Financial Management Overview PDF

FINANCIAL MANAGEMENT OVERVIEW MEANING  Men, Money, Machines, Materials, Methods, Minutes and Management, are the 7 M’s of Business Management. Dr. Alaknanda Lonare  Money–is one of the important vitamins required for ru...

FINANCIAL MANAGEMENT OVERVIEW MEANING  Men, Money, Machines, Materials, Methods, Minutes and Management, are the 7 M’s of Business Management. Dr. Alaknanda Lonare  Money–is one of the important vitamins required for running any organization.  Put it simply, a currency as long as you have it with you is money and when you lend it to others to buy or invest in investment avenues it becomes finance. 2 DEFINITION  Financial management mainly involves raising funds and their effective utilization with the objective of maximizing shareholders wealth. Dr. Alaknanda Lonare  Financial management concerned with maximizing shareholders value primarily through sound investment and financing decisions, efficient working capital management, judicious risk management and well designed performance management system.  Financial management concerned with the acquisition, financing and management of assets with some overall goal in mind. 3 FINANCIAL MANAGEMENT IS CONCERNED WITH THREE ACTIVITIES  Anticipating financial needs, which means estimation of funds required for investment in fixed and current assets or long-term and short-term assets. Dr. Alaknanda Lonare  Acquiring financial resources–once the required amount of capital is anticipated the next task is acquiring financial resources i.e., where and how to obtain the funds to finance the anticipated financial needs and  Allocating funds in business – means allocation of available funds among the best plans of assets, which are able to maximize shareholders’ wealth.  Thus, the decisions of financial management can be divided into four viz., investment, financing, dividend and working capital decisions. 4 FINANCIAL DECISIONS  As mentioned in the contents of modern approach the discussions of financial management can be broken down into four major decisions Investment decision Dr. Alaknanda Lonare   Financing decision  Dividend decision  Working capital decisions  A firm takes these decisions simultaneously and continuously in the normal course of business.  Firm may not take these decisions in a sequence, but decisions have to be taken with the objective of maximizing 5 shareholders’ wealth.  INVESTMENT DECISIONS  These decisions are taken in the light of their probable impact on the wealth of shareholders. It involves huge capital outlay, it has long-term implications and these decisions are usually irreversible. Dr. Alaknanda Lonare  It is also referred to as capital budgeting decisions and are critical for long-term survival and growth.  It aims at selecting the most productive avenues that maximizes the Return On Investment.  Examples include: Expansion Modernization and replacement 6 R&D expenditure FINANCING DECISIONS  Vaguely referred to as capital structure decisions. It determines the financial risk of a company and thrust is to bring down the cost of financing. Financing decisions are mainly concerned with Identifying the Dr. Alaknanda Lonare  suitable sources of funds and Tapping of these sources  The main issues involved are:  Where to procure the requisite funds from?  What should be the optimal mix of various sources of capital?  How much should be the proportion of short-term and long-term funds?  How do the expectations of providers of each source of capital changes with alteration in the capital mix? 7 DIVIDEND DECISIONS  Dividend Decisions are mainly concerned with deciding the mix of profits to be distributed as dividends and those to be ploughed back for future financing needs of business. Dr. Alaknanda Lonare  Dividend Decisions depends on trade off between future financing needs of the firm and current consumption requirements of the shareholders.  Generally, firms in sectors with a high-growth rate follow a policy of high retention and low payout. 8 WORKING CAPITAL DECISIONS  Working capital decisions are concerned with the management of current assets. Dr. Alaknanda Lonare  The two key decision points in working capital management are:  Level of investment in current assets  Financing of current assets. 9 GOALS OF FINANCIAL MANAGEMENT  Profit maximization:  Profit is a positive and fruitful difference between revenue and expenses, over a period of time. Dr. Alaknanda Lonare  Shareholder’s Wealth Maximization:  Maximizing NPV of a course of action to shareholders.  