Helpful for BBS, BBA, BBM, and MBA

2. What is money?

4. Savings:

5. What is Finance?
The art and science of managing money, or
management of money.
• It is the study of value.
• It is the study of how to make good
decision that involve money.
– What assets to buy?
– How to pay for the assets you buy?

6. What is finance?
 Suppose you want to start up a business. No matter what
the nature of the proposed business is, its size or how it
will be registered, you will have to address some
fundamental questions:
 How much investment is required to set up the business? It
includes preliminary expenditure, land and building, plant
and machinery, and furniture and fixture.
 How will you raise the money? It includes long term
sources like equity and debt.
 How will you finance your day-to-day activities? It includes
your inventory, giving credit to customers, and some cash
to take care of daily operations.
 All this involves finance.

7. Domains of Finance:
Personal Or Individual Finance
Business, Managerial, Corporate Finance
Public or Government Finance

8. 1. Personal Or Individual Finance:
Personal finance deals with the management of financial
resources of an individual.
2. Business, Managerial, Corporate Finance:
Business, Managerial, Corporate Finance deals with
management of financial resources of a business entity.
3. Public or Government Finance:
public finance refers to the management of financial
resources of financial resources of a government. A
government could be the local government like district
development committee or the centralgovernment like
Nepal Government.

9. Importance of financial management:
1. Helps to setting clear goal.
2. Helps to efficient utilization of resources.
3. Helps deciding sources of financing.
4. Helps making dividend decision.

10. Finance function:
The Finance Function is a part of financial management.
Financial Management is the activity concerned with the
control and planning of financial resources.
In business, the finance function involves the acquiring
and utilization of funds necessary for efficient
operations. Finance is the lifeblood of business without
it things wouldn’t run smoothly. It is the source to run
any organization, it provides the money, it acquires the
money.

12. Objectives of Finance Functions:
A. managerial finance function:
managerial finance function also known as executive
functions,require managerial skills in planning, execution and
control.therefore, they are carried out at managerial level.
1. Investment Decisions–
This is where the finance manager decides where to put the company
funds. Investment decisions relating to the management of working
capital, capital budgeting decisions, management of mergers, buying or
leasing of assets. Investment decisions should create revenue, profits and
save costs.
2. Financing Decisions–
Here a company decides where to raise funds from. They are two main
sources to consider mainly equity and borrowed. From the two a decision
on the appropriate mix of short and long-term financing should be made.
The sources of financing best at a given time should also be agreed upon.

13. 3. Dividend Decisions–
These are decisions as to how much, how frequent and in what form to
return cash to owners. A balance between profits retained and the
amount paid out as dividends should be decided here.
4. Liquidity Decisions–
Liquidity means that a firm has enough money to pay its bills when
they are due and have sufficient cash reserves to meet unforeseen
emergencies. This decision involves the management of the current
assets so you don’t become insolvent or fail to make payments.

14. Key Issues In Financial Decision-making:
Investment
Decision
• What business to be in?
• What growth rate is appropriate?
• What assets to acquire?
Financing
Decision
• What mix of debt and equity to be used?
• Can we change value of the firm by changing the capital mix?
• Is there an optimal debt–equity mix?
Dividend
Decision
• How much of the profit should be distributed as dividends and how
much should be ploughed back
• Can we change value of the firm by changing the amount of dividend?
• What should be the mode of dividend payment
Working
Capital
Decision
• What level of inventory is ideal?
• What level of credit should be given to the customers?
• What level of cash should be maintained?
• How can the blockage of funds in the current assets be minimized
without compromising with profits?

15. B. Routine finance functions:
Routine finance functions generally do not require
managerial involvement to carry out them. These
functions are performed for the effective execution of
managerial finance functions and are carried out by the
people at lower levels.

16. Financial Organizational Structure of
the firm:
Organization of finance function is the authority and
responsibility relationship among persons involved in
finance functions in an organization. Reason for placing
the finance functions in the hands of top management.
-Financial decisions are crucial for the survival of
the firm.
– The financial actions determine solvency of the
firm
– Centralisation of the finance functions can
result in a number of economies to the firm.

