The document defines finance and financial management. It states that financial management provides a framework for financial decision making regarding acquiring, financing, and managing assets to help individuals and businesses grow financially. The main goals of financial management are to maximize profit and shareholder wealth. Financial management involves decisions related to capital budgeting, capital structure, dividends, working capital, and long-term and short-term finances. It also interfaces with other functional areas like marketing, production, and HR to achieve its goals.

2. Meaning and Definition of Finance
 Financial management provides a conceptual
framework and analytical tool for financial decision
making
 Finance is the art and science of managing wealth
 It is about making decisions regarding what assets to
buy/sell and when to buy/ sell these assets
 Its main objective is to make individuals and their
business grow financially

3.  Financial management is concerned with the acquisition,
financing, and management of assets with some overall
goal in mind.
 Thus, the decision function of financial management can
be broken down into three major areas: the investment,
financing, and asset management decisions.

4. Definition
“Financial management is that area of business management
devoted to a judicious use of capital and a careful selection
of the source of capital in order to enable a spending unit to
move in the direction of reaching the goals.” – J.F.
Brandley

5. Overview of Financial Management

6. Finance Functions
Capital Budgeting or
investment decision
Capital-structure or financing
decision
Profit allocation or dividend
decision
Long-term financial
decisions
Short-term financial
decisions
Working capital or liquidity
decision

7. Capital Budgeting or Investment decision
 Investment decision relates
 Capital budgeting relates to the selection of an asset whose
benefits would be available over the project's life
Capital-structure or Financing decision
 Financing decision relates to the choice of the proportion of
debt and equity sources of financing
 Optimal Capital Structure

8. Profit allocation or Dividend decision
 Deciding on dividend-payout ratio (Dividend paid/EPS)
 Investment opportunities
Working capital or Liquidity decision
 Working capital management is concerned with the
management of current assets
 Short term survival key for long term
 Trade-off between profitability and liquidity

9. Goals of Finance function
Profit
Maximization
Shareholder Wealth
Maximization
(SWM)

10. Profit Maximization
Favorable arguments
 Indicates economic
efficiency
 Select projects which
are profitable
 Efficient allocation of
resources
Arguments against
 Ambiguity
 Timings of profits
 Uncertainty

11. Wealth Maximization
Favorable arguments
• The timing and risk of the expected benefits
• Focus on shakeholders (Stakeholders include
groups such as employees, customers, suppliers,
creditors, owners and others who have a direct
link to the firm)
• Economic Value added (EVA) (NOPAT-
WACC*Capital)
• Maximization of Market Capitalization (MP*No. of
shares)
SWM means maximizing the net present value
(NPV) of a course of action to shareholders

12. Interface of finance department with other functional areas
• Investment Analysis
• Sources and cost of funds
• Dividend Policy
• Working Capital Management
• Analysis of risk and return
Related Disciplines
• Marketing
• Production
• HR
• Quantitative Methods
Primary Disciplines
• Accounting
• Macroeconomics
• Microeconomics
Support
Support
Shareholders Wealth
Maximization
Result
in

14. • Agency problem is the likelihood that managers may place
personal goals ahead of corporate goals
• An agency problem results when managers as agents of owners
place personal goals ahead of corporate goals.

15. Examples:
 Wasting company money on big offices, Corporate
parties
 May not be ready to take up risky projects
 Fix higher salaries and perks for self

16. • Agency costs include the less than optimum share value
for shareholders and costs incurred by them to monitor
the actions of managers and control their behavior
• Firms incur agency costs in the form of monitoring and
bonding expenditures, opportunity costs and structuring
expenditures which involve both incentive and
performance-based compensation plans to motivate
management to act in the best interest of the shareholders
• Market forces and the threat of hostile takeover tend to
act to prevent/minimize agency problems

17. Emerging role of finance manager in India
A financial manager is a person who is responsible, in a significant
way, to carry out the finance functions.
 Investment Planning- efficient allocation of funds.
 Profit Planning
 Financial Structure
 Treasury Operations
 Investor Communication
 Management Control- a process that helps to achieve
organizational goals
 Foreign exchange management
 Understanding Capital Markets