Introduction To Financial Management

Introduction to financial management

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What Is Business Finance?

Imagine you were to start your own business.

you would have to answer the following three questions. 1.What

long-term investments should you take on? That is, what lines of business will you be in and what sorts of buildings, machinery, and equipment will you need? 2.Where will you get the long-term financing to pay for your investment? 3.How will you manage your everyday financial activities such as collecting from customers and paying suppliers?

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These are not the only questions, but they are among the most important. Business finance, broadly speaking, is the study of ways to answer these three questions. We’ll be looking at each of them in the chapters ahead.

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Classifications of financial Public finance 1.Government institutions finance 2. central government finance 3. state government Non-profit 4. local self government organization

private 1. Business 2. personal 3.Finance of

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Definitions Finance management J.F. Bradlery :-“financial management is the area of business management devoted to a judicious use of capital and a careful selection of sources of capital in order to enable a business firm to move in the direction of reaching its goals” 5

Definition Business finance Guthmann and dougall:-” business finance can be broadly defined as the activity concerned with the planning, raising, controlling and administering the funds used in the business”.

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Meaning of financial management Financial management is application of principles of management to the subject called finance , it involves planning, controlling decision making with respect to finance activity of the business. 7

The Four Basic Areas of finance •Corporate finance •Investments •Financial institutions •International finance

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Why Study Finance? Marketing

and finance Budgets, marketing research, marketing financial products Accounting and finance Dual accounting and finance function, preparation of financial statements Management and finance Strategic thinking, job performance and profitability you and finance(personal finance) Budgeting, retirement planning, college planning, day-to-day cash flow issues

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The Evolution of Financial Managem  Early

1900 : instrument, institution, and procedures of capital market and money market  Around 1920 : focus on security and banking sector, and investment in common stock  Around 1930 : focus on liquidity, debt, regulation, bankruptcy, reorganization  End of 1950 : capital budgeting, valuation, and dividend policy  Around 1960 : development of portfolio theory  Around 1970 : CAPM model and APT model that can be used to value the financial assets

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Financial Manager Financial

managers is responsible for managing all the financial obligations of the firm. The top financial manager within a firm is usually the Chief Financial Officer (CFO) ◦ Treasurer – oversees cash management, credit management, capital expenditures and financial planning ◦ Controller – oversees taxes, cost

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Organization structure of finance

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Nature of financial management

FM

is an area of decision making in finance function of the business. It is descriptive/ theoretical/ statistical/ historical and analytical in nature. It involves application of management principles to the finance function. It is applicable to every organization irrespective of its size, nature, place.

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Continued… It

deals with accumulation and utilization of financial resources(business resources). It is directed towards achieving business objectives.

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Scope of financial management. 1.Estimating financial requirements 2.Deciding capital structure 3.Selecting source of finance 4.Selecting pattern of investment 5.Cash management 6.Profit management 7.Ensuring liquidity 8. Meeting statuary requirement. 9. Generation and mobilization of 15

Financial Management Decisions Investment

decision

Financial

decision

Dividend

decision

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Objectives of financial management 1)

Profit Maximization

2)Wealth

Maximization

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1) Profit maximization When

profit-earning is the main aim then its maximization should be obvious. Profitability is a barometer for measuring efficiency and economic prosperity of a business enterprise. Profits fuel business growth. So business should maximize profit to ensure strong growth. Business risks are unavoidable as well as uncertain. All other business goals (social goals can be meat only with adequate profits)so it should be maximized.

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Criticisms of profit maximization  Profit

maximization ignores time value of money.  Profit maximization does not take into account the risk involved in prospective earnings.  It would lead to inequalities and loss of human values which are essential to a society.  Today's market is characterized by imperfect competition in this scenario, profit maximization can not be the obvious objective of the business.  The term profit itself is not precisely defined, it can be short term/long term or 19

2) Wealth maximization

Wealth maximization means maximizing share/stock holders wealth. symbolically share holder’s = no of sharesCurrent x × stock wealth owned price per share

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Factors in favor of wealth maximization It

serves the interests of creditors, employs, shareholders and society. Wealth maximization adds to productivity and efficiency of the firm. It minimizes the conflict between share holders and management of the company. Wealth maximization takes into account time value of money.  the objective helps in increasing

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Criticisms of wealth maximization It

is prescriptive idea. It is not descriptive of what firms actually do. Wealth maximization is not necessarily socially desirable. There is some controversy as to whether the objective is to maximize shareholders wealth or firms wealth(since debenture holders, preferential holders also

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The End of Session 1 But not end of presentation

Brain storming

Sessions... 24

1.What is the goal/objective of financial management? A. Profit maximization and wealth maximization B. Business expansion and asset management C. Investments and share market analysis 25

A. Profit maximization and wealth maximization

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2. What are the four basic areas of finance? A. Business finance, share market, domestic finance and investments. B. Corporate finance, investments, financial institutions and international finance. C. Public finance, private

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B. Corporate finance, investments, financial institutions and international finance.

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3. What are the three types of financial management decisions A. Capital budgeting, capital structure and working capital management. B. Profit management, cash management and deciding capital structure. C. Capital budgeting, deciding

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A. Capital budgeting, capital structure and working capital management.

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4. Who is the present CFO of JS BANK LTD A. Naveed Qazi B. Yousaf Ammanullah C. Khalil ur Rehman D. kamil yaqoob

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B. Yousaf Ammanullah

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5. Name any five financial institutions.

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1) JS BANK LTD 2) HSBC 3) HBFC 4) Meezan Bank LTD 5) Bank Alfalah

6. Who is the present finance minister of PAKISTAN A. Shaukat Tareen B. Naveed Qamar C. Hina Rabbani Khar

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A. Shaukat Tareen

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THANK YOU….. FARAZ AHMAD JS BANK LTD

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