Financial management provides a conceptual framework for making financial decisions to help individuals and businesses grow financially. It involves acquiring, financing, and managing assets to achieve overall goals. The key financial decisions are investment, financing, and managing working capital. Investment decisions evaluate projects and allocate capital. Financing decisions determine optimal debt-equity ratios. Working capital management balances short-term liquidity and long-term profitability. Together, these decisions aim to maximize shareholder wealth over the long run.

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. Forms of Business organizations
Sole proprietorship–
• A type of business organization, in which only one person is the owner as well
as operator of the business, is known as Sole Proprietorship
• Proprietor is solely responsible for the profits & losses
• Scope for raising capital is limited
• Unlimited personal liability for the debts of the business
• All income is taxed as personal income

6. Partnership-
• A business form in which two or more persons agree to carry on business and
share profits & losses is known as Partnership
• Indian Partnership Act, 1932 is the governing act
• Minimum partner is 2 and maximum is 100 partners
• Profit & Loss is shared in agreed ratio
• Property cannot be held in the name of firm
• The partnership firm is constituted under a contract between the partners.
• The contract between the partners is known as a partnership deed which
regulates the relationship among the partners and also between the partners and
the partnership firm.
• General partners and limited partners

7. Limited Liability Partnership (LLP)
• Limited Liability Partnership is a form of business operation which combines the
features of a partnership and a body corporate.
• The LLP can continue its existence irrespective of changes in partners.
• It is capable of entering into contracts and holding property in its own name.
• The LLP is a separate legal entity, is liable to the full extent of its assets but
liability of the partners is limited to their agreed contribution in the LLP.
• Limited Liability Partnership Act, 2008
• Registration is mandatory
• Charter document is LLP Document
• Audit of accounts is mandatory, only if turnover and capital contribution
overreaches 40 lakhs and 25 lakhs respectively.

8. Corporations-Joint stock company –
• Company is a distinct legal person formed under the Companies Act,2013
• A joint stock company is an organisation which is owned jointly by all its shareholders.
• All the stakeholders have a specific portion of stock owned, usually displayed as a
share.
• A joint stock company is an individual legal entity
• Perpetual in nature
• Shareholders Liability is limited
• Private limited or public limited company
• Minimum number of persons
• The growth potential is high due to access to funds
• Transferability of ownership

9. Private Limited Company & Public Limited Company
• Minimum number of persons- two in case of private company and Seven in case of
public company
• Maximum persons- 200 for a private co. and unlimited for a public co.
• Subscription of shares – Public co. allowed
• Transferability of shares-restricted in Private co.
• Disclosure of Financial Report- Only a public company needs to disclose its
financial reports quarterly and annual.

10. Government Company
• Government company means any company in which not less than fifty-one per
cent of the [paid-up share capital] is held by the Central Government, or by any
State Government or Governments, or partly by the Central Government and
partly by one or more State Governments
One Person Company (OPC)
• One Person Company (OPC) is a company incorporated by a single person.

11. Sec 8 Company
• A non-profit organization can be registered under the Registrar of
societies or as a Non-profit company under the Section 8 Company of
the Company Act,2013.
• The profits of this company, if there are any, are applied towards
promoting the objectives of the company and not distributed as dividends
to its shareholders

12. Real And Financial Assets
 Real Assets: Can be Tangible or Intangible
Tangible real assets are physical assets that include plant, machinery,
office, factory, furniture and building.
Intangible real assets include technical know-how, technological
collaborations, patents and copyrights.
 Financial Assets are also called securities, are financial papers or
instruments such as shares and bonds or debentures.

13. Overview of Financial Management

15. Investment decision/Capital budgeting
• Capital Budgeting is the process of evaluating and selecting long-term
investment projects that involve significant financial investment.
• It aims to maximize shareholder wealth by allocating resources to
projects with the highest potential returns.
• Key Steps:
• Identification of alternatives
• Evaluation
• Selection: Prioritize projects based on criteria such as Net Present Value
(NPV), Internal Rate of Return (IRR), Payback Period, and Profitability Index.
• Funding:

16. Financing decision/capital structure decision
• The financing decision involves determining the ideal mix of debt and
equity to fund a company's operations, projects, and growth
initiatives while maintaining financial stability.
• Trade-offs:
• a. Debt Advantages:
• Lower cost of capital (interest is tax-deductible)
• Financial leverage magnifies returns to shareholders
• b. Debt Disadvantages:
• Interest payments increase financial risk
• Default risk affects credibility of the company

17. Financing decision/capital structure decision
• c. Equity Advantages:
• No fixed interest payments
• Enhances financial flexibility
• d. Equity Disadvantages:
• Dilution of ownership
• Higher cost of equity
• Decision Making:
• Strive for an optimal capital structure that balances risk, cost, and growth
objectives. Factors such as industry norms, growth prospects, and company
life cycle stage influence the decision.

