Module 1 Fin Man PDF

Welcome to the Kolehiyo ng Lungsod ng Dasmariñas MARY JANE S. LEGASPI Introduction to Financial Management Introduction to Financial Management Introduction to Financial Management Introduction to Financial Management Introduction to finance 3 A’s of Financi...

Welcome to the Kolehiyo ng Lungsod ng Dasmariñas MARY JANE S. LEGASPI Introduction to Financial Management Introduction to Financial Management Introduction to Financial Management Introduction to Financial Management Introduction to finance 3 A’s of Financial Management Objectives of financial management Profit maximization Wealth maximization Changing role of finance managers Scope of Financial Management Organization of finance function Approaches to financial Management  Finance Finance is the life blood of business. Finance is an art & science of managing money. Finance is the set of activities dealing with the management of funds. More specifically, it is the decision of collection and use of funds. DEFINITION OF FINANCE According to Khan and Jain, “Finance is the art and science of managing money”. According to Oxford dictionary, the word ‘finance’ connotes ‘management of money’. Webster’s Ninth New Collegiate Dictionary defines finance as “the Science on study of the management of funds and the management of fund as the system that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities”.  Financial Management It concerned with the ( 3 A’s of Financial Management) Anticipation of financial requirements(estimation of financial needs of a company Acquisition of fund (gathering funds from different sources Allocation of funds (use of funds to buy fixed and current assets) Financial Management Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise. Definitions of Financial Management According to S.C. Kuchal “Financial Management deals with procurement of funds and their effective utilization in the business”. According to Howard and Upton Financial management is defined "as an application of general management principles to the area of financial decision-making”. Objectives of Financial Management To ensure regular and adequate supply of funds to the concern. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost. To ensure safety of investment, i.e., funds should be invested in safe ventures so that adequate rate of return can be achieved. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital. Objectives of Financial Management To ensure profit maximization To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders. It aims at maximization of wealth of the shareholders Profit maximization as the main objective of business Profit earning is the main aim of every economic activity. A business being an economic institution must earn profit to cover its costs and provide funds for growth. No business activity can survive without earning profit. Profit is a measure of efficiency of a business enterprise. Profits also serve as protection against risks which cannot be ensured. The accumulated profits enable a business to face risks like fall in prices, competition from other units, adverse government policies etc. Thus profit maximization is considered as the main objective of business Wealth maximization as an important objective of Financial Management Wealth maximization has been accepted by the finance managers, because it overcomes the limitations of profit maximization. Wealth maximization means maximizing the net wealth of the company’s share holders. Wealth maximization is possible only when the company pursues policies that would increase the market value of shares of the company. Functions of Financial Management/role of finance managers Estimation of capital requirements: A finance manager has to make estimation with respect to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise. Determination of capital composition: Once the estimations have been made, the capital structure has to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties. Functions of Financial Management/role of finance managers Choice of sources of funds: For additional funds to be procured, a company has many choices like- Issue of shares, debentures, loans from banks and financial institutions, public deposits etc. Choice of the source will depend on relative merits and demerits of each source and period of financing. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible. Functions of Financial Management/role of finance managers Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done in two ways: (a) Dividend declaration - It includes identifying the rate of dividends to be declared and paid to share holders (b) Retained earnings - The volume has to be decided which will depend upon expansional, innovational, diversification plans of the company. Functions of Financial Management/role of finance managers Management of cash: Finance manager has to make decisions with respect to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintenance of enough stock, purchase of raw materials, etc. Functions of Financial Management/role of finance managers Financial controls: The finance manager should not only plan, procure and utilize the funds but also exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, budgetary control etc. Scope of FM - Financial Decisions Financial decisions refers to the decisions concerning financial matters of a business concern. There are many kinds of financial management decisions that the firm makes in pursuit of maximizing shareholder’s wealth, viz, kind of assets to be acquired, pattern of capitalization, distribution of firm’s income Types of financial decisions/scope of Financial Management Investment decisions Financing decisions Dividend decisions Investment decisions Investment decisions pertain to the determination of total amount of assets to be held in the firm. It is