Financial Management
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EVOLUTION Evolution of financial accounting can be divided into three major phases
• The traditional phase • The transitional phase • The modern phase
TRADITIONAL PHASE The main focus of financial management was mainly on certain episodic events such as: • • • • • •
FORMATION ISSUANCE OF CAPITAL MAJOR EXPANSION MERGER REORGANISATION LIQUIDATION
TRANSITIONAL PHASE
The financial management during this phase had similar nature with that of traditional phase, but the focus shifted to working capital management . Greater emphasis was put on day-to-day problems of financial managers in the field of: • Fund analysis • Planning • control
MODERN PHASE The basic features of modern phase are: • Considered to be rational matching of funds to their uses as to maximise the wealth of shareholders. • The approach became more analytical and quantitative.
Goal of FM •
To maximise the wealth of its current shareholders.
•
Critics view
•
Certain critique arguments & defenders
Capital mkt sceptics
Shares fails to reflect long term value rather managers make more reliable decision s of value creation
Financial economists
In developed capital mkts shares are less biased & gives estimation of value creation.managers cannot asses value in comparison to investors
Strategic visionaries
Firm should have product market goal directly influence the wealth of shareholders.
It is true ,however, beyond a certain point this goal comes at the cost of shareholders value.
Balancers
Firms should seek the balance between the shareholders, customers, suppliers, community etc.
Not practical. There is no way to figure out the right balance
Alternative goals
Max of profit Max of earning per share Max on return on equity LIMITATIONS Not give a proper guide for decision making. Comparisons cannot be made at diff time & durations. Uncertain, based on probability distribution.
Shareholders orientation in India
Previously firms showed sporadic concern about shareholders but the trend is changing. Factors contributing to the goal of shareholders wealth max isForeign exposure Greater dependence on capital mkt Growing imp of institutional investors Abolition of wealth tax on financial assets
Summarize
There are greater benefits & incentives attached in creating value for shareholders. Firms like Reliance & Mahindra has communicated this new thinking clearly in their annual reports. Fundamental objective of firm: Enhancement of long term shareholders value Protecting the int of other stakeholders
Risk – Return Trade Off
Financial Decisions involve evaluation of alternative course of action To an every course of action there is a diff risk return implications attached Financial decision = calculated amt of risk n return involved = creating the value for the firm
AGENCY PROBLEM • Conflict between shareholders and managers arises due to personal interest of mangers over shareholders interest
• Agency cost Difference between the value of an actual firm and value of an hypothetical firm.
BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • FRAUD violating the law for e.g. satyam case
• UNETHICAL BEHAVIOUR breaching the code of ethics or moral behaviour.
Benefits of ethical behaviour • Avoid fines and legal expenses • Attract and retain talented people • Build public trust • Create goodwill
CORPORATE SOCIAL RESPONSIBILITY Contribute to economic devlopment while improving the quality of life of the work force and their families as well as for the community for e.g. • TATA IN JAMSHEDPUR • MUNJALS IN DHARUVERA
TATA MOTORS CORPORATE SOCIAL RESPONSIBILTY • Annual expenditure on R&D is approximately 2% of turnover. • Set up two in house engineering research center that house India’s only certified crash test facility. • Tata motor has planted as many as 80,000 trees in the work as and the township and the more than 2.4 million trees have been planted in jamshedpur • CNG vehicles like buses
ORGANISATION OF THE FINANCIAL FUNCTION
CHIEF FINANCE OFFICER
TREASURES
CONTROLLER
CASH MANAGER
CREDIT MANAGER
FINANCIAL ACCOUNTING MANAGER
COST ACCOUNTING MANAGER
CAPITAL BUDGETING MANAGER
FUND RAISING MANAGER
TAX MANAGER
DATA PROCESSING MANAGER
PORTFOLIO MANAGER
INTERNAL AUDITOR
FUNCTIONS OF FINANCIAL SYSTEM POOLING OF FUNDS. TRANSFER OF RESOURCES. RISK MANAGEMENT. COORDINATING DECENTRALISED DECISION MAKING. DEALING WITH INCENTIVE PROBLEM.