17. Financial Organizational Structure of
the firm:

18. Financial Management:
meaning of financial management:
Financial Management means planning, organizing, directing
and controlling the financial activities such as procurement
and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the
enterprise.
The most popular and acceptable definition of financial
management as given by S.C.Kushal is
that “Financial Management deals with procurement of
funds and their effective utilization in the business”.
Weston and Brigham: Financial Management “is an area of
financial decision-making, harmonizing individual motives
and enterprise goals”.

19. Joshep and Massie: Financial Management “is the
operational activity of a business that is responsible for
obtaining and effectively utilizing the funds necessary for
efficient operations”
Financial Management is critical to any company, whether
small or big. It is like the lifeline of the business. It is also a
vital activity that must be performed in any organization.
However, financial management entails the process
of planning, organizing, monitoring, and also controlling
the financial resources of an organization. The idea for
doing such is to be able to achieve the vision or goals of the
company at the stipulated time frame.
Financial management is a regular practice in a business
environment. It involves managing a company’s financial
resources to ensure there is little or no wastage.

20. Profit Maximization:
The main aim of any form of business is to earn a profit. All
the business entity operates to earn the maximum amount of
return in terms of profits. Profit earning capacity is a
measuring technique to evaluate the efficiency of the
concerned business. Profit Maximization is the traditional
and narrow approach that aims to maximize the profit for an
organization.
Features of Profit Maximization:
Profit Maximization consists of the following features:
 Profit Maximization is also known as cash per share
maximization. It helps in achieving the objects to maximize
the business operation for profit maximization.

21.  The ultimate objective of any business is to earn a
huge amount of return in terms of profit. Thus,
this objective of financial management considers
all the possible ways to increase the profitability
of the business concern.
 Profit earning capacity is kind of a parameter for
measuring the efficiency of a particular business.
Thus, it shows the entire position of business
along with the measures to improve and increase
profitability.
 Profit Maximization is an objective that helps
in reducing risk.

22. Drawbacks:
Irrespective of profit maximization being the best objective as it
maximizes the owner’s economic welfare, this objective is being
rejected from practice due to the following drawbacks:
1. Ambiguity:
This objective is ambiguous as profit means different things for
different people. Should it mean long term profit or short-term
profit? Or we shall consider total profit earned or only earnings per
share are sufficient. Profit before tax is considered or the one after
tax.
2. The haziness of the concept “Profit”:
The term “Profit” is a vague term. It is because different
mindset will have a different perception of profit. For e.g.
profits can be the net profit, gross profit, before tax profit,
profit per share or the rate of profit etc. There is no clearly
defined profit maximization rule about the profits.

23. 3. Ignores the time value of money:
Profit Maximization objective does not consider the time value
of money and ignores the magnitude and timings of earnings. It
treats all earnings similar irrespective of the fact that those
income has occurred in different periods. It ignores the fact that
cash received today has more value than the same cash received
in previous years.
4. Ignores risk factor:
While considering the objective of profit maximization, it
does not consider the fact of risk involved in the
prospective earning streams. Like some projects are riskier
than the other. Two firms can have the same expected
earnings per share but in case of earning a stream of
anyone is riskier than the market value of its share would
be comparatively less.

25. Is Profit Maximization An Appropriate Goal For
Financial Managers?
According to conventional theory of the firm, profit
maximization is considered to be the principal objective of
the firm because price and output decision associated with
a firm is usually based on the profit maximization criteria.
Profit maximization refers to maximizing dollar income of
the firm.
According to this goal, the actions that increase profits
should be undertaken and those that decrease profits are to
be avoided. Those who are in favor of profit maximization
argue that profit is a test of economic efficiency; it leads to
effective utilization of scaring economic resources in every
business firm, and it leads to total economic welfare since it
increases the economic efficiency of every individual firm.

26. Therefore, profit maximization is considered to be a basic
criterion for financial decision-making. However, this goal is
not appropriate on the following grounds;
1. It is ambiguous
 Profit is a vague term. it conveys a different meaning to
different people. For example, the term profit may mean
long-term profit or short-term profit, profit after tax or
profit before tax, gross profit or net profit, earning per
share, return on equity etc. So if profit maximization is
taken as a goal of the firm, there will be confusing in
decision-making.
 Merely issuing shares and using the proceeds in the
treasury bill can maximize the amount of profit. However,
this would result in a decrease in earnings per share (EPS).
This goal is not clear whether the financial manager
should take such to step to maximize the profit.

