FINANCIAL MANAGEMENENT CH#1

1. CHAPTER # 01
Introduction To Financial Management
Prepared by
Gulfam
FINANCIAL MANAGEMENT

2. OUTLINE
• Introduction
• Meaning & Definition of Finance
• Definition of Business finance
• Types of Finance
• Definition of Financial Management
• Scope of Financial Management
• Objectives of Financial Management
• Approaches to Financial Management

3. OUTLINE CONTI….
• Functions of Finance Manager
• Importance of Financial Management
• The modern Corporations
• Agency Theory
• Corporate governance
• Corporate Social Responsibility

4. INTRODUCTION
• Business concerns need finance to meet their
requirements in the economic world.
• Finance is considered as life blood of organization.
• Entire business activities are related with profitability.
• Finance may be called as capital, investments, funds
etc.

5. MEANING & DEFINITION OF
FINANCE
“Finance is the art and science of managing money”
• Finance function is the procurement of funds and
their effective utilization of business.
• Finance also means that provision of money at the
time when it is needed.

6. BUSINESS FINANCE
“Business finance can broadly be defined
as the activity which concern with the
acquisition and conversion of capital
funds in meeting financial needs and
over all objectives of business concern”.

7. TYPES OF FINANCE
• Private Finance
Individual Finance
Partnership Finance
Business Finance
• Public Finance
Central Government
State Government
Semi Government

8. FINANCIAL MANAGEMENT
“Financial Management is concerned with the
acquisition, financing and management of assets
with some overall goal in mind”.
Thus decision function of financial management can
broken into three major areas:
• The investment
• Financing
• And asset management decisions.

9. INVESTMENT DECISIONS
Following are three important investing decisions:
• What is the Optimal firm size?
• What specific assets should be acquired?
• What assets(if any)should be reduced or
eliminated?

10. FINANCING DECISIONS
The following are the main financing decisions:
• What is the best type of financing?
• What is the best financing mix?
• What is the best dividend policy?
• How will the funds be physically acquired?

11. ASSETS MANAGEMENT
DECISIONS
• How do we manage existing assets efficiently?
• Financial manager has varying degrees of
operating responsibility over assets.
• Greater emphasis on current asset management
than fixed asset management.

12. SCOPE OF FINANCIAL
MANAGEMENT
Financial Management & Economics
• Financial economics is one of the emerging area, which provides
immense opportunities to finance, and economical areas.
Financial Management & Accounting
• In the olden periods, both financial management and accounting
are treated as a same discipline. But nowaday’s financial
management and accounting discipline are separate and
interrelated.
Financial Management & Mathematics
• Economic order quantity, discount factor, time value of money,
present value of money, cost of capital, capital structure
theories, dividend theories, ratio analysis and working capital
analysis are used as mathematical and statistical tools and
techniques in the field of financial management.

13. SCOPE OF FINANCIAL
MANAGEMENT
Financial Management & Production Management
• Production performance needs finance, because production
department requires raw material, machinery, wages, operating
expenses etc.
Financial Management & Marketing
• The financial manager or finance department is responsible to
allocate the adequate finance to the marketing department.
Financial Management & Marketing
• Financial manager should carefully evaluate the requirement of
manpower to each department and allocate the finance to the
human resource department as wages, salary, remuneration,
commission, bonus, pension and other monetary benefits to the
human resource department.

14. OBJECTIVES OF FINANCIAL
MANAGEMENT
Objectives of Financial management may broadly be divided
into two categories:
• Profit Maximization(Cashing Per Share Maximization)
• Wealth Maximization(Value Maximization)

15. PROFIT MAXIMIZATION
(FAVORABLE ARGUMENTS)
• Main aim of any business is profit earning.
• Profit is the measuring technique to understand the
efficiency of concern.
• Profit maximization is also called as the traditional or
narrow approach.
• IT leads to maximize business operation for profit
maximization.
• It consider all possible way to increase profit.
• Profit is the parameter of measuring the efficiency of
business.
• This objective reduces the risk of business.
• Profitability meets the social needs also.

