Lesson 1: Overview of Financial Management PDF

I. Overview of Financial Management LEARNING OBJECTIVES 1. Describe what Finance is 2. Explain the subfield of Finance 3. Explain the concept, objective and significance of Financial Management 4. Describe the traditional and modern scope of Financial Management  What is Finance? FINANCE i...

I. Overview of Financial Management LEARNING OBJECTIVES 1. Describe what Finance is 2. Explain the subfield of Finance 3. Explain the concept, objective and significance of Financial Management 4. Describe the traditional and modern scope of Financial Management  What is Finance? FINANCE is a body of facts, principles and theories relating to raising and using money by individuals, businesses, and governments. This concerns both financial management of profit-oriented business organizations particularly the corporate form of business. Finance involves the ways people and organizations raise and allocate capital, use monetary resources, and account for the risk involved.  The Subfield of Finance include the a. Study of corporate finance or financial management b. Study of investments c. Study of financial institutions and markets. Financial Management Three major functions: d. financial analysis and planning e. utilization of funds, and f. acquisition of funds from investors  Financial Management involves how to organize the firm in a manner that will attract capital how should capital be raised (i.e., debt or equity) which projects to fund how should the resources (long-term and short-term) be allocated and managed how much capital to retain for ongoing operations and new projects how to minimize taxations how to go about paying back capital providers  Study of Investments This involves methods and techniques for making appropriate decisions about what kind of securities to own (e.g., bonds or equity), which firms securities to buy or how to pay that investor back in the form that the investor wishes (e.g., the amount, timing and certainty of the promised cash flows)  Financial Institutions and Markets These institutions help facilitate the capital flows between investors and companies. It involves the firms initially acquiring capital and then investors’ ongoing securities trading. It also involves study of the functions of financial institutions like banks, insurance companies, investment houses, rates of interest; etc. FINANCIAL MANAGEMENT - referred to as managerial finance, corporate finance and business finance, is a decision-making process concerned with planning, acquiring and utilizing funds in a manner that achieves the firms’ desired goals. Investors and companies can help one another. If investors lend or invest their capital to companies, then companies can use this capital to fund expansion projects. Objective of Financial Management The goal of financial management is to make money and add value for the owners. The financial manager in a business enterprise must make decision for the owners of the firm. He must act in the owner’s or shareholders’ best interest by making decisions that increase the value of the firm or value of the equity share.  Significance of Financial Management The importance of financial management is known for the following aspects:  Applicability – the principles of finance are applicable wherever there is cash flow. The concept of cash flow is one of the central elements of financial analysis, planning, control and resource allocation decisions. Cash flow is important because the financial health of the firm depends on its ability to generate sufficient amounts of cash to pay its employees, suppliers, creditors and owners. Financial management is equally applicable to all forms of business like sole proprietorship,  Significance of Financial Management  Chances of Failure – a firm having latest technology, sophisticated machinery, high caliber marketing and technical experts and so forth may still fail unless its finances are managed on sound principles of financial management. The strength of business lies in its financial discipline. Therefore, finance function is treated as primordial which enables the other functions like production, marketing,  Significance of Financial Management  Return on Investments Anybody who invests his money will expect to earn a reasonable return on his investment. The owner of the business try to maximize their wealth. Financial management studies the risk-return perception of the owners and the time value of money.  Scope of Financial Management Traditionally, financial management is primarily concern with acquisition, financing and management of assets of the business concern in order to maximize the wealth of th firm for its owners. The basic responsibility of the Finance Manager is to acquire funds needed by the firm and investing those funds in profitable ventures that will maximize  Scope of Financial Management Financial Management looks into the following: Functions of Financial Manager 1. Procurement of short-term as well as long-term funds from financial institutions. 2. Mobilization of funds through financial instruments such as equity shares, preference shares, debentures, bonds, notes, and so forth. 3. Compliance with legal and regulatory  Scope of Financial Management In view of modern approach, the Finance Manager is expected to analyze the business firm and determine the following: a. The total funds requirements of the firm b. The assets or resources to be acquired and c. The best pattern of financing the assets  Summary: Finance is a body of facts, principles and theories relating to raising and using money by individuals, businesses, and governments. Subfield of Finance are the ff: a. Study of corporate finance or financial management b. Study of investments c. Study of financial institutions and markets. Three Major Functions of Financial Management a. financial analysis and planning b. utilization of funds, and c. acquisition of funds from investors Financial Management involves decisions on: a. How to organize the firm, that will attract capital b. How should capital be raised c. Which projects to fund d. How should the resources be allocated e. How much capital to retain for ongoing operations f. How to minimize taxation g. How to go about paying back capital providers Objective of Financial Management: “The goal of financial management is to maximize the current value of ownership in a business firm.” Significance of Financial Management ASPECTS: 1. Applicability 2. Chances of Failure 3. Return on Investment Scope of Financial Management: 1. Procurement of short-term as well as long-term funds from financial institutions. 2. Mobilization of funds through financial instruments such as equity shares, preference shares, debentures, bonds, notes, and so forth. 3. Compliance with legal and regulatory provisions relating to funds procurement, use and distribution as well as coordination of the finance Finance Manager is expected to analyze the business firm and determine the following: a. The total funds requirements of the firm b. The assets or resources to be acquired and c. The best pattern of financing the assets