Introduction to Financial Management,meaning , definition, profit and wealth maximization, significance, financing decision and investment decision, dividend decision,financial planning, duties of controller and treasurer.

1. Financial
Management
B.com IV semester
CHAPTER ONE –
INTRODUCTION TO
FINANCIAL MANAGEMENT
By: Chaitra Mandara
Assistant Professor
KLE Society’s Degree College,
Nagarabhavi-560072

2. FINANCE
• ONE OF THE MAJOR ELEMENTS
• IT IS THE LIFEBLOOD OF ECONOMIC ACTIVITY.
• AN EFFICIENT FINANCIAL SYSTEM CALLS FOR
THE EFFECTIVE PERFORMANCE OF FINANCIAL
INSTITUTIONS, FINANCIAL INSTRUMENTS
AND FINANCIAL MARKETS.
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3. FINANCIAL MANAGEMENT
DEFINITION: - JOSEPH & MASSIE
“ financial management is the operational
activity of a business that is responsible for
obtaining and effectively utilizing the funds
necessary for efficient operation”.
Meaning: Financial management deals with
planning and control of financial operations to
corporate enterprises. This deals with the
procurement of funds and their effective
utilisation.
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4. GOALS OF FINANCIAL MANAGEMENT.
GOALS
GENERAL
OBJECTIVES
SPECIFIC
OBJECTIVES
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5. SPECIFIC OBJECTIVES:
SPECIFIC OBJECTIVES:
PROFIT
MAXIMISATION
WEALTH
MAXIMISATION
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6. PROFIT MAXIMISATION:
• Profit maximization achieved by an organization is
regarded as a primary measure of its success.
• The survival depends upon its ability to earn profits.
• It is a social obligation (for exploiting resources of the
country) and also economic obligation for the
organizations to obtain surplus funds for the expansion
and growth in order to cover the cost of funds.
There are arguments in this regard which are in favour of
and against of profit maximization.
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7. For Against
Barometer for performance
measurement
Profit is not a clear term.
Accounting profit? Economic
profit? PBT? PAT ?
Profit ensures welfare to the
shareholders, employees, and
prompt payment to the creditors.
Encourages corrupt practices to
increase profits.
Increases the confidence of
management in expansion and
diversification
It does not consider the element
of risks.
Attracts the investors to invest It does not consider the time
value of money
Indicates efficient use of funds
for different requirements.
True and fair picture cant be
known with profit maximization
Attracts cut- throat competition
Huge amount of profit attracts
govt intervention
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8. In favour of Against
Some industries like to attain ‘
Industry Leadership’ and do not
bother about the increase in cost
and getting low profit with huge
market share.
Huge profits makes employees
demand high salary and fringe
benefits.
Modern marketing concepts does
not support high profit margin as
it ruins the morale of the
customers and they feel exploited
by the company.
Estimating the exact amount of
profit is impracticable task and it
is also a narrow concept which
affects the long term liquidity of
a company.
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9. CONCLUSION:
• From the above points it is clear that firms always
would like to have normal profits and profit
maximization is only an illusion.
• But the companies do earn the profits to pay
dividends to shareholders , to pay creditors , to
offer fair amount of wages and salaries by
maintaining high quality of products.
• Through this, the image of the company will go up.
• The image offers high returns to the equity
shareholders in the stock market, resulting in
capital appreciation to the owners in course of
time, which is called “ Wealth Maximization”.
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10. WEALTH MAXIMISATION:
• The concept of ‘wealth maximization’ refers to the
gradual growth of the value of assets of the firm in terms of
benefits it can produce.
• In other words, it is nothing but the process of creating
wealth of an organization.
• It is reflected in the market value of shares.
• NPV= GPV of benefits – investments.
• The cash inflow should be greater than outflow.
• This concept exhibits profit cannot contribute to the
welfare of the shareholders.
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11. EXAMPLE:
• CASE 1 : COMPANY ISSUED 50000 SHARES OF RS.10
EACH AND EARNED PROFIT OF RS.20000.
THEREFORE: EPS= EATESH/ NO OF EQUITY SHARES ISSUED
ANS: 0.40. RS
COMPANY INCREASED ADDITIONAL CAPITAL OF RS.50000
AND PROFIT INCREASED TO RS.30000
THEREFORE: TOTAL CAPITAL = 100000
TOTAL PROFIT = 30000
SO NOW THE EPS REDUCED TO 0.30.RS
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12. SIGNIFICANCE OF WEALTH MAXIMIZATION
• APART FROM SHAREHOLDERS COMPANY SHOULD
ALSO CONCENTRATE ON
LENDERS/
CREDITORS
MANAGEMENT/
OWNERS
SOCIETY/GOVT
WORKERS/
EMPLOYEES
BUSINESS
CONCERN
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13. ADVANTAGES AND CRITICISMS OF WEALTH MAXIMIZATION.