16. UN-FAVORABLE ARGUMENTS FOR
PROFIT MAXIMIZATION
• Profit maximization leads to exploiting workers
and consumers.
• Profit maximization creates immoral practices
such as corrupt practice, unfair trade practice, etc.
• Profit maximization objectives leads to
inequalities among the sake holders such as
customers, suppliers, public shareholders, etc.

17. DRAWBACKS OF PROFIT
MAXIMIZATION
It is vague:
• In this objective, profit is not defined precisely or
correctly.
It ignores the time value of money:
• Profit maximization does not consider the time value of
money or the net present value of the cash inflow.
It ignores risk:
• Profit maximization does not consider internal and
external risk of the business concern that may affect the
operation of Business.

18. WEALTH MAXIMIZATION
• Wealth maximization is one of the modern
approaches
• The term wealth means shareholders wealth.
• It is also known as value maximization or net
present worth maximization.
• This objective is an universally accepted concept
in the field of business.

19. WEALTH MAXIMIZATION
(FAVORABLE ARGUMENTS)
• Wealth maximization is superior to the profit
maximization
• Wealth maximization considers the comparison of
the value to cost associated with the business
concern.
• Wealth maximization considers both time and
risk of the business concern.
• Wealth maximization provides efficient allocation
of resources.
• It ensures the economic interest of the society

20. WEALTH MAXIMIZATION
(UN-FAVORABLE ARGUMENTS)
• It provides perspective idea of business that may not
be suitable to present day business.
• Wealth maximization is nothing, it is also profit
maximization.
• Wealth maximization creates ownership-
management controversy.
• Management alone enjoy certain benefits.
• The ultimate aim of the wealth maximization
objectives is to maximize the profit.

21. APPROACHES TO FINANCIAL
MANAGEMENT
• Financial management is not a revolutionary
concept but an evolutionary. The definition and
scope of financial management has been changed
from one period to another period and applied
various innovations.
• Financial management approach may be broadly
divided into two major parts.
1-Traditional Approach
2-Modern Approach

22. TRADITIONAL APPROACH
• Traditional approach is the initial stage of financial
management, which was followed, in the early part of
during the year 1920 to 1950.
• Arrangement of funds from lending body.
Arrangement of funds through various financial
instruments.
• Finding out the various sources of funds.

23. FUNCTIONS OF FINANCE MANAGER
• Finance Function is one of the major parts of
business organization, which involves the
permanent, and continuous process of the business
concern.
• Forecasting Financial Requirements
• Acquiring Necessary Capital
• Investment Decision
• Cash Management
• Interrelation with Other Departments

24. IMPORTANCE OF FINANCIAL
MANAGEMENT
• Financial Planning
• Acquisition of Funds
• Proper Use of Funds
• Financial Decision
• Improve Profitability
• Increase the Value of the Firm
• Promoting Savings

25. THE MODERN CORPORATION
• There exists a SEPARATION between owners and
managers.
Modern Corporation
Shareholders Management

26. ROLE OF MANAGEMENT
• Management acts as an agent for the
owners (shareholders) of the firm.
• An agent is an individual authorized by
another person, called the principal, to
act in the latter’s behalf.

27. AGENCY THEORY
Jensen and Meckling developed a theory of the firm based
on agency theory.
“Agency Theory is a branch of economics relating to the
behavior of principals and their agents”.
Principals must provide incentives so that management
acts in the principals’ best interests and then monitor
results.
Incentives include stock options, perquisites, and bonuses.

28. CORPORATE GOVERNANCE
• The system in which corporations are
managed and controlled.
• It encompasses the relationships
among a company’s shareholdrs,board
of directors, and senior management.
• The board of directors-the critical link
between shareholders and managers.

29. CORPORATE SOCIAL
RESPONSIBILITY(CSR)
• Wealth maximization does not preclude the
firm from being socially responsible.
• Assume we view the firm as producing both
private and social goods.
• Then shareholder wealth maximization
remains the appropriate goal in governing
the firm.

30. ?
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