Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.

1. Nature of Financial
Management

2. Classification of Finance Function
Finance
Public Finance
Government Institutions
State Government
Central Governments
Municipal authorities
Private Finance
Personal Finance
Business Finance
Finance of Non Profit Organizations

3. Meaning Of Business Finance
Business Finance
Sole Proprietary
Finance
Partnership Firm Finance
Company Or Corporate Finance

4. Business Activities
 Production
 Marketing
 Finance
 Human Resource management

5. Finance function & its Importance
 Financial planning and successful promotion of
enterprise
 Acquisition of funds as and when required at
minimum possible cost
 Proper use and allocation of funds
 Taking sound financial decisions
 Improving profitability through financial controls
 Increasing the wealth of investor and the nation
 Promoting and mobilizing individual and corporate
savings

6. Approaches to Finance Function
 The Traditional Approach
 The Modern Approach

7. Finance Functions
 Investment or Long Term Asset Mix Decision
 Financing or Capital Mix Decision
 Dividend or Profit Allocation Decision
 Liquidity or Short Term Asset Mix Decision

8. Basic Functions
 Estimating the optimum requirement of funds
 Identification & Evaluation of different sources
of finance
 Deciding the optimum capital structure
 Selecting the pattern of investments
 Working capital management
 Dividend/ Retention Policy Decisions

9. Subsidiary Functions
 Supply of cash to all parts of the organization
 Implementation of Financial controls
 Relations with banks and financial institutions
 Investor relations
 Capital market regulation fulfillment
 Accounting & audit
 Tax administration
 Disclosure to all stakeholders

10. Relationship of Finance with other
Functional Areas
 Production
 Marketing
 Human Resource Management
 MIS

11. Finance Manager’s Role
 Raising of Funds
 Allocation of Funds
 Profit Planning
 Understanding Capital Markets

12. Financial Goals
 Profit maximization (profit after tax)
 Maximizing Earnings per Share
 Shareholder’s Wealth Maximization

13. Profit Maximization
 Maximizing the Rupee Income of Firm
 Resources are efficiently utilized
 Appropriate measure of firm performance
 Serves interest of society also

14. Objections to Profit Maximization
 It is Vague
 It Ignores the Timing of Returns
 It Ignores Risk
 Assumes Perfect Competition
 In new business environment profit
maximization is regarded as
 Unrealistic
 Difficult
 Inappropriate
 Immoral.

15. Maximizing EPS
 Ignores timing and risk of the expected benefit
 Market value is not a function of EPS. Hence
maximizing EPS will not result in highest price
for company's shares
 Maximizing EPS implies that the firm should
make no dividend payment so long as funds
can be invested at positive rate of return—
such a policy may not always work

16. Shareholders’ Wealth Maximization
 Maximizes the net present value of a course
of action to shareholders.
 Accounts for the timing and risk of the
expected benefits.
 Benefits are measured in terms of cash flows.
 Fundamental objective—maximize the
market value of the firm’s shares.

17. Inter- Relation Of Financial Decisions
Investment Decisions
Financing Decisions
Dividend Decisions

18. Inter-relation of Financial Decisions
Financial management
Is concerned with
Financing Decisions Investment Decisions Dividend Decisions
Perform Analysis
&
Work out the
Risk & Return Trade Off
To Achieve The Goal Of
Wealth maximization

19. Factors Influencing Financial
Decisions
 External factors
1. State of Economy
2. International Factors
3. Capital & Money markets
4. Government Policies
5. Taxation Policies
6. Regulatory Guidelines
7. Extent Of Financial
Integration
 Internal factors
1. Nature & Size of Business
2. Expected Return , cost &
Risk
3. Ownership Structure
4. Earnings & Their Character
5. Age of Firm
6. Liquidity Position
7. Working Capital
Requirement

20. Organization Of Finance Function
Board Of Directors
VP ( HR) VP(Production) VP (Finance) VP( Marketing)
Managing Director
Financial Controller Treasurer

21. Organization Of Finance Function
 Treasurer
1. Provisions Of Capital
2. Relations with banks &
Financial Institutions
3. Cash management
4. Receivable management
5. Protect funds and securities
6. Investor Relations
7. Audit
 Controller
1. Accounting
2. Preparation Of Financial
Projects
3. Reporting & Interpreting
4. Planning & Control
5. Internal Audit
6. Tax administration
7. Economic appraisal &
reporting to government

22. Risk-return Trade-off
 Risk and expected return move in tandem;
the greater the risk, the greater the expected
return.
 Financial decisions of the firm are guided by
the risk-return trade-off.
 The return and risk relationship:
Return = Risk-free rate + Risk premium
 Risk-free rate is a compensation for time and
risk premium for risk.

23. Managers Versus Shareholders’
Goals
 A company has stakeholders such as employees, debt-
holders, consumers, suppliers, government and society.
 Managers may perceive their role as reconciling
conflicting objectives of stakeholders. This stakeholders’
view of managers’ role may compromise with the objective
of SWM.
 Managers may pursue their own personal goals at the
cost of shareholders, or may play safe and create
satisfactory wealth for shareholders than the maximum.
 Managers may avoid taking high investment and financing
risks that may otherwise be needed to maximize
shareholders’ wealth. Such “satisfying” behaviour of
managers will frustrate the objective of SWM as a
normative guide.

24. Financial Goals and Firm’s Mission
and Objectives
 Firms’ primary objective is maximizing the welfare of
owners, but, in operational terms, they focus on the
satisfaction of its customers through the production of
goods and services needed by them
 Firms state their vision, mission and values in broad
terms
 Wealth maximization is more appropriately a decision
criterion, rather than an objective or a goal.
 Goals or objectives are missions or basic purposes of a
firm’s existence

25. Financial Goals and Firm’s Mission
and Objectives
 The shareholders’ wealth maximization is the
second-level criterion ensuring that the
decision meets the minimum standard of the
economic performance.
 In the final decision-making, the judgement of
management plays the crucial role. The wealth
maximization criterion would simply indicate
whether an action is economically viable or not.

26. Organisation of the Finance Functions
 Reason for placing the finance functions in
the hands of top management
 Financial decisions are crucial for the survival of
the firm.
 The financial actions determine solvency of the
firm
 Centralisation of the finance functions can result in
a number of economies to the firm.

27. Status and Duties of Finance Executives
 The exact organisation structure for financial
management will differ across firms.
 The financial officer may be known as the
financial manager in some organisations,
while in others as the vice-president of
finance or the director of finance or the
financial controller.

28. Role of Treasurer and Controller
 Two more officers—the treasurer and the
controller—may be appointed under the
direct supervision of CFO to assist him or her.
 The treasurer’s function is to raise and
manage company funds while the controller
oversees whether funds are correctly applied.