Financial Management Financial Management Meaning Meaning

Finance Function Finance Function

Aims of Finance Function Aims of Finance Function

Financial Management Financial Management

Goals of Financial Goals of Financial Management Management

Financial Decisions Financial Decisions

Finance function Finance function Meaning Meaning

It is one of the It is one of the mainmain functions of functions of a business organisation, which, a business organisation, which, aimsaims at at procuringprocuring and and judiciously judiciously utilisingutilising the the financial resources financial resources with a view to with a view to maximisingmaximising the the value of the firmvalue of the firm thereby the thereby the value of the ownersvalue of the owners i.e., equity i.e., equity shareholders in a company is shareholders in a company is maximised. maximised.

Approaches to Finance FunctionApproaches to Finance Function Providing of funds needed by a business Providing of funds needed by a business

on most suitable terms (This approach on most suitable terms (This approach confines only to raising of funds)confines only to raising of funds)

Second Approach relates finance function Second Approach relates finance function to cash. This approach implies that to cash. This approach implies that finance function is related to every finance function is related to every activity in the business activity in the business

Third approach to this function envisages Third approach to this function envisages the raising of funds and their effective the raising of funds and their effective utilisation .utilisation .

To conclude, finance function covers To conclude, finance function covers financial planning, raising of funds, financial planning, raising of funds, allocation of funds, financial control.allocation of funds, financial control.

Aims of Finance Function Aims of Finance Function Acquiring sufficient funds Acquiring sufficient funds Proper utilisation of funds Proper utilisation of funds Increasing profitability Increasing profitability Maximising concern’s value Maximising concern’s value

Scope or Content of Finance Scope or Content of Finance functionfunction

Estimating financial requirementsEstimating financial requirements Deciding the capital structure Deciding the capital structure Selecting a Source of finance Selecting a Source of finance Selecting a pattern of investment Selecting a pattern of investment Proper cash management Proper cash management Implementing financial controls Implementing financial controls Proper use of surpluses.Proper use of surpluses.

Organisation chart of finance function Organisation chart of finance function

Finance Director / CFO

Board of Directors

Managing Director

Financial Controller

Internal Auditor

Treasurer

ManagerAccounts

managementAccountant

Manager Credit

Manager Taxation

Cash manager

Corp Finance & Funding Manager

Foreign exchange manager

Financial Management Financial Management Meaning Meaning

Financial management refers to that part of Financial management refers to that part of management activity which is concerned with management activity which is concerned with the planning and controlling of form’s financial the planning and controlling of form’s financial resources.resources.

It deals with the finding out various sources for It deals with the finding out various sources for raising funds for the firm.raising funds for the firm.

The basic objective centers around:The basic objective centers around: Procurement of funds from various sources like, Procurement of funds from various sources like,

ESC, PSC, debentures, term loans and bondsESC, PSC, debentures, term loans and bonds Effective utilisation of the funds to maximise Effective utilisation of the funds to maximise

the profitability of the firm and wealth of its the profitability of the firm and wealth of its owners. owners.

Objectives / goals of financial management Objectives / goals of financial management Profit maximisation( Survival, Security and Profit maximisation( Survival, Security and

maintenance of liquidity) it serves as the maintenance of liquidity) it serves as the protection against the risk, facing protection against the risk, facing competition, adverse government competition, adverse government policies. policies.

Arguments in favour of profit Maximisation Arguments in favour of profit Maximisation 1.1. It is a barometer to measure the It is a barometer to measure the

efficiency and economic prosperity efficiency and economic prosperity 2.2. A firm will be able to survive the A firm will be able to survive the

adverse business conditions only if it adverse business conditions only if it has earnings to face the situation.has earnings to face the situation.

3.3. It facilitates growth It facilitates growth 4.4. It helps to achieve social goalsIt helps to achieve social goals

5. It motivates investment 5. It motivates investment 6. Credibility of the firm increases 6. Credibility of the firm increases 7. Stock prices will go up in the market 7. Stock prices will go up in the market

Arguments against profit maximisationArguments against profit maximisation The concept profit is very vagueThe concept profit is very vague It ignores risk factor and timing of It ignores risk factor and timing of

returns returns It may allow decision to be taken at the It may allow decision to be taken at the

cost of Long-run stability and cost of Long-run stability and profitability of the concernprofitability of the concern

It emphasises more on the short run It emphasises more on the short run profitability and short run projects profitability and short run projects

It fails to consider the social It fails to consider the social responsibility responsibility

Wealth MaximisationWealth MaximisationIt means maximising the Net Present Value It means maximising the Net Present Value

(or wealth) of a course of action. The NPV (or wealth) of a course of action. The NPV of a course of Action is the difference of a course of Action is the difference between the present value of its benefits between the present value of its benefits and the present value of its cost. and the present value of its cost.

The maximisation of wealth is possible by The maximisation of wealth is possible by making decisions of the firm to get making decisions of the firm to get benefits that exceeds cost. It takes into benefits that exceeds cost. It takes into consideration the time and the risk of consideration the time and the risk of effected benefits. The wealth effected benefits. The wealth maximisation is not only for the maximisation is not only for the shareholders but also for the stake shareholders but also for the stake holdersholders

The WM goals advocated on the following The WM goals advocated on the following groundsgrounds

It takes into consideration the long-run It takes into consideration the long-run survival and growth of the firmsurvival and growth of the firm

It is consistent with the object of owners It is consistent with the object of owners economic welfare economic welfare

It suggests the consistent dividend It suggests the consistent dividend payments to the shareholders payments to the shareholders

The financial decisions result in the The financial decisions result in the capital appreciation capital appreciation

It considers risk and time value of money It considers risk and time value of money It considers all future cash flows, It considers all future cash flows,

dividends and EPS dividends and EPS

The maximisation of firm’s value is The maximisation of firm’s value is reflected in the market price of share.reflected in the market price of share.

