Financial Management Overview and Decisions

Financial Management Overview

• Financial management involves raising funds and maximizing shareholder wealth.
• Key elements of business management are men, money, machines, materials, methods, and minutes (7Ms).
• Money is a crucial resource for any organization, acting as both currency and a component of finance.
• Financial management involves maximizing shareholder value using sound investment and financing decisions, effective working capital management and risk management.
• Financial management encompasses the acquisition, financing, and management of assets with an overarching goal in mind.
• Financial management activities include anticipating financial needs, acquiring financial resources, and allocating funds.

Financial Decisions

• Financial decisions are broadly categorized into investment, financing, dividend, and working capital decisions.
• These decisions are made simultaneously and continuously within a business.
• The aim of these decisions is maximizing shareholder wealth.
• Investment decisions, or capital budgeting, involve selecting productive avenues for maximizing ROI with long-term implications.
• Examples include expansion, modernization/replacement, and R&D expenditure.

Financing Decisions

• Financing decisions focus on identifying suitable funding sources and optimizing capital structure to minimize financing costs.
• Main considerations include the optimal mix of short-term and long-term capital, and expectations of capital providers.
• Determining the source of funds and the right proportion of capital are important aspects of financing decisions.

Dividend Decisions

• Dividend decisions involve determining the appropriate distribution of profits as dividends versus reinvestment for future financing needs.
• These decisions balance current shareholder expectations with future business growth potential.
• High-growth companies often employ high retention and lower dividend payout policies.

Working Capital Decisions

• Working capital decisions center on current asset management.
• Two key elements are managing levels of investment in current assets and financing those investments efficiently.
• Effective management of working capital is essential for operational efficiency.

Goals of Financial Management

• Profit Maximization: The difference between revenues and expenses over a period.
• Maximizing Shareholder Wealth: Focus on increasing the Net Present Value (NPV) for shareholders.
• Alternative Motives: Maximizing Return on Equity (ROE), Earnings Per Share (EPS), and using reserves for growth and expansion.

Evolution of Financial Management

• Financial management evolves through distinct phases: Traditional, Transitional, and Modern phases.

Aims of Finance Function

• Finance managers anticipate funding needs, secure funds, allocate funds, increase profitability, and maximize firm value.

Functions of Finance Manager

• The treasurer's core function involves financing and investment activities (e.g., capital budgeting, portfolio management, raising fund).
• The controller's function relates to asset management and control (e.g., financial accounting, cost accounting, tax management, budgeting).

Forms of Business Ownership

• Various forms like sole proprietorship, partnership, limited liability partnership, cooperative societies, companies, and government companies exist.

Agency Problem

• In public limited companies, shareholders delegate management to a board of directors, potentially leading to conflicts of interest.
• Potential conflicts between directors' (agents) and shareholders' (principals) interests can cause agency problems.

Overcoming Agency Problems

• Potential solutions to agency problems include aligning managerial compensation with profitability, direct interventions by shareholders, the threat of firing/takeover.