2. FINANCEFINANCE
1.1. Finance is the life-blood of business. Without financeFinance is the life-blood of business. Without finance
neither any business can be started nor successfully run .neither any business can be started nor successfully run .
2.2. Finance is needed to promote or establish business,Finance is needed to promote or establish business,
acquire fixed assets, make necessary investigations,acquire fixed assets, make necessary investigations,
develop product keep man and machines at workdevelop product keep man and machines at work
,encourage management to make progress and create,encourage management to make progress and create
values.values.
3.3. Finance is the managerial activity which is concernedFinance is the managerial activity which is concerned
with planning and controlling of the firms Financialwith planning and controlling of the firms Financial
ResourcesResources..
3. What is FinancialWhat is Financial
Management?Management?
Concerns theConcerns the acquisitionacquisition,,
financingfinancing, and, and managementmanagement ofof
assets with someassets with some overall goaloverall goal
in mind.in mind.
4. DefinitionDefinition
Financial management is the ways andFinancial management is the ways and
means of managing money. i.e. themeans of managing money. i.e. the
determination, acquisition, allocation anddetermination, acquisition, allocation and
utilization of financial sources usually withutilization of financial sources usually with
the aim of achieving some particular goalsthe aim of achieving some particular goals
or objectives.or objectives.
““Financial management is the application ofFinancial management is the application of
planning and control function of the financeplanning and control function of the finance
function”- Howard and Uptonfunction”- Howard and Upton
5. NATURE AND SCOPE OFNATURE AND SCOPE OF
FINANCIAL MANAGEMENTFINANCIAL MANAGEMENT
The nature of financial decisions would beThe nature of financial decisions would be
clear when we try to understand theclear when we try to understand the
operation of a firm. At the very outset, theoperation of a firm. At the very outset, the
promoters makes an appraisal of variouspromoters makes an appraisal of various
investment proposals and selects one orinvestment proposals and selects one or
more of them ,depending upon the netmore of them ,depending upon the net
benefits derived from each as well as on thebenefits derived from each as well as on the
availability of funds.availability of funds.
6. FINANCIAL DECISION PROCESSFINANCIAL DECISION PROCESS
1. Selection of investment proposals ,known as the1. Selection of investment proposals ,known as the
investment decision.investment decision.
2. Determination of working capital2. Determination of working capital
requirements, known as the working capitalrequirements, known as the working capital
decision.decision.
3. Raising of funds to finance the assets,3. Raising of funds to finance the assets, knownknown
as the financing decision.as the financing decision.
4. Allocation of profit for dividend4. Allocation of profit for dividend payment,payment,
known as the dividend decision.known as the dividend decision.
7. What is Finance?What is Finance?
What is this course all about?What is this course all about?
• Accounting is the language of business.Accounting is the language of business.
• Finance uses accounting information togetherFinance uses accounting information together
with other information to make decisions thatwith other information to make decisions that
affect the market value of the firm.affect the market value of the firm.
• There areThere are threethree primary decision areas thatprimary decision areas that
are of concern.are of concern.
8. Investment DecisionsInvestment Decisions
What is the optimal firm size?What is the optimal firm size?
What specific assets should be acquired?What specific assets should be acquired?
What assets (if any) should be reduced orWhat assets (if any) should be reduced or
eliminated?eliminated?
Most important of the three decisions.Most important of the three decisions.
9. •: Investment decisions: Investment decisions
What assets should the company hold? ThisWhat assets should the company hold? This
determines the left-hand side of the balance sheet.determines the left-hand side of the balance sheet.
these decision are concerned with the effectivethese decision are concerned with the effective
utilization of funds in one activity or the other. Theutilization of funds in one activity or the other. The
investment decision can be classified under twoinvestment decision can be classified under two
groups-groups-
(i) Long term investment decision(i) Long term investment decision
(ii) Short term investment decision(ii) Short term investment decision
The former are referred to as theThe former are referred to as the capital budgetingcapital budgeting
and the latter as working capital management.and the latter as working capital management.
10. Financing DecisionsFinancing Decisions
What is the best type of financing?What is the best type of financing?
What is the best financing mix?What is the best financing mix?
What is the best dividend policy (e.g.,What is the best dividend policy (e.g.,
dividend-payout ratio)?dividend-payout ratio)?
How will the funds be physically acquired?How will the funds be physically acquired?
Determine how the assets (LHS of balance
sheet) will be financed (RHS of balance sheet).
11. Financing decisionFinancing decision
How should the company pay for the investmentsHow should the company pay for the investments
it makes? This determines the right-hand side ofit makes? This determines the right-hand side of
the balance sheet. it is also known asthe balance sheet. it is also known as capitalcapital
structure decisionstructure decision. It involves the choosing the. It involves the choosing the
best source of raising funds and deciding optimalbest source of raising funds and deciding optimal
mix of various source of finance.mix of various source of finance.