ADVANTAGES CRITICISMS
The present value of cash flows are
considered and net effect of investment and
benefits can be measured clearly.
The concept is not descriptive and increasing
the wealth concept differs from one entity to
another.
It considers the time value of money It leads to confusions and misrepresentation
of financial policy because different
yardsticks are used by different interest in a
company.
It is universally accepted as it takes care of all
round welfare.
Academicians and corporate officers have
now urged more socially conscious business
behaviour/ management
Frames consistent strong dividend policy to
give maximum returns to equity holders
FM have to rise equal to the acceptance of
social responsibility of business.
Considers risk factor by using discount rate
and by making adjustments to cover the risk
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14. Other Objectives:
• BALANCED ASSET STRUCTURE:
Balance between fixed assets and current assets have to be
maintained.
• LIQUIDITY:
It will exploit the long-term vision of a company to meet all is
short and long term obligation.
• JUDICIOUS PLANNING OF FUNDS:
Wealth and profit maximization is achieved not only by
reducing overall cost but by reducing the cost of obtaining the
funds also. Proper blend of cost and equity is recommended.
• EFFICIENCY:
The threat of competition makes organization more creative and
efficient.
• FINANCIAL DISCIPLINE:
The financial indiscipline should be curbed and proper financial
management activities must be adopted.
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15. 6 A’s of Financial Management
1. ANTICIPATING FINANCIAL NEEDS: Financial manager
anticipates the financial needs through array of documents ( Balance
sheet, Cash Budget etc)
2. ACQUIRING FINANCIAL RESOURCES: Knowing when, where
and how to obtain the funds which a business needs.
3. ALLOCATING FUNDS IN BUSINESS: Allocating funds in a
business means investing them in the best plan of assets. Finance
manager should strike a balance between under and over financing. He
should allocate funds according to their profitability, liquidity and
leverage.
4. ADMINISTRATING THE ALLOCATION OF FUNDS: Once funds
are allocated on various investments it is the duty of the finance
manager to analyze its performance.
5. ANALYZING THE PERFORMANCE OF FINANCE: After
administration it is very easy to make decisions. The cost of each
investment and its returns must be properly analyzed.
6. ACCOUNTING AND REPORTING TO THE MANAGEMENT:
Finance manager should update the financial performance to the top
management regularly and see to it that sufficient funds are available
for the smooth functioning of business operation.
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16. DECISIONS IN FINANCIAL
MANAGEMENT
THE FINANCE FUNCTION INVOLVES THREE
IMPORTANT DECISIONS THEY ARE :
1. INVESTMENT DECISIONS
2. FINANCING DECISIONS
3. DIVIDEND DECISIONS
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17. The above 3 decisions contribute to the corporate goal of wealth
maximization:
INVESTMENT DECISIONS:
• Activity of deciding the pattern of investment. It covers
both short term as well as long term investments, in other
words capital and current assets.
• It is a long range financial decision and deals with
allocation of capital.
• It shows how funds can be invested in assets which would
yield maximum returns to the business concern.
• It requires maximum care in selecting the area of
investment with regard to risk and returns.
• Various tools and techniques such as CVP analysis, capital
budgeting, NPV etc should be used before the investment
decision is taken.
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18. FINANCING DECISIONS:
1. The appropriate mix of finance with debt to equity contributes
to the profitability of a business unit.
2. The instrument selected must maximize the returns and
protect the interest of the creditors.
3. The finance manager must adopt proper combination of
capital structure from the following mix:
• Equity (leverage benefits will be lost)
• Equity + Debt (proper balance must be maintained)
• Equity + Debt+ Preference shares
• Equity + Debt+ Preference shares + Public Deposits with term
loan.
Therefore ‘ FINANCING MIX’ should be proper to gain the
benefits of expansion, diversification etc and capital structure
should also be flexible.
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19. DIVIDEND DECISIONS:
• The ultimate objective of a business concern is to fulfill the
desires of equity shareholders and their wealth
maximization.
• The finance manager should take proper care with regard
to the decisions such as:
1. Percentage of dividend and its maintenance.
2. Maximum returns to share holders in the form of capital
gains
3. Cash dividend to be paid to shareholders
4. Retained earnings
5. Keep an eye on psychology of investors.
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20. • WORKING CAPITAL MANAGEMENT
OR
• CURRENT ASSET MANAGEMENT is also
one of the important liquidity concept that
should be kept in mind by the finance manager to
keep business operations going with proper
management of cash, accounts receivable and
inventory.
