
profitability of new investment•The measurement of a cut-off rate against
which the prospective new investment could be compared (opportunity cost of capital)
Financing•It concerns from where and how to acquire funds
•It also helps in deciding the Optimum capital structure▫Use of debt increases returns to
shareholders and increases risk also•Proportion of long term and short term capital
•Impact on cost of capital due to changes in capital structure
DividendAmount of profit distributed to the shareholders is known as dividend
•Future financing needs•Expectation of the shareholders
Issues:-•Distribute 100% profits•Retain 100% profits•Distribute a part and retain the
remaining profit
Long-term Finance Functions
Investment
FinancingDividend
Liquidity (Short-term)Total of liquid assets which can be
converted in cash within one year
Profitability V/s Risk (Illiquidity)
Less Less
High High
Profitability
Risk (Illiquidity)
High Liquidity
Low Liquidity
GOALS/ objectives
• Target Market Share• Maintaining Financial
Liquidity & Solvency• Profit Maximization• Wealth Maximization
Financial Goals
• Increase Employee Satisfaction
• Social Objective• Quality service to
consumers
Non Financial Goals
Goals/ Objectives of Financial Management
•Profit Maximization•Wealth Maximization
Profit Maximization
Critism•Ambiguity•Time Value of money•Sole-trader versus public limited company
•Historic
Shareholder’s Wealth MaximizationIt is also known as value maximization or NPV.
It is universally acceptable operational decision of FM
•Based on cash flow principle•Time value of money
Criticism of SWM
•Shareholder (owners/Mangers) serve their own interest
•Only takes view of shareholders and few of stakeholders but not of all stakeholders
Functions of a finance Manager
•Forecasting & Planning•Analyzing & Evaluating the investment activities
•Coordination and control•Understanding the finance market
•Risk Management•Performance Management
Agency ProblemManagers are the agents of shareholders and shareholders are the principal.
Agency Cost (cost associated with monetary activities of owners to control and monitor the management) : -
•Monitoring Expenses •Internal and external Audit•Structuring Expenses
▫Stock Option▫Performance Plans
Organization of Finance FunctionBoard of Director
s
CEO
VP (Operatio
ns)
VP (Finance)/CFO
Accounting & auditing
Finance Decision Making
VP (Marketin
g)
Organization of Finance Function
Acc
ou
nti
ng
& A
ud
itin
g
Accounting Mgr.
Insurance Mgr.
Cost accounting Mgr.
Planning & Budgeting Mgr.
Internal Audit & control
Organization of Finance Function
Fin
an
cia
l d
ecis
ion
m
akin
g
Cash Mgr.
Credit Mgr.
Capital Budgeting Mgr.Financial Planning Mgr.
FOREX Mgr.
Tax Planning
Banking & investment
Risk Manager