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