Funds
Deposits/Shares
Financial Institutions Commercial Banks Insurance Companies Mutual Funds Provident Funds Non-Banking Financial Companies
Suppliers of Funds Individuals Businesses Governments
Fund s Securiti es
Funds Loans
Demands of Funds Individuals Businesses Governements
Financial Markets Money Market Capital Market
Funds Securities
• The traditional phase • The transitional phase • The modern phase
TRADITIONAL PHASE The main focus of financial management was mainly on certain episodic events such as: • • • • • •
FORMATION ISSUANCE OF CAPITAL MAJOR EXPANSION MERGER REORGANISATION LIQUIDATION
TRANSITIONAL PHASE
The financial management during this phase had similar nature with that of traditional phase, but the focus shifted to working capital management . Greater emphasis was put on day-to-day problems of financial managers in the field of: • Fund analysis • Planning • control
MODERN PHASE The basic features of modern phase are: • Considered to be rational matching of funds to their uses as to maximise the wealth of shareholders. • The approach became more analytical and quantitative.
Goal of FM •
To maximise the wealth of its current shareholders.
•
Critics view
•
Certain critique arguments & defenders
Capital mkt sceptics
Shares fails to reflect long term value rather managers make more reliable decision s of value creation
Financial economists
In developed capital mkts shares are less biased & gives estimation of value creation.managers cannot asses value in comparison to investors
Strategic visionaries
Firm should have product market goal directly influence the wealth of shareholders.
It is true ,however, beyond a certain point this goal comes at the cost of shareholders value.
Balancers
Firms should seek the balance between the shareholders, customers, suppliers, community etc.
Not practical. There is no way to figure out the right balance
Alternative goals
Max of profit Max of earning per share Max on return on equity LIMITATIONS Not give a proper guide for decision making. Comparisons cannot be made at diff time & durations. Uncertain, based on probability distribution.
Shareholders orientation in India
Previously firms showed sporadic concern about shareholders but the trend is changing. Factors contributing to the goal of shareholders wealth max isForeign exposure Greater dependence on capital mkt Growing imp of institutional investors Abolition of wealth tax on financial assets
Summarize
There are greater benefits & incentives attached in creating value for shareholders. Firms like Reliance & Mahindra has communicated this new thinking clearly in their annual reports. Fundamental objective of firm: Enhancement of long term shareholders value Protecting the int of other stakeholders
Risk – Return Trade Off
Financial Decisions involve evaluation of alternative course of action To an every course of action there is a diff risk return implications attached Financial decision = calculated amt of risk n return involved = creating the value for the firm
AGENCY PROBLEM • Conflict between shareholders and managers arises due to personal interest of mangers over shareholders interest
• Agency cost Difference between the value of an actual firm and value of an hypothetical firm.
BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • FRAUD violating the law for e.g. satyam case
• UNETHICAL BEHAVIOUR breaching the code of ethics or moral behaviour.
Benefits of ethical behaviour • Avoid fines and legal expenses • Attract and retain talented people • Build public trust • Create goodwill
CORPORATE SOCIAL RESPONSIBILITY Contribute to economic devlopment while improving the quality of life of the work force and their families as well as for the community for e.g. • TATA IN JAMSHEDPUR • MUNJALS IN DHARUVERA
TATA MOTORS CORPORATE SOCIAL RESPONSIBILTY • Annual expenditure on R&D is approximately 2% of turnover. • Set up two in house engineering research center that house India’s only certified crash test facility. • Tata motor has planted as many as 80,000 trees in the work as and the township and the more than 2.4 million trees have been planted in jamshedpur • CNG vehicles like buses
ORGANISATION OF THE FINANCIAL FUNCTION
CHIEF FINANCE OFFICER
TREASURES
CONTROLLER
CASH MANAGER
CREDIT MANAGER
FINANCIAL ACCOUNTING MANAGER
COST ACCOUNTING MANAGER
CAPITAL BUDGETING MANAGER
FUND RAISING MANAGER
TAX MANAGER
DATA PROCESSING MANAGER
PORTFOLIO MANAGER
INTERNAL AUDITOR
FUNCTIONS OF FINANCIAL SYSTEM POOLING OF FUNDS. TRANSFER OF RESOURCES. RISK MANAGEMENT. COORDINATING DECENTRALISED DECISION MAKING. DEALING WITH INCENTIVE PROBLEM.
Funds
Deposits/Shares
Financial Institutions Commercial Banks Insurance Companies Mutual Funds Provident Funds Non-Banking Financial Companies
Suppliers of Funds Individuals Businesses Governments
Fund s Securiti es
Funds Loans
Demands of Funds Individuals Businesses Governements
Financial Markets Money Market Capital Market
Funds Securities
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