The document provides an overview of financial management. It defines financial management as planning and controlling a firm's financial resources, including procuring funds in an economic manner and employing funds optimally to maximize returns. It then outlines the evolution of financial management from the traditional to modern phase. Key aspects of financial management are investment, financing, and dividend decisions. Investment decisions involve selecting profitable investment avenues. Financing decisions relate to determining the optimal capital structure and sources of finance. Dividend decisions balance paying dividends to shareholders versus retaining profits for reinvestment.

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Amity Business School
MBA(HR) Class of 2017,
Semester II
FINANCIAL MANAGEMENT
FIBA601
Lecture 1

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What is Financial Management?
Financial Management is that managerial activity
which is concerned with the planning and controlling
of the firm’s financial resources.
It encompasses the procurement of the funds in the
most economic and prudent manner and employment
of these funds in the most optimum way to maximize
the return to the owner.

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Evolution of Financial Management
Financial Management emerged as a distinct field of study
at the turn of 20th
century. Its evolution may be divided into
three phases
1. The Traditional Phase
2. The Transitional Phase
3. The Modern Phase

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The Traditional Phase
Features
The focus of financial management was mainly on certain episodic
events like formation, issuance of capital, expansion etc in the life
Cycle of the firm.
The approach was mainly descriptive and institutional.
The outsider’s points of view was dominate. Financial Management
Was viewed mainly from the point of the investment bankers, lenders
and other outsiders….

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The Transitional Phase
The transitional phase began around the early forties and continued
through the early fifties.
Though the nature of financial management during this phase was
similar to that of the traditional phase, great emphasis was placed on
day to day problems faced by the finance managers in the areas of
fund analysis, planning and control

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The Modern Phase
The modern phase began in the mid fifties and has
witnessed an accelerated Pace of development with the
infusion of ideas from economic theory and Application
of quantitative methods of analysis.
Significant contribution to the development of modern theory of Financial Management
Theory of Portfolio Management developed by Harry Markowitz in 1950
The Theory of Leverage and Valuation of Firm developed by Modigliani &
Miller in 1958
The Presentation of Option Valuation Model by Black and Scholes in 1970

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he trust of financial decision making is on Procurement of funds
nd their optimal Utilisation through investment, financing, dividends
nd working capital decision.
he scope of financial management extends to 3 key decisions areas:
. Investment Decision
. Financing Decision
. Dividend Decision

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Investment Decision
Investment decisions pertain to selection of the most productive
avenues with a view to maximise the returns on investment and
consequently the shareholders wealth.
Investment decisions which are alternatively referred to as capital
Budgeting decisions are crucial for survival and growth of any
Firm as they involve large capital outlay.
Acquisition of Fixed Assets
Land
Building
Machines
Intangibles
Long term Assets
(What & When to Buy)
Survival
& Growth

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Investment decision
Long Term Investment
Decision
Short Term Investment
Decision
Capital Budgeting
Decisions
Working Capital
Decisions
Factors Affecting Investment Decisions
Capital Budgeting Decision
•Cash Flow of the Project
•Cost of Capital
•Investment criteria involved
Working Capital Decision
•Nature of the Business
•Credit Policy
•Price Level Change
•Market Competitions etc…..

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Financing Decisions
Financing Decisions are concerned with the procurement of the
required amount of Funds on most convenient terms as and
when needed.
Financing Decision relates to the composition of relative proportion
Of various sources of finance. It involves deciding the proportion of
Equity and debt in Capital Structure.
Financial Decision
Capital Structure Decision Cost of Capital

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Decision Taken
From which Source Equity should be raised- whether by issue of Equity
shares or through Preference share.
What should be the proportion of equity and debt in the Capital structure?
From which source Debt should be raised – whether by issue of debenture
Or raising long term loans.
Factor affecting Financing Decisions
Risk
Cost
Cash Flow Ability
Flexibility
Market Conditions
Floating Costs
Legal Framework

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Dividend Decision
Dividend decision involves deciding whether to distribute the profits
as dividend to shareholders or to retain profits and reinvest in
the business.
Objective
The main objective of dividend decision is to divide net earnings in an
Optimum manner so as to pay dividend to the shareholders and to
Retain earnings for reinvestments with the objective of maximizing
The wealth of shareholders
Decision Taken
How much earnings should be retained for reinvestment opportunities?
How much earnings should be distributed as dividend to shareholders?