THE MEANING & ROLE OF FINANCE MANAGEMENT

Guided by:- Dr. Yogesh A. Chauhan

Prepeared by:-Aziz Companiwala

FINANCIAL MANAGEMENT

Financial Management can be defined as the science and art of managing money.

Financial Management (or Business Finance) is concerned with managing a corporation’s money.

WHAT IS FINANCE?

At the personal level, finance is concerned with individuals’ decisions about

• how much of their earnings they spend,

• how much they save, and

• how they invest their savings.

In a business context, finance involves the same types of decisions:

• how firms raise money from investors,

• how firms invest money in an attempt to earn a profit, and

• how they decide whether to reinvest profits in the business or distribute them back to investors.

FUNCTIONS OF FINANCIAL MANAGER

Daily

• Cash management• (receipt and disbursement of funds)• Credit management• Inventory control• Short-term financing• Foreign Exchange hedging• Bank relations

Occasinally

• Intermediate financing• Bond issues• Leasing• Stock issues• Capital budgeting• Dividend decisions• Forecasting

THE GOALS OF FINANCIAL MANAGEMENT

• Primary goal is to maximize the long-term wealth of the company’s shareholders (owners) by increasing the market value (price) of their shares

• This may conflict with– social / ethical goals (for example, pollution control)– interests of management (for example, short-term compensation)• Management can encourage an increase in share price by earning an attractive return at an acceptable level of risk

ROLES OF FINANCIAL MANAGEMENT

The financial management will give information about:- the interest rates which the company is willing to take loans at;- the future cash flow needs;- the recommendations of long-term debt increase, of shares’ issue or a combination between these two;- recommendations about taking short-term loans or about self-financing;- the availability of risk management techniques;- the economic units’ productions and the impact on the existing and planned projects.

ROLES OF FINANCIAL MANAGEMENT

Objectives of Financial ManagementThe financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be-

• To ensure regular and adequate supply of funds to the concern.• To ensure adequate returns to the shareholders which will depend upon the earning

capacity, market price of the share, expectations of the shareholders.• To ensure optimum funds utilization. Once the funds are procured, they should be

utilized in maximum possible way at least cost.

ROLES OF FINANCIAL MANAGEMENT

Objectives of Financial Management(contd…)

• To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved.

• To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.

FUNCTIONS OF FINANCIAL MANAGEMENT• Estimation of capital requirements: A finance manager has to make estimation with

regards to capital requirements of the company.• Determination of capital composition: Once the estimation have been made, the

capital structure have to be decided. This involves short- term and long- term debt equity analysis.

• Choice of sources of funds: For additional funds to be procured, a company has many choices like-• Issue of shares and debentures• Loans to be taken from banks and financial institutions• Public deposits to be drawn like in form of bonds.

• Choice of factor will depend on relative merits and demerits of each source and period of financing.

FUNCTIONS OF FINANCIAL MANAGEMENT• Investment of funds: The finance manager has to decide to allocate funds into profitable

ventures so that there is safety on investment and regular returns is possible.• Disposal of surplus: The net profits decision have to be made by the finance manager.

This can be done in two ways:• Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.• Retained profits - The volume has to be decided which will depend upon expansional,

innovational, diversification plans of the company.• Management of cash: Finance manager has to make decisions with regards to cash

management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, etc.

• Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances.

ACTIVITIES OF FINANCIAL MANAGEMENT

• Capital Budgeting:• Capital Structure:• Working Capital Management

CAPITAL BUDGETING

• Capital budgeting is the planning of long-term corporate financial projects relating to investments funded through and affecting the firm's capital structure.

That is:-

oAnalysis of potential projects.oLong-term decisions; involve large expenditures.oAnd is Very important to firm’s future.

WHY CAPITAL BUDGETING?

• Perhaps its a most impt. function financial managers must perform

• Results of Capital Budgeting decisions continue for many future years, so firm loses some flexibility

• Cap Budgeting decisions define firm’s strategic direction.

• To get benefit from particular investment

CAPITAL STRUCTURE:

• This means by which company is financed:For public companies mostly a mix bonds (debt) and stocks (equity) sold to investors and owners• Capital Structure means the combination of various sources of

finances like equity capital, preference capital, debentures etc.• It also explores the decision of distributing the company’s profit

to shareholder or reinvesting within the company for financing its future expansions.

WORKING CAPITAL MANAGEMENT

• Every running business needs working capital. Even a business which is fully equipped with all types of fixed assets required is bound to collapse without

(i) adequate supply of raw materials for processing; (ii) cash to pay for wages, power and other costs; (iii) creating a stock of finished goods to feed the market demand

regularly; and, (iv) the ability to grant credit to its customers.

All these require working capital.

WORKING CAPITAL MANAGEMENT• The business will not be able to carry on day-to-day• activities without the availability of adequate working capital. The diagram• shown on the next page clarifies it:

WORKING CAPITAL MANAGEMENT• The working capital needs of a business are influenced by numerous factors.• The important ones are discussed in brief as given below:1. Availability of Raw Material2. Market Condition3. Operations4. Manufacturing/Production Policy5. Nature of Enterprise6. Growth and Expansion7. Price Level Changes8. Manufacturing Cycle

CONCLUSION:-• Financial Management (or Business Finance) is concerned with managing a

corporation’s money

• Functions involve:– raising funds for the firm at minimal cost and acceptable risk– investing those funds in company assets so as to earn an attractive return given acceptable risks

CONCLUSION:-Activities include:– Working Capital Management• short-term (S/T) financial decisions (<1 year)• ex., managing cash and other current assets– Capital Budgeting• long-term (L/T) financial decisions (>1 year)• ex., purchasing a new machine in the future– Financing decisions• how to raise money• loans? leases? shares? bonds?

Thank You