Profit Maximisation partly enables the Profit Maximisation partly enables the firm in wealth maximisation firm in wealth maximisation

Shareholders prefer WM to PM Shareholders prefer WM to PM

CriticismsCriticisms The society’s resources are used to the The society’s resources are used to the

advantage of a particular firm, hence, advantage of a particular firm, hence, society welfare is criticised society welfare is criticised

It is a prescriptive idea than a descriptive It is a prescriptive idea than a descriptive one one

Value maximisation Value maximisation The primary objective of FM is to maximise The primary objective of FM is to maximise

the value of the firm. It facilitates in the value of the firm. It facilitates in maximising the value of equity share maximising the value of equity share which serves as an index of the which serves as an index of the performance of the company.performance of the company.

It takes into consideration the present and It takes into consideration the present and the future earnings, risk dividend, the future earnings, risk dividend, retention policies, level of gearing. retention policies, level of gearing.

The Share holder wealth is maximised only The Share holder wealth is maximised only if market share increases, hence WM is if market share increases, hence WM is redefined as value maximisation redefined as value maximisation

Other maximisation of objectivesOther maximisation of objectives

Sales Maximisation Sales Maximisation Growth Maximisation Growth Maximisation Return on investment maximisation Return on investment maximisation Social objectives Social objectives Group of objectives ( Production, Group of objectives ( Production,

inventory, sales, market share, inventory, sales, market share, profit) profit)

Financial objectives of a firmFinancial objectives of a firm Return on Capital employed or ROIReturn on Capital employed or ROI Value addition and profitability Value addition and profitability Growth in EPS and PE ratio Growth in EPS and PE ratio Growth in MV of Share Growth in MV of Share Growth in Dividends Growth in Dividends Optimum level of leverage Optimum level of leverage Survival and growth of the firmSurvival and growth of the firm Minimisation of finance charges Minimisation of finance charges Effective utilisation of Short, medium and Effective utilisation of Short, medium and

long term objectives long term objectives

Types of decisionsTypes of decisions

Investment decisions Investment decisions Finance Decisions Finance Decisions Dividend decisions Dividend decisions

Investment decisions Ascertainment of the total volume of funds, a Ascertainment of the total volume of funds, a

firm can commit firm can commit Appraisal and selection of capital investment Appraisal and selection of capital investment

proposals proposals Measurement of risk and uncertainty in the Measurement of risk and uncertainty in the

investment proposal investment proposal Prioritisation of investment decisions Prioritisation of investment decisions Fund allocation and its rationing Fund allocation and its rationing Determination of fixed assets to be acquired Determination of fixed assets to be acquired Determination of the level of investments and Determination of the level of investments and

its management its management Buy or lease decisions Buy or lease decisions Asset replacement decisions Asset replacement decisions Restructuring, reorganisation, mergers and Restructuring, reorganisation, mergers and

acquisitionsacquisitions Securities analysis and portfolio managementSecurities analysis and portfolio management

Finance Decisions Finance Decisions Determination of the degree or level of gearing Determination of the degree or level of gearing Determination of the pattern of LT, MT & ST Determination of the pattern of LT, MT & ST

funds funds Raising of funds through various instruments Raising of funds through various instruments Arrangement of funds through various Arrangement of funds through various

institutions institutions Consideration of interest burden Consideration of interest burden Consideration of debt level changes and firm’s Consideration of debt level changes and firm’s

bankruptcy bankruptcy Taking advantage of interest and depreciation Taking advantage of interest and depreciation

in reducing the tax liability of the firm in reducing the tax liability of the firm Considering the various modes on improving Considering the various modes on improving

the EPS and market value of the share.the EPS and market value of the share.

Consideration of cost of capital of Consideration of cost of capital of individual component and weighted individual component and weighted average cost of capital to the firm average cost of capital to the firm

Optimisation of finance mix to improve Optimisation of finance mix to improve returnsreturns

Portfolio management Portfolio management Consideration of the impact of under Consideration of the impact of under

capitalisation and over capitalisationcapitalisation and over capitalisation Consideration for foreign exchange risk Consideration for foreign exchange risk

exposure exposure Balance between owner’s capital and Balance between owner’s capital and

outside capitaloutside capital Evaluation of alternative use of funds Evaluation of alternative use of funds Review of performance by analysis.Review of performance by analysis.

Dividend Decisions Dividend Decisions Determination of dividend and retention Determination of dividend and retention

policies of the firm policies of the firm Consideration of the impact of the levels Consideration of the impact of the levels

of dividend and retention of earnings on of dividend and retention of earnings on the market value of the share and the the market value of the share and the future earnings of the company future earnings of the company

Consideration of possible requirements of Consideration of possible requirements of funds by the firm for expansion and funds by the firm for expansion and diversification proposals for financing diversification proposals for financing existing business requirements existing business requirements

Reconsideration of distribution and Reconsideration of distribution and retention policies in boom and recession retention policies in boom and recession period period

Considering the impact of legal and Considering the impact of legal and cashflow constraints on dividend cashflow constraints on dividend decisionsdecisions

Assignment Assignment

Write a note on the functions of the Write a note on the functions of the finance manager finance manager (10 points)(10 points)