Alternative Motives:  Maximization of ROE  Maximization of EPS  Management of Reserves for growth and expansion 10 EVOLUTION OF FINANCIAL MANAGEMENT  The Traditional Phase  The Transitional Phase Dr. Alaknanda Lonare  The Modern Phase 11 AIMS OF FINANCE FUNCTION  Finance manager performs the following major functions: Dr. Alaknanda Lonare  Anticipation of Funds Needed  Acquire the Anticipated Funds  Allocation or Utilization of Funds  Increase Profitability  Maximizing Firm’s Value 12 FUNCTIONS OF FINANCE MANAGER  Treasurer:  The main concern of treasurer is mainly financing activities and investment activities. Dr. Alaknanda Lonare  Capital Budgeting, Portfolio Manager, Investment Banking, Fund Raising Manager, Credit Management.  Controller:  The function of controller are related to the management and control of assets.  Financial Accounting Manager, Cost Accounting Manager, Tax Manager, Financial Statement Preparation, Budget Preparation. 13 FORMS OF BUSINESS OWNERSHIP  Sole Proprietorship  Partnership  Limited Liability Partnership Dr. Alaknanda Lonare  Co-operative Society  The Company Form of Business Ownership  Government Company 14  Limited Liability Sole Private Limited Public Limited Co-operative Aspect Partnership Partnership Proprietorship Company Company Society (LLP) Minimum 2 2-200 members Minimum 7 Minimum 10 Ownership Single owner 2 to 50 partners partners (shareholders) members members Unlimited (except Limited to the Limited to Limited to Liability Unlimited for limited extent of Limited shareholding shareholding partners) contribution Requires Requires Registered under Registered under registration under registration under Formation Simple, low cost Moderately simple Cooperative LLP Act, 2008 Companies Act, Companies Act, Dr. Alaknanda Lonare Societies Act 2013 2013 Not distinct from Not distinct from Separate legal Separate legal Separate legal Separate legal Legal Status owner partners entity entity entity entity Compliance Minimal Low to moderate Moderate High Very high Moderate Managed by Full control with Shared among Partners as per Managed by Managed Control directors and owner partners agreement directors democratically board Taxed as Taxed as a Taxed as a Taxed as a co- Taxation Taxed as firm Taxed as LLP individual company company operative society Owner retains all Shared as per Shared as per Distributed as Distributed as Distributed among Profit Sharing profits agreement agreement dividends dividends members May dissolve upon Dissolves with Perpetual Perpetual Perpetual Depends on Continuity partner's owner's incapacity succession succession succession member continuity incapacity Limited to Limited to Funded by Limited to owner's Easier access to Easy access to Investment partners' partners' members' 15 resources funding public funding contributions contributions contributions Local shops, Law firms, small Startups, Family businesses, Listed companies Housing societies, Examples freelancers businesses consulting firms SMEs like Tata Steel credit unions IDENTIFY THE PERSON??? Dr. Alaknanda Lonare 16 AGENCY PROBLEM  In company (public ltd) form of business organization, shareholders (equity) are the owners of the company. They may be in crores and they spread out through the country, (or some cases through the world). Dr. Alaknanda Lonare  Due to this they cannot control or manage the company. They elect board of directors (BoDs) as their representative or agent and assign the responsibility to the management.  Once BoDs are elected the actual power of shareholders is restricted, except in certain companies where the shareholders are also the directors. 17  If they want to know the future prospects of their company they can collect from the annual report, accounts, stock brokers, journals, and daily newspapers. In this circumstances, the (BoDs) management act in Dr. Alaknanda Lonare  the interest of the shareholders or they may try to achieve their personal goals at the cost of the shareholders.  Conflict of interest between the Principle and Agent causes agency problems.  To resolve such agency problems monitoring and 18 control mechanisms become imperative. HOW TO OVERCOME AGENCY PROBLEM  Connecting pay to the profit earned  Rewarding managers with shares Dr. Alaknanda Lonare  Direct intervention by owners  Threat of firing  Threat of takeover  Readings  https://www.forbesindia.com/article/iim- calcutta/governance-conflicts-in-companies-how- 19 structural-overhaul-can-help/81785/1