, introduction to financial management , what is financial management , concept of financial management , areas of finance , scope/major areas of finance , agency theory , what is an agency problem

1. Introduction to financial
management
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What Is Financial Management?
• Financial management is used to help make
three major decisions:
1. Which assets should we invest in?
2.How will we pay for these assets?
3.What should we do with the earnings generated
by the assets?
• These are called the investment, financing,
and dividend decisions.

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Concept of Financial Management
Financial Management is the efficient and effective
planning and controlling of financial resources of an
organization.

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Areas of Finance
i. Money & Capital Markets: They deal with the financial
institutions.
ii. Investments: Investments deal with sales, analysis of
individual securities, & determination of the optimal
mix of securities for a given investor.
iii. Managerial Finance: It deals with selection of
securities to be issued to finance expansion,
decision regarding the credit terms, current assets
management, merger analysis, & dividend policy.

5. Scope/Major areas of Finance:
Money Market and Capital Market
Investment
Financial Management
Money Market and Capital Market: The market for
short-term, highly liquid, low-risk assets such as
Treasury bills and negotiable CDs.
On the other hand, capital market, the market for
long-term securities such as bonds and stocks.
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6. Scope/Major areas of Finance….
Investment: The commitment of funds to one or more assets that
will be held over some future time periods.
• Treasury bill: Short term discounted securities issued by
Gov’t.
• Negotiable Certificate of Deposit/ Certificate of deposit: An
interest bearing security that certifies that a specified amount
of money placed in a Bank will receive a stated amount of
interest for a stated amount of time.
• Commercial Paper: It refers to unsecured promissory notes by
companies to raise short term financing.
Md. Azizur Rahman
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Goals of Financial Management
i. Profit Maximization: It refers to increase in net profits
of an enterprise during a particular year as compared
to the previous period.
ii. Wealth Maximization: It represents to increase in
share price in the long run.
iii. Social Responsibility: It indicates to increase the
welfare of its employees, customers & community.

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Organization of the Financial Management Function
Board of Directors
President
VP: Sales VP: Finance VP: Operations
Treasurer Controller
Credit Manager
Inventory Manager
Capital Budgeting Director
Cost Accounting
Financial Accounting
Tax Department

9. Scope/Major areas of Finance….
Relationship among Investment, Money and Capital Market, Financial
Management:-
Investor Firm
Investments Financial
Management
Money and
Capital Market
Profit
Funds
Financial Securities
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10. Scope/Major areas of Finance….
Financial Management
• It’s an applied Economics concerned with
the allocation of scarce financial resource
among competing choice.
Financial Management is concerned with
acquisition , financing and management of
assets with some overall goal in mind.
• Financial Management in concerned with
raising, allocating and controlling the firm’s
funds.
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Fundamental Financial Management Decisions…
Financial
Decisions
Investment
Decisions
Financing
Decisions
Dividend
Decisions
Capital
Budgeting
Working
Capital

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Key Decision of a Financial Manager
i. Investment Decision: Where invest should be made?
ii. Financing Decision: How the required fund would be
collected?
iii. Dividend Decision: How much net profit would be
distributed as dividend among the shareholders &
how much would be retained as retained earnings?

13. The functions of financial Manager
 Financial planning
 Identification of source
 Raising fund
 Investment of fund
 Protection of fund
 Distribution of profit
 Management of asset
 Cost control
 Pricing
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14. Goal of a firm
Goal of a firm
Profit maximization Wealth maximization
Profit is the yardstick of efficiency
Profit utilization of resources
Yard stick to evaluate firm’s decision
Social welfare
Clear concept of wealth
It considers time value of money
Focus on market price of share
Risk trade off
Look for growth
Market increase
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15. Types of Business Organization
Organization
Sole
Proprietorship
Partnership Corporations
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Agency Theory
A theory concerning the relationship between a
principal and an agent of the principal.
• Owners—managers
• Franchisee—franchisor
• Owners—lenders
• Agency relationships involve a principal
(example: owner) and an agent (example:
manager).

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Agency Cost
An internal cost which develops due to resolve the
agency problem.
1. Managerial Compensation (Incentives)
2. Shareholder Intervention
3. Threat of Takeover.

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What Is an Agency Problem?
The conflict of goals between shareholders and
management because shareholders wish for
management to run the company in a way that
increases shareholder value, but management may
wish to grow the company in ways that maximize their
personal power and wealth that may not be in the best
interests of shareholders.