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21. DUTIES OF TREASURER
1. Routine matters are looked after by the treasurer.
2. He takes care of opening bank accounts, depositing cash
and maintaining day to day financial matters.
3. Search for the opportunities for the investment.
4. Periodical tax administration and insurance related
issues.
5. Credit collection and its follow up, preparation of ageing
schedule (accounts receivable table)
6. Maintaining the inflow of cash , fulfilling the
requirement of periodical payment of interest and its
principal, maintaining the relationship with bankers and
financial institutions.
7. Responsible for submitting regular inventory
statements, cash and fund flow statements to the banker
as per terms and conditions of loan agreements.
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22. DUTIES OF CONTROLLER
1. Controller is more responsible than treasurer.
2. All the special matters are managed by him
3. In charge of planning, developing strategies
and guiding management in decisions.
4. Preparations of financial planning, planning for
investments, economic appraisal, cost
reduction strategies, protection of assets and
5. Preparation of annual report and other
important issues.
6. Plays the role of STAFF to the TOP
management.
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23. Who is a FINANCE MANAGER?
• Finance manager is a person who heads the
department of finance.
• He anticipates financial needs, acquire financial
resources and allocate funds to various
departments of the business.
• He undertakes all the activities of finance such as
planning, co-ordination and controlling
activities.
• He takes the key decisions on the allocation and
use of money by various departments.
• It is the primary objective , to maximize the value
of the firm to its stockholders.
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24. Functions of Finance Manager:
1. Anticipating the total financial requirements of the
firm
2. Selecting the right sources of fund at right time and
right cost.
3. Allocating the available funds in various profitable
avenues.
4. Maintaining liquidity position of the firm.
5. Analyze the financial performance and plan for its
growth.
6. Administrate the activities of working capital
management.
7. Protect the interests of stake holders.
8. Also fulfill the social obligation of a business unit.
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25. Functional areas of financial
management:
• Estimation of the financial requirements: funds are
needed to establish the industry both for meeting capital
expenditure and revenue expenditure. Total estimation of
funds for these assets are the major function of financial
management.
• Selection of right sources of funds: After the
estimation second important function is selection of right
type of sources of fund at right time and at right cost. Each
financial instrument is associated with different types of
cost.(equity = cost of dividend , debt = interest cost)
• Allocation of funds: After mobilizing it is the
responsibility of finance manager to distribute the funds to
capital and revenue expenditure. Evaluation should be
made on different project proposals before investing.
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26. 4. Analysis and interpretation of financial performance: Ratio analysis
and comparison of actual with standard helps the financial manager to have
maximum control over operations and he is also expected to watch the
performance of portfolio.
5. Analysis of CVP: helps in evaluation of different proposals of investments.
Make/buy decision, deletion and continuation of product line can be done using
CVP/BEP analysis.
6. Capital Budgeting: involves analysis on Pay back period, ARR,IRR, NPV,
percentage of returns, issues to be handled by finance manager etc.
7. Working Capital Management: It is the lifeblood of a firm. Accounts
receivables and inventory are the components of working capital. They rotate in
sequence ( cash to stock to sale to cash or account receivable) variation in
working capital management result in liquidity crunch.
8. Profit Planning and Control: Profit is the excess of income over expenditure.
This can be achieved by various cost management techniques.
9. Fair returns to the investors: Returns are the divisible profits available to
the investors. It is social as well as economic obligation of the company to protect
the interest of the investors. This encourages the savings in public and in return
it helps in nation building.
10. Maintaining Liquidity and wealth maximization: It is the prime objective
of a business firm. Liquidity enhances the borrowing capacity and thereby
assures wealth maximization in the form of growth of capital over the years.
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27. CHANGING ROLE OF FINANCE
MANAGER
CHANGING ROLE OF FINANCE MANAGER
TRADITIONAL ROLE
1. PRIMARY MARKET
2. SECONDARY MARKET
3. FINANCIAL INSTITUTION
4. LEVERAGE
5. TECHNIQUES
6. CAPITAL BUDGETING
7. CVP ANALYSIS
8. WORKING CAPITAL
MANAGEMENT
9. DIVIDEND DECISIONS.
NEW ROLE
1. MERGERS
2. TAX PLANNING
3. COST REDUCTION
STRATEGIES
4. ACCESS TO FOREIGN
INVESTMENT
5. FOREX MANAGEMENT
6. INFORMATION
TECHNOLOGY
7. COMMUNICATION
NETWORK
8. LEARNING ATTITUDE etc.
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28. FINANCIAL PLAN
• Financial plan refers to the reasonable mixture of owned capital and
borrowed capital of a company at its very start.
