1. FINANCIAL MANAGEMENT
Definition
The planning, directing, monitoring,
organizing, and controlling of the monetary
resources of an organization.
2. • Taking a commercial business as the most
common organizational structure, the key
objectives of financial management would be
to:
• • Create wealth for the business
• • Generate cash, and
• • Provide an adequate return on investment
bearing in mind the risks that the business is
taking and the resources invested
3. • FINANCIAL PLANNING
• Management needs to ensure that there is
enough funding available at the right time to
meet business needs.
• Short term needs include equipment, stock,
employees and cost of sales.
• Long term needs include significant additions
to assets on the productive capacity .
4. • FINANCIAL CONTROL
• In order to ensure that business meets its
objectives decisions have to be made on;
• Are assets being used efficiently
• Are the business Assets secure
• Does management act in the best interest of
shareholders and according to business rules
and mission?
5. • FINANCIAL DECISION MAKING
• Critical decisions relate to investment,
financing and dividends.
• Investments must be made in a particular as
envisioned
• Finances can be raised from alternative
sources i.e. selling new shares, borrowing or
taking credit from suppliers.
6. • A key decision to be made is whether profits
earned by the venture should be retained to
add value to net worth of business or be
distributed to shareholders as dividends.
• If dividends are too high business may be
starved of funding to reinvest and grow.
7. NEED OF FM FOR PROJECTS
• To plan agricultural projects we compare the
stream of investment and production costs of
an agricultural undertaking with the flow of
benefits it will produce.
• The whole complex of activities in the
undertaking that uses resources to gain
benefits constitutes the agricultural project. If
this definition seems broad, it is intentionally
so.
8. • . This broad concept of project format capable
of accommodating diverse agricultural
endeavors. An enormous variety of
agricultural activities may usefully be cast in
project form.
9. • The World Bank itself lends for agricultural
projects as different as irrigation, livestock,
rural credit, land settlement, tree crops,
agricultural machinery, and agricultural
education, as well as for multisectoral rural
development projects with a major
agricultural component. In agricultural project
planning, form should follow analytical
content.
10. • Virtually every developing country has a
systematically elaborated national plan to
hasten economic growth and further a range
of social objectives.
• This is captured by diverse projects in
separate sectors impacting socially,
economically and potically on the larger
economy.
11. • Projects provide an important means by which
investment and other development
expenditures foreseen in plans can be clarified
and realized.
12. • Sound development plans require good
projects, just as good projects require sound
planning. The two are interdependent.
13. • Financial Management can be defined as:
• The management of the finances of a
business / organisation in order to achieve
financial objectives
14. • Taking a commercial business as the most
common organizational structure, the key
objectives of financial management would be
to:
• • Create wealth for the business
• • Generate cash, and
• • Provide an adequate return on investment
bearing in mind the risks that the business is
taking and the resources invested
15. ROLE OF FM
• Financial management is the management of
financial functions.
• Financial functions include obtain funds
(raising of funds) and how to use these funds
(allocation of funds).
• Financial managers are concerned with the
determination of total assets worth of
investments in various assets and choose the
sources of funds to finance the asset.
16. • To obtain funds, financial managers can
obtain it from within and outside the
company. Sources from outside the company
come from the capital market, may take the
form of debt or equity capital.
17. • Financial management can be defined from
the duties and responsibilities of financial
manager.
• The main task of financial management,
among others, include decisions to invest,
financing business activities and the
distribution of dividends a company, thus the
task of financial managers is to plan to
maximize shareholder value.
18. • Another important activity that should be the
financial manager concerning the four
aspects:
• 1. Financial managers must cooperate with
other managers in charge of general planning
company.
• 2. Financial managers must focus on
various investment and financing decisions,
and other aspects related to FM
19. • 3. Financial managers must cooperate with
managers in the company so the company can
operate as efficiently as possible
• Financial managers must be able to connect
the company with the financial markets,
where companies can obtain funds and
corporate securities can be traded.
20. In terms of corporate goals and
objectives
• If financial management leads to maximisation
stock price, it needs good management and
efficient in accordance with consumer
demand.