A company can not depend upon only one sourceA company can not depend upon only one source
of finance ,hence a varied financial structure isof finance ,hence a varied financial structure is
developed. but before using any particular sourcedeveloped. but before using any particular source
of capital ,its relative cost of capital ,degree of riskof capital ,its relative cost of capital ,degree of risk
and control etc should be thoroughly examined byand control etc should be thoroughly examined by
the financial manager. the major source of long-the financial manager. the major source of long-
term capital asterm capital as sharesshares andand debenturesdebentures..
12. DIVIDEND DECISIONDIVIDEND DECISION
Dividend decisions - What should be doneDividend decisions - What should be done
with the profits of the business? Thewith the profits of the business? The
dividend decision is concerned withdividend decision is concerned with
determining how much part of the earningdetermining how much part of the earning
should beshould be distributeddistributed among the shareamong the share
holders by way of dividend and how muchholders by way of dividend and how much
should beshould be retainedretained in the business forin the business for
meeting the future needs of funds internally.meeting the future needs of funds internally.
13. Asset ManagementAsset Management
DecisionsDecisions
How do we manage existing assetsHow do we manage existing assets efficientlyefficiently??
Financial Manager has varying degrees ofFinancial Manager has varying degrees of
operating responsibility over assets.operating responsibility over assets.
Greater emphasis onGreater emphasis on Current Asset ManagementCurrent Asset Management
(Working Capital Management)(Working Capital Management) thanthan fixed assetfixed asset
managementmanagement..
14. Importance of Finance inImportance of Finance in
Modern WorldModern World
Financial ProblemsFinancial Problems
Wealth Maximization GoalWealth Maximization Goal
Allocation of FundsAllocation of Funds
Maximizing EarningsMaximizing Earnings
Cost of Present & Future FundsCost of Present & Future Funds
Allocation of EarningsAllocation of Earnings
16. Factors influencing financialFactors influencing financial
decisiondecision
These factors are divided into two parts-These factors are divided into two parts-
1.Micro economic factor1.Micro economic factor
2.Macro economic factor2.Macro economic factor
Micro economic factor- micro economic factor isMicro economic factor- micro economic factor is
related to the internal condition of the firm-related to the internal condition of the firm-
(a) Nature and size of the firm(a) Nature and size of the firm
(b) Level of risk and stability in earnings(b) Level of risk and stability in earnings
(c) Liquidity position(c) Liquidity position
(d) Asset structure and pattern of ownership(d) Asset structure and pattern of ownership
(e) Attitude of the management(e) Attitude of the management
17. Macro economic factorMacro economic factor
These are the Environmental factor-These are the Environmental factor-
1. The state of the economy1. The state of the economy
2. Governmental policy2. Governmental policy
18. What is the Goal ofWhat is the Goal of
the Firm?the Firm?
Maximization ofMaximization of
Shareholder Wealth!Shareholder Wealth!
Value creation occurs when weValue creation occurs when we
maximize the share price for currentmaximize the share price for current
shareholders.shareholders.
19. Objectives of financial managementObjectives of financial management
The objective of financial managementThe objective of financial management
are considered usually at two levels –atare considered usually at two levels –at
macro level and micro level. three primarymacro level and micro level. three primary
objectives are commonly explained as theobjectives are commonly explained as the
Objective of financial management-Objective of financial management-
1.1. Maximization of profitsMaximization of profits
2.2. Maximization of returnMaximization of return
3.3. Maximization of wealthMaximization of wealth
20. Maximization of profitsMaximization of profits
Profit earning is the main aim of everyProfit earning is the main aim of every
economic activity. Profit maximizationeconomic activity. Profit maximization
simply means maximizing the income of thesimply means maximizing the income of the
firm . Economist are of the view that profitsfirm . Economist are of the view that profits
can be maximized when the difference ofcan be maximized when the difference of
total revenue over total cost is maximum, ortotal revenue over total cost is maximum, or
in other words total revenue is greater thanin other words total revenue is greater than
the total cost.the total cost.
21. Maximization of returnMaximization of return
Some authorities on financial managementSome authorities on financial management
conclude that maximization of returnconclude that maximization of return
provide a basic guideline by which financialprovide a basic guideline by which financial
decision should be evaluated .decision should be evaluated .
22. Maximization of wealthMaximization of wealth
According to prof. Solomon Ezra of stand fordAccording to prof. Solomon Ezra of stand ford
university , the ultimate goal of financialuniversity , the ultimate goal of financial
management should be the maximization of themanagement should be the maximization of the
owners wealth. The value of corporate wealth mayowners wealth. The value of corporate wealth may
be interpreted in terms of the value of thebe interpreted in terms of the value of the
company’s total assets. The finance shouldcompany’s total assets. The finance should
attempt to maximize the value of the enterprise toattempt to maximize the value of the enterprise to
its shareholders. Value is represented by theits shareholders. Value is represented by the
market price of the company’s common stock.market price of the company’s common stock.