27. 2. It ignores time value of money concepts
 Benefits received in earlier periods are valuable than
those received in the later period. But, profit
maximization goal ignores this fundamental truth the
benefits received earlier are more valuable than those that
receive later because the earlier benefits can be reinvested
to earn a return.
 Thus, earlier the better principal match to the real world
situation. But the profit maximizing goal ignores the
fundamental truth, earlier the better.

28. 3. It ignores the quality of benefits
 Quality of benefit refers to the degree of certainty with
which the future benefits can be expected from the
financial course of action. The quality of expected
benefits is said to be lower if they are more uncertain or
fluctuating. Profit maximization considers only the size
of the total benefits. not it’s quality.
 So, it selects a project with large benefit without
considering their degree of certainty and exposes the
firm to high-risks. So, the profit maximization cannot be
taken is an appropriate decision criterion.

29. 4. Unsuitable in modern business environment
 Profit maximization objective was developed in the 19th
century when the majority of business was sell
financing. The modern business is characterized by
separate ownership and management. The owners and
managers have their own rights and responsibilities. The
owners or investors, therefore, cannot impose profit
maximization goal in a firm.
 Maximizing profits goal is considered outdated,
unethical, unrealistic, difficult and unsuitable in the
present context. It increases conflict of interest among a
number of shareholders such as customers, employees,
government, society etc. it might lead to inequality of
income and wealth. So it is doubtful that it leads to
optimum social welfare as advocated.

30. Wealth Maximization:
Wealth Maximization: Wealth maximization is one of the
modern approaches, which involves latest innovations and
improvements in the field of the business concern. The
term wealth means shareholder wealth or the wealth of the
persons those who are involved in the business concern.
Wealth maximization is also known as value maximization
or net present worth maximization. This objective is a
universally accepted concept in the field of business. It
removes technical disadvantages of the profit
maximization. Wealth maximization is superior to the
profit maximization because the main aim of the business
concern under this concept is to improve the value or
wealth of the shareholders.

31. Wealth maximization considers the comparison of the value
to cost associated with the business concern. Total value
detected from the total cost incurred for the business
operation. It provides extract value of the business concern.
This concept considers both time and risk of business
concern. This criteria provides efficient allocation of
resources and it also ensures the economic interest of the
society. The wealth maximization criterion is based on cash
flows generated and not on accounting profit. The
computation of cash inflows and cash outflows is precise.
Wealth maximization can be activated only with the help of
the profitable position of the business concern. So The goal
of maximizing the value of the stock avoids the problems
associated with the different goals we discussed above.

32. In a simple language a good financial decisions increase the
market value of the owners’ equity and poor financial
decisions decrease it. So the financial manager best serves
the owners of the business by identifying goods and services
that add value to the firm because they are desired and
valued in the free marketplace. So it is a long term concept
based on the cash flows rather than profits and hence there
can be a situation where a business makes losses every year
but there are cash profits because of heavy depreciation
which indirectly suggests heavy investment in fixed assets
and that is the real wealth and it takes into account the time
value of money and so is universally accepted.

33. Why Study Finance?
• Marketing
– Budgets, marketing research, marketing financial
products
• Accounting
– Dual accounting and finance function, preparation of
financial statements
• Management
– Strategic thinking, job performance, profitability
• Personal finance
– Budgeting, retirement planning, day-to- day cash flow
issues

34. Career in Finance:
The career for finance graduates is ever expanding.The
important fields where finance graduates may pursue their
career are described below.
1. Investment companies.
2. Corporate business house
3. Financial institutions.
4. International financial institution
5. Local and federal government organization.
However , we emphasize that corporate business houses
ranging from manufacturing companies, processing
companies, hydropower projects,hotels, travel and recreation
industry, transportation, to name a few , offer very good career
oppertunities for those studying financial management.