This document provides an overview of financial management. It discusses key topics such as the role of financial management in businesses, the scope and elements of financial management including investment, financial, and dividend decisions. It also covers related topics such as finance vs financing, careers in finance, financial institutions and capital markets, and financial management issues in the new millennium.

1. Finance Management
Lecture 2
By: Noor ul hadi (Lecturer)
Govt College of Management Sciences
Peshawar

2. An Overview of Financial
Management
• Financial management plays vital role in
modern business organization. It raised
fund and managed their fund. It
supplement performance of employees,
financial manage adapt changes, raised
fund, invest in assets and manage wisely
the firm resources, maximize the profit
and grow the value of the firm.

3. Scope/Elements of FM
• Investment decisions includes investment in fixed assets
(called as capital budgeting). Investment in current
assets is also a part of investment decisions called as
working capital decisions.
• Financial decisions - They relate to the raising of finance
from various resources which will depend upon decision
on type of source, period of financing, cost of financing
and the returns thereby.
• Dividend decision - The finance manager has to take
decision with regards to the net profit distribution. Net
profits are generally divided into two:
– Dividend for shareholders- Dividend and the rate of it has to be
decided.
– Retained profits- Amount of retained profits has to be finalized
which will depend upon expansion and diversification plans of
the enterprise

4. Finance
• Finance is the art of to raise fund and best
allocation or utilization to achieve
organizational goal.
• A branch of economics concerned with
resource allocation as well as resource
management, acquisition and investment.
Simply, finance deals with matters related
to money and the markets.

5. Finance Vs Financing
Finance:
Finance is a branch of economics that deals with
the management of funds, financial resources
and other assets. In broader terms, finance is
raising or investing money either as equity or
debt.
Financing:
• The process or means of acquiring capital
necessary to conduct a business activity. Two of
the most common forms of financing are debt
financing and equity financing.

6. FINANCIAL MANAGEMENT
Definition:
a. 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.
b. Financial Management concerns the acquisition,
financing, and management of assets with some
overall goal in mind.

7. Careers in Finance
Finance or knowledge of finance is important for two
reasons.
• First you need the knowledge of finance to make
personal decision i.e. investment your saving,
buying and selling of building, car etc or planning
your future (fund and pension)
• Secondly organization needs the backing of
finance in each function and departments,
• The career of finance students may be exercise in:
1. Capital market and institutions 2. investment
3. Financial management

8. Institutions and capital markets
Money & Capital markets, which deals with
securities markets & financial institutions.
• Bank
• Insurance companies,
• Mutual fund
• Investment baking
Financial manager needs knowledge of valuation
techniques to determine interest rate, and a
person with finance knowledge knows about
stock, bond, mortgages, auto loan and certificate
of deposit.

9. Investments
• Investments, which focuses on the decisions of both
individual and institutional investors as they choose
assets for their investment portfolios.
• Can work as
– Brokerage house in sales or as security analyst.
– Investment portfolio manager in bank, insurance and other
institutes.
– Work for Financial consulting firm.
– Financial advisor for pension fund and investment.
– Financial planner who help individual to develop and achieve
long-term financial goal
– Investment function
• Sales
• Analysis
• Optimal mix (portfolio)

10. Financial management
• Financial Management, or business finance
which involves the actual management of firms.
• Financial management is important for all type of
business including public and private sector.
– Banks
– Financial institutes
– Government operation
– Because FM includes decision making, selection of
securities

11. Responsibility of the Financial
Staff
• Maximize stock value by:
– Forecasting and planning
– Investment and financing decisions
– Coordination and control
– Transactions in the financial markets
– Managing risk

12. Role of Finance in a Typical
Business Organization
Board of Directors
President
VP: Sales VP: Finance VP: Operations
Treasurer Controller
Credit Manager Cost Accounting
Inventory Manager Financial Accounting
Capital Budgeting Director Tax Department

13. Financial Management Issues
of the New Millennium
• The effect of
changing
technology
• The globalization of
business

14. Percentage of Revenue and Net Income
from Overseas Operations for 10 Well-
Known Corporations, 2001
Company % of Revenue % of Net Income
from overseas from overseas
Coca-Cola 60.8 35.9
Exxon Mobil 69.4 60.2
General Electric 32.6 25.2
General Motors 26.1 60.6
IBM 57.9 48.4
JP Morgan Chase & 35.5 51.7
Co.
McDonald’s 63.1 61.7
Merck 18.3 58.1
3M 52.9 47.0
Sears, Roebuck 10.5 7.8

15. Alternative Forms of Business
Organization
• Sole proprietorship
• Partnership
• Corporation

16. Sole proprietorships & Partnerships
• Advantages
– Ease of formation
– Subject to few regulations
– No corporate income taxes
• Disadvantages
– Difficult to raise capital
– Unlimited liability
– Limited life

17. Corporation
• Advantages
– Unlimited life
– Easy transfer of ownership
– Limited liability
– Ease of raising capital
• Disadvantages
– Double taxation
– Cost of set-up and report filing

18. Financial Goals of the Corporation
• The primary financial goal is shareholder
wealth maximization, which translates to
maximizing stock price.
– Do firms have any responsibilities to society
at large?
– Is stock price maximization good or bad for
society?
– Should firms behave ethically?

19. Is stock price maximization the
same as profit maximization?
• No, despite a generally high correlation
amongst stock price, EPS, and cash
flow.
• Current stock price relies upon current
earnings, as well as future earnings and
cash flow.
• Some actions may cause an increase in
earnings, yet cause the stock price to
decrease (and vice versa).

20. Agency relationships
• An agency relationship exists whenever a
principal hires an agent to act on their
behalf.
• Within a corporation, agency relationships
exist between:
– Shareholders and managers
– Shareholders and creditors

21. Shareholders versus Managers
• Managers are naturally inclined to act in
their own best interests.
• But the following factors affect managerial
behavior:
– Managerial compensation plans
– Direct intervention by shareholders
– The threat of firing
– The threat of takeover

22. Shareholders versus Creditors
• Shareholders (through managers) could
take actions to maximize stock price that
are detrimental to creditors.
• In the long run, such actions will raise the
cost of debt and ultimately lower stock
price.

23. Factors that affect stock price
• Projected cash
flows to
shareholders
• Timing of the cash
flow stream
• Riskiness of the
cash flows

24. Basic Valuation Model
CF CF CF
Value = 1
+ 2
+ + n
(1 +k) 1 (1 +k) 2 (1 +k) n
n
CF
=∑ t
t
.
t = (1 +k)
1
• To estimate an asset’s value, one estimates the
cash flow for each period t (CFt), the life of the
asset (n), and the appropriate discount rate (k)
• Throughout the course, we discuss how to
estimate the inputs and how financial management
is used to improve them and thus maximize a
firm’s value.

25. Factors that Affect the Level
and Riskiness of Cash Flows
• Decisions made by financial managers:
– Investment decisions
– Financing decisions (the relative use of debt
financing)
– Dividend policy decisions
• The external environment