Fm Intro

Scope of Financial Management    



Traditional Approach Dominant upto early fifties Concerned with procurement of funds: Institutional arrangement Financial instruments & procedural aspects of capital markets Legalities between firms & sources of funds

Limitations of traditional approach    

Ignored internal decision- making Focused on corporate enterprises only Built around episodic events Focus on long term financing

Scope of Financial Management 





Modern approach Provides conceptual & analytical framework for financial decision making i.e…. It is concerned with planning,raising,controlling & administering of funds used in the business It covers acquisition of funds as well as their efficient & wise allocation to various uses.

Finance function 

What specific assets should an enterprise acquire? (the investment decision)



How are these resources to be financed? Should it be out of own money or should it be borrowed money? (the financing decision )



How should the profits from business be treated should it be distributed to the owners or should it be reinvested? (the reward/dividend decision)

Functions of finance 



Investment Decision It relates to the selection of assets in which funds will be invested by a firm The assets to be acquired fall into 2 groups: Long-term assets Capital Budgeting

  

Selection of asset/proposal Risk & uncertainty Cost of capital

Short term assets Working capital Mgmt.

Profitability –Liquidity trade off Mgmt. of individual current assets

Functions of finance 



  

Financing Decision It is concerned with the financing mix or capital structure It is concerned with determining the proportion of debt & equity for maximising the return to the shareholders. Thus it covers 2 aspects viz.: Capital structure theory & Capital structure decision

Functions of finance 

   

Dividend Policy Decision It is a decision regarding whether the profits should be distributed as dividends to the shareholders in the form of dividends or should it be reinvested in the business. It has to be analysed w.r.t. financing decision of the firm Major aspects to be covered: Determining the dividend payout ratio The factors determining dividend policy of a firm

Fund flow V/S Cash flow 



The difference between closing and opening cash/bank/marketable securities balance is explained through cash flow statement i.e.it is a statement of cash inflows and outflows reflecting the efficiency in the acquisition and use of cash during a particular period. The term ‘funds’ is a wider concept and involves working capital in contrast to ‘cash’ which is one of the elements of funds(W.C.)

BALANCE SHEET AND FINANCE TOPICS • Share capital • Equity • Preference • Reserves and surplus • Secured loans • Debentures • Loans and advances • Unsecured loans • Current liabilities and provisions • Trade creditors • Provisions • Fixed assets (net) • Gross block • Less: depreciation • Investments • Current assets, loans and advances • Cash and bank

Capital structure and cost of capital

Working capital financing policy

Capital budgeting Portfolio management Cash management

• Receivables

Credit management

• Inventories

Inventory management

• Miscellaneous expenditure and losses

Objectives of financial management 



  

The objective provides a framework for optimum financial decision making It helps in designing a method of operating the internal investment & financing of a firm. Two approaches: Profit maximisation Wealth maximisation

Profit maximisation 



   

Investing,financing & dividend decisions should be oriented to the maximisation of profits. It implies that :select assets,projects & decisions which are profitable and reject those which are not. Limitations of the approach: Ambiguity Timing of benefits Quality of benefits

Wealth Maximisation 





  

Also known as Value maximisation or Net present value maximisation. Universally accepted as an appropriate operational decision criterion for financial management decisions. Removes the limitations of profit maximisation approach by satisfying 3 operational requirements e.g. Precision Time value of money & Quality of benefits(Uncertainty)

Role of finance manager

Trends & facts      

Strong job outlook Strategic & global thinker Team player Value based management Integrated risk management Quantitative skills

Trends & facts    

Benefits focus Negotiation skills Leadership skills Centralised corporate finance function

Changing role of finance manager 



    

Mergers & acquisitions-valuation & other legal aspects Cost cutting to improve profitability & productivity to sustain & grow in the competitive world Industrial licensing has been relaxed Heavy dependence on capital markets Emergence of a number of investment opportunities Demanding investors Various options available for raising loans