18. Dividend decision
• Definition: The dividend decision involves determining the amount of dividend
payments to shareholders from a company's profits.
• Objective: Striking a balance between distributing profits to shareholders and
retaining funds for reinvestment to support growth and operations.
• Trade-offs:
• a. Dividend Advantages:
• Rewards shareholders with consistent income
• Attracts the investors so share value increases in short term
• b. Dividend Disadvantages:
• Limits funds available from internal sources, company need to depend on external sources
for funds
• Decision Making:
• Balance the company's financial health, growth opportunities, and shareholder preferences
to determine appropriate dividend policies.

19. Working capital/Liquidity decision
• The working capital decision involves managing the company's short-
term assets and liabilities to ensure smooth operations and meet
daily financial obligations.
• Components:
• Working capital = current assets
• Net working capital= Current assets-current liabilities
• Current Assets: Include cash, accounts receivable, inventory, and short-term
investments.
• Current Liabilities: Encompass accounts payable, short-term loans, and
accrued expenses.

20. Working capital/Liquidity decision
• Trade-off
• Short term liquidity
• Long-term profitability
• Decision:
• Effective working capital management ensures the company has enough
liquidity to cover operational expenses and seize growth opportunities.

21. 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

22. Capital Budgeting or Investment decision
• Evaluation of projects
• Cut-off rate
Capital-structure or Financing decision
• Proportion of debt-equity
• Optimal Capital Structure

23. Profit allocation or Dividend decision
• Deciding on dividend-payout ratio (Dividend paid/EPS)
• Future Investment opportunities
Working capital or Liquidity decision
• Trade-off between profitability and liquidity

24. Finance Manager’s Role
 Raising of Funds
 Allocation of Funds
 Profit Planning
 Understanding Capital Markets

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

26. Profit Maximization:
• Objective: Aims to maximize short-term profits, often measured in
terms of accounting profits.
• Considerations: Ignores time value of money and risks, potentially
leading to unsustainable practices.
• Approach: Focuses on revenue generation and cost reduction without
necessarily considering long-term consequences.
• Drawbacks: May lead to unethical practices, neglect of investment
opportunities, and damage to stakeholder relationships.

27. Wealth Maximization:
• Objective: Focuses on increasing the long-term value of the firm and
maximizing the wealth of shareholders.
• Considerations: Takes into account the time value of money and risk
factors, aiming to generate sustainable returns.
• Approach: Emphasizes quality of earnings, efficient resource
allocation, and strategic decision-making.
• Benefits: Aligns with shareholders' interests, promotes growth, and
supports overall financial health.

28. Profit maximization Vs wealth maximisation
• Time Horizon: Wealth maximization has a long-term focus, while profit
maximization is short-term oriented.
• Risk: Wealth maximization considers risk and return trade-offs, whereas profit
maximization may ignore risk factors.
• Sustainability: Wealth maximization aims for sustainable growth and value
creation, while profit maximization can lead to short-sighted decisions.
• Stakeholders: Wealth maximization considers the interests of all stakeholders,
while profit maximization may prioritize shareholders over other stakeholders.
• Decision Making:
• Wealth Maximization: Involves strategic planning, investment decisions, and risk
management to enhance overall company value.
• Profit Maximization: Focuses on maximizing current profits through pricing, cost control, and
short-term operational decisions.

29. Important Business Activities
 Finance
 Human Resource
 Production
 Marketing
Production
Marketing
Finance
Human
Resource

30. 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
Primary Disciplines
• Accounting
• Macroeconomics
• Microeconomics
Support
Support
Shareholders Wealth Maximization
Result in

31. • Operations Department:
• Collaboration: Finance works closely with operations to manage costs,
optimize production, and allocate resources efficiently.
• Objective: Ensure that operations are financially viable and aligned with the
company's overall financial goals.
• Marketing Department:
• Collaboration: Finance supports marketing by allocating budgets, evaluating
the financial impact of campaigns, and assessing ROI.
• Objective: Ensure marketing efforts contribute to revenue growth while
maintaining financial sustainability.
• Human Resources Department:
• Collaboration: Finance collaborates with HR to manage payroll, benefits, and
budgeting for employee-related expenses.
• Objective: Ensure a balance between employee compensation and the
company's financial capabilities.

32. • Supply Chain and Procurement Department:
• Collaboration: Finance collaborates to manage inventory levels, negotiate vendor
terms, and control supply chain costs.
• Objective: Optimize supply chain efficiency while controlling expenses to maintain
profitability.
• Sales Department:
• Collaboration: Finance supports sales by providing pricing strategies, evaluating
credit policies, and analyzing sales data.
• Objective: Ensure sales activities are financially sound and contribute positively to
the bottom line.
• Cross-Departmental Goals:
• Teamwork: Collaboration ensures that all departments work together
towards the company's financial success.
• Decision Alignment: Financial considerations guide decisions across
departments, promoting a unified business strategy.