• Companies that managed to always put
efficiency and innovation as a priority,
resulting in new products, new technological
discoveries and expanding employment
21. • External factors such as environmental
pollution, product safety assurance and safety
becomes more important to consider.
• Fluctuations in all levels of business activity
and the changes that occur in conditions of
financial markets is an important aspect of the
external environment.
22. • Cooperation between industry and
government is needed to create regulations
governing corporate behavior, and vice versa
companies comply with these regulations.
• Corporate purpose is essentially value of the
company with technical considerations.
23. • Basically, the purpose of financial
management is to maximize corporate value.
• However, behind this goal is still there is a
conflict between business owners with
providers of funds as creditors.
24. • If the company running smoothly, then the
value of the company’s stock will rise, while
the value of corporate debt in the form of
bonds is not affected at all.
25. • If the company running smoothly, then the
value of the company’s stock will rise, while
the value of corporate debt in the form of
bonds is not affected at all.
• So it can be concluded that the value of stock
ownership can be an appropriate index to
measure the level of effectiveness of
company..
26. • Based on that reason, the financial
management objectives expressed in terms of
maximizing the value of shares of corporate
ownership, or maximize stock prices
27. • The purpose of maximizing the stock price
does not mean that managers should attempt
to seek capital appreciation of shares at the
expense of bondholders.
28. • The main financial objective of the managers
of a business is to maximise its value to its
owners.
• To ensure that they have the right balance,
managers set objectives in a number of areas,
that affect the value of the business:
29. • Liquidity
• Is the ability of an organisation to pay its
short-term obligations as they fall due.
• A business must have sufficient cash flow to
meet financial obligations or convert current
assets into cash quickly.
• Planning cash flow is essential in this goal.
30. • Profitability
• Is the ability of an organization to maximise its
profits.
• Profits satisfy owners and shareholders and
are important for long term sustainability.
31. • Efficiency
• Is the ability of an organization to minimise its
costs and manage its assets so that maximum
profit is achieved with the lowest possible
level of assets.
• Control measures are essential here.
32. • Growth
• An important aspect of profit maximisation is
the ability of an organization to maintain
profits in the longer term.
• To do this growth is essential, and growth is
the ability of the organization to increase its
size in the longer term.
33. • Return on Capital
• Is the amount of profit returned to owners or
shareholders as a percentage of their capital
contribution.
• Owners have expectation profits will be
maximised such that they can receive a share
of them.
• .
34. • Managers will set different objectives on the
return on capital for different projects
depending on the risk associated
35. PRINCIPLES OF FM
• There are ten principles that form the basics
of FINANCIAL MANAGEMENT.
• These can be called as the foundation of
finance that plays significant role in decision
making made by financial managers as
follows;
36. • PRINCIPLE 1: The risk return trade off-
investors wont take additional risk unless they
expect to be compensated with additional
return.
PRINCIPLE 2: Time Value of Money - a dollar
received today is worth more than a dollar
received a year from now.
37. • PRINCIPLE 3: CASH, not profits is KING - it is
cash flows not profits that are actually
received by the firm and can be reinvested.
PRINCIPLE 4: Incremental Cash Flows- It's only
what changes that counts. The incremental
cash flow is the difference between the cash
flows if the project is taken on versus what
they will be if the project is not taken on.
38. • PRINCIPLE 5: The Curse of Competitive
Markets-Why it's hard to find exceptionally
profitable projects.
PRINCIPLE 6: Efficient Capital Markets-the
markets are quick and the prices are right. An
efficient market is characterized by a large
number of profit-driven individuals who act
independently.
39. • PRINCIPLE 7: The Agency Problem-a problem
resulting from conflicts of interest between
the manager/agent and the stockholder.
PRINCIPLE 8: Taxes Bias Business Decisions
40. • PRINCIPLE 9: All Risk is not Equal-some risk
can be diversified away, and some cannot.
PRINCIPLE 10: Ethical Behavior is doing the
right thing, and ethical dilemmas are
everywhere in finance.