the most important decision since funds involve cost and are available in a limited quantity. Its proper utilization is necessary to achieve the goal of wealth maximization Investment decisions can be classified into two categories Long term investment decisions Short term investment Long term investment decisions The long term investment decision is referred to as the capital budgeting decisions. Capital budgeting is the process of making investment decisions in capital expenditure. These are expenditure, the benefit of which is expected to be received over a long period of time. The finance manager has to assess the profitability of various projects before committing funds. The investment proposal should be evaluated in terms of profitability, cost involved and risk associated with the project Short term investment decisions They are also called as working capital decisions. It related to allocation of funds towards current assets. Short term decisions ensure sound liquidity position Financing decisions The financial manager must decide the mode of rising the funds to meet the firm’s investment requirement. He has to select such sources which will minimize the cost of capital and maximize the profitability. The debt equity ratio should be fixed in such a that it helps in maximizing profitability of the concern. Raising of more debt will involve fixed interest. It may help in increasing the return on equity but will also enhance risk. Therefore a financial manager has to strike a balance between debt and equity Dividend decision The term dividend decision refers to quantum of profits to be distributed among shareholders and the quantum of profits to be retained earnings. The higher rate of dividend may increase the market price of the shares and thus maximize the wealth of the shareholders. Organization of Finance Function Board of Directors President VP: Sales VP: Finance VP: Operations Treasurer Controller Credit Manager Cost Accounting Inventory Financial Manager Accounting Capital Budgeting Tax Department Director From the chart it is clear that treasurer and financial controller work under VP finance. VP finance is responsible to the president for his actions. Treasurer performs the functions of procurement of essential funds, their utilization, investment, banking, cash management credit management, dividend distribution, pension, management etc. Financial, controller is responsible for general accounting, cost accounting, auditing, budget, reporting and preparing financial statement etc.  Approaches to FM Traditional Modern approach approach Traditional Approach Traditional approach is the initial stage of financial management, which was followed, in the early part of during the year 1920 to 1950. This approach is based on the past experience and the traditionally accepted methods. Main part of the traditional approach is rising of funds for the business concern. Traditional approach consists of the following important area.  Arrangement of funds from lending body. Arrangement of funds through various financial instruments. Finding out the various sources of funds. It ignored effective utilization of funds Modern Approach Since 1950s, the approach and utility of financial management has started changing in a revolutionary manner. Financial management is considered as vital and an integral part of overall management. The emphasis of Financial Management has been shifted from raising of funds to the effective and judicious utilization of funds. The modern approach is analytical way of looking into the financial problems of the firm. Key Functions of Financial Management: Financial Planning: Determining capital requirements based on organizational goals. Identifying sources of funding. Establishing a financial structure that balances equity and debt. Key Functions of Financial Management: Budgeting: Allocating financial resources to various departments or projects. Monitoring and controlling spending to ensure it aligns with the budget. Key Functions of Financial Management: Financial Analysis and Control: Analyzing financial statements to assess the financial health of the organization. Implementing financial controls to ensure assets are used efficiently. Key Functions of Financial Management: Investment Decision-Making: Evaluating potential investment opportunities. Deciding where to allocate resources to maximize returns. Key Functions of Financial Management: Funding and Capital Structure: Deciding the mix of debt and equity financing. Managing relationships with banks, investors, and other stakeholders. Key Functions of Financial Management: Risk Management: Identifying financial risks (e.g., market risk, credit risk). Implementing strategies to mitigate these risks. Key Functions of Financial Management: Dividend Decision: Determining the portion of profits to be distributed to shareholders. Deciding on the frequency and amount of dividends. Key Functions of Financial Management: Working Capital Management: Managing short-term assets and liabilities. Ensuring the organization has sufficient liquidity to meet its obligations.  REFERENCES MAIN BOOK Fundamentals of Financial Management by Eugene F. Brigham & Joel F. Houston, 12th Edition OTHER BOOKS Gitman, L. J., & Zutter, C. J. (2015). Principles of Managerial Finance. Eddie McLaney(2009). Business Finance – Theory & Practice Prasanna Chandra : Financial Management, Tata McGraw Hill, New Delhi.  MODEL QUESTIONS 1. What is finance? 2. Define financial Management. 2. Explain the objectives of financial management. 3. Discuss the functions of financial management. 4. Critically evaluate various approaches to the financial management. 5. Explain the scope of financial management. 6. Elucidate different types of financial decisions 7. Discuss the role of financial manager. 8. Explain the Organization of finance function