• It involves and implies 3 major sectors viz., capital structure, capital
expenditure, and cash flow.
• According to Cohen’s and Robin’s expression, financial plan contains the
following:
1. Determination of financial resources
2. Generation of funds from internal and external sources
3. Control upon proper allocation and use of funds
4. Most effective profit volume cost analysis
5. Financial operations results analysis
6. Reporting the facts to the top members with
recommendations
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29. Formulating financial plan involves the decision as
to the proportion of financial sources and such
process is called financial planning.
Financial planning, includes:
1. The quantum of finance (amount needed for
implementing the business)
2. The patterns of financing (The form and
proportion of various corporate securities to be
issued to raise the required amount, and)
3. The policies to be pursued for the floatation of
various corporate securities, particularly
regarding the time of their floatation.
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30. Need for Financial Planning
1. To maintain Liquidity
2. Surplus resource availability
3. Ensuring sufficient cash for meeting expenses
4. Eliminates all the waste resulting from
complexity of operations
5. Replacement of existing assets and acquisition of
new assets to meet the growing needs of future.
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31. PRINCIPLE GOVERNING A
FINANCIAL PLAN
1. SIMPLICITY
2. LONG-TERM VIEW
3. FORESIGHT
4. OPTIMUM USE
5. CONTINGENCIES
6. FLEXIBILITY
7. LIQUIDITY
8. ECONOMY
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32. STEPS IN FINANCIAL PLANNING
1. ESTABLISHING OBJECTIVES: Financial
planners should establish both short and long
term objectives.
2. POLICY FORMATION: Financial policies
include activities of procuring , administering,
and disbursing the funds of business firms.
3. FORECASTING: Financial management has
to forecast the future variability of factors.
4. FORMULATION OF PROCEDURE:
Financial Policies are broad guides which, to be
executed properly , must be translated into
detailed procedures.
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33. TYPES OF FINANCIAL PLAN
THERE ARE TWO TYPES OF FINANCIAL PLAN:
1. SHORT TERM FINANCIAL PLAN
2. LONG TERM FINANCIAL PLAN
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34. SHORT TERM
FINANCIAL PLAN
1. Short term here refers to the period less than 12 months
2. Aims at providing liquidity to the business firm
3. Facilitate the company in utilizing the long term capital
assets and to maintain the continuous working of the
business firm.
Services generally used to meet the short term financial needs of the
company are:
1. Cash credit
2. Over draft
3. Bill discounting
4. Short term loan
5. Working capital loans etc.
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35. LONG TERM
FINANCIAL PLAN
• Long term refers to the period of more than 5 yrs to 35 yrs.
• These funds are required to meet the capital expenditure
namely Land, Building, furniture, Fixtures etc.
The following financial instruments are utilized to develop a
comprehensive long-term financial plan. They are :
1. Equity share
2. Preference share
3. Debentures
4. Term loans
5. Venture capital etc
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36. CAPITALISATION
• According to Lincoln “CAPITALISATION
refers to the sum of the outstanding stocks
and funded obligations, which may
represent wholly fictitious values.”
• It refers to the way in which its long-term
obligations are distributed between
different classes of owners and creditors.
• Capitalization of an enterprise depends on
its expected average net income.
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37. Two recognized theories of
capitalization for new companies:
1. Cost theory
2. Earnings theory
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38. COST THEORY:
• TOTAL AMOUNT OF CAPITALISATION
= THE COST OF FIXED ASSETS
+ AMOUNT OF WORKING CAPITAL
+ COST OF ESTABLISHING THE BUSINESS
ADVANTAGES:
• It enables promoters of the company to estimate the amount of
capital to be raised.
• It can act as representative of the value of the enterprise.
DISADVANTAGES:
• It fails to provide net worth of the business. Net worth depends not
on the cost of the assets but on its earning capacity.
• Sometimes assets might have been purchased at inflated prices or
obsolete and these aspects would be ignored.
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39. EARNINGS THEORY
• THIS THEORY EMPHASIS THAT WORTH OF A COMPANY IS
NOT MEASURED BY THE CAPITAL RAISED BUT BY THE
EARNINGS MADE OUT OF PRODUCTIVE HARNESSING OF
THE CAPITAL.
• EARNINGS THEORY
= AVERAGE ANNUAL FUTURE EARNING * 100
CAPITALISATION RATE
ADVANTAGES:
1. Directly correlates the value of the company with its earning
capacity.
DISADVANTAGES:
1. In case of new companies it may be difficult to estimate
correctly the amount of future earnings
2. If earnings are not correctly estimated this method may be
risky for the company.
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40. THANK
YOU
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