1 functions and scope of financial mgt (2)

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1 functions and scope of financial mgt (2)

  1. 1. •Financial ManagementFinancial Management By Dr. B. Krishna ReddyBy Dr. B. Krishna Reddy Professor and Head_SKIMProfessor and Head_SKIM
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
  15. 15.  Conflicting Goal of ManagementConflicting Goal of Management  Structural ChangesStructural Changes -Mergers, Reorganization, Consolidation,-Mergers, Reorganization, Consolidation, Liquidation, Collaboration & InternalLiquidation, Collaboration & Internal Restructuring.Restructuring.
  16. 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. 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. 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. 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. 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. 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. 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.

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