2. FINANCIAL PLANNING
• is the process of estimating the capital required
and determining it’s competition. It is the process
of framing financial policies in relation to
procurement, investment and administration of
funds of an enterprise.
3. FINANCIAL MANAGEMENT: OVERVIEW
AND ROLE AND RESPONSIBILITIES
• Financial management deals with the ways in which an organization
can raise funds for the various projects, allocation of those funds in
the most productive and efficient way, how to exercise control over
those funds, and how to distribute the returns of those funds to the
various stakeholders.
• It generally deals with planning, controlling, organizing, and directing
the financial activities of a firm.
4. • Financial Management ensures that the
organization meets its primary objectives such as
maximizing the shareholders’ wealth, cutting down
the finance cost, and other non-financial objectives
which are to other stakeholders such as the
government, employees, and suppliers.
5. IMPORTANCE OF FINANCIAL PLANNING
• Financial Planning is process of framing objectives,
policies, procedures, programmes and budgets
regarding the financial activities of a concern. This
ensures effective and adequate financial and
investment policies. The importance can be
outlined as-
6. • Adequate funds have to be ensured.
• Financial Planning helps in ensuring a reasonable balance between outflow and
inflow of funds so that stability is maintained.
• Financial Planning ensures that the suppliers of funds are easily investing in
companies which exercise financial planning.
• Financial Planning helps in making growth and expansion programmes which
helps in long-run survival of the company.
• Financial Planning reduces uncertainties with regards to changing market
trends which can be faced easily through enough funds.
• Financial Planning helps in reducing the uncertainties which can be a hindrance
to growth of the company. This helps in ensuring stability an d profitability in
concern.
7. A financial instrument is a contract in which one party
agrees to pass money or stock in a business to
another party in the future in return for something of
value. So, financial instruments can be as simple as
an invoice or check, or as complex as the credit
default swaps that caused the collapse of the
insurance company AIG in 2008. Let’s see some of the
examples of financial instruments and the different
types which include derivatives and cash instruments.
8. TYPES OF FINANCIAL INSTRUMENT
Cash instruments are financial instruments with values directly influenced by the
condition of the markets. Within cash instruments, there are two types; securities and
deposits, and loans.
• Securities: A security is a financial instrument that has monetary value and is traded on
the stock market. When purchased or traded, a security represents ownership of a part of
a publicly-traded company on the stock exchange.
• Deposits and Loans: Both deposits and loans are considered cash instruments because
they represent monetary assets that have some sort of contractual agreement between
parties.
9. Derivative Instruments
• Derivative instruments are financial instruments that have
values determined from underlying assets, such as
resources, currency, bonds, stocks, and stock indexes.
10. Foreign Exchange Instruments
Foreign exchange instruments are financial
instruments that are represented on the foreign
market and primarily consist of currency
agreements and derivatives.
11. SCOPE OF FINANCIAL MANAGEMENT
a. Financial functions
• This function deals with decisions on how to raise funds to finance the
activities of the organization
• The short term sources of funds include; bank overdrafts, factoring, commercial
papers, account payable delays, sale and leaseback, and account receivables
collections.
• The long term sources of funds include; ordinary share capital, preference
share capital, long term loans (debt capital) and leases.
12. Before choosing the source of funds, a financial
manager must consider factors such as cost, tax effects,
dilution of ownership and control, financial risks,
collateral securities, access to capital markets, nature of
project to be financed and other conditions and
restrictive covenants.
13. b. Investment function
• This function involves decisions concerning the allocation of funds to
various projects. A financial manager needs to evaluate the various
projects to venture into considering both their returns and the level of
risk.
• Investment decisions are difficult to make as they involve assessment of
the future which is difficult to predict with precision and most of the
investments are irreversible
14. c. Liquidity function
• These are decisions involving the management of working capital to
avoid liquidity problems.it generally involves investment into current
15. d. Dividend function
• This involves decisions on how much of the total earnings of the organization
should be paid out as dividends to the shareholders and how much should be
retained by the organization for re-investment.
• The dividend decision should be in line with the dividend policy of the
organization, which is contained in the article of association. The finance
manager should ensure that the organization has an optimal dividend payout
ratio.
16. GOALS OR OBJECTIVES OF A FIRM
The main goal of any firm is maximizing the wellbeing of owners or the shareholders. This is
indicated using the following parameters
• Profit maximization means maximizing the income of a firm either by increasing sales volume
or increasing the price in return the business maximizes profit which leads to an increase in the
dividends paid to shareholders
• The capital gain or wealth maximization. Capital gain is represented by the market value of
shares where wealth is said to be maximized when there is an increase in the value of those
market shares.
17. The secondary objectives of the firms are those responsibilities owed to other
parties required by the firm in the pursuit of its main objective.
• For example, the responsibilities owed to employees are; providing them with reasonable
remuneration, providing them with medical facilities, and providing them with transport,
pension and training facilities.
• Responsibilities owed to customers are; providing them with high-quality goods and services
at reasonable prices.
• Responsibilities owed to society are participating in charitable organizations and ensuring
that the activities of the firm are environmentally friendly.
18. ROLE OF FINANCIAL MANAGERS
• Accounting and bookkeeping. A financial manager prepares or supervises the preparation of the
various financial statements, activity reports, and forecasts. He should also ensure that there is an
effective accounting system in the organization.
• Estimating the amount of capital required for purchase of assets, growth, and expansion of the
business and meeting working capital requirements
• Ensures that debt and equity ratios are maintained and balanced when raising funds from various
sources.
• Analyze the market trends to identify available opportunities for both investment and expansion of
the business
• Financial control. A financial manager exercises financial control through the use of techniques like an
internal audit.
• Forecasts cash flowing into the business and cash flowing out of the business to ensure that there is
no shortage of funds or even surplus cash within the firm. Funds must be