Nature of Financial Management

Financial Management, also referred to as managerial finance, corporate finance, and business finance,

a decision making process concerned with planning, acquiring and utilizing funds in a manner that

achieves the firm's desired goals.

The Goal of Financial Management

The goal of the financial manager is to maximize the current value per share of the existing stock or
ownership in a business firm.

SHARED PROSPERITY: NEW, SHARED PROSPERITY: NEW, SHARED PROSPERITY: NEW, BROADER GOAL
OF BUSINESSES BROADER GOAL OF BUSINESSES

Business Groups' Response to Inequality and the Pandemic

It has been said that the ultimate end of the corporate governance advocacy It has been said that the
ultimate end of the corporate governance advocacy is sharing the prosperity; that is, to help companies
create wealth ethically is sharing the prosperity; that is, to help companies create wealth ethically and to
share that wealth, like good stewards, to eradicate poverty. and to share that wealth, like good
stewards, to eradicate poverty.

Financial Management and Public Responsibility

The primary goal for managers of publicly owned companies implies that decisions should be made to
maximize the long-run value of the firm's equity shares.

Scope of Financial Management

Traditionally, financial management is primarily concerned with acquisition, financing ang management
of asset of business concern in order to maximize the wealth of the firm of its owners.

FUNCTIONS

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 function with the accounting function

Types of Financial Decisions

3 major types of decisions

 Investment Decision - concerned with how the firm’s funds are invested in different
assets (e.g., short term & long term investment decisions)
 Financing Decision - concerned with the amount of finance to be raised from various
long term sources of funds like, equity shares, preference shares, debentures, bank
loans etc. In other words, it is a decision on the ‘capital structure’ of the company.
  Dividend Decision - concerned with deciding how much of the profit earned by the
company should be distributed among shareholders (dividend) and how much should
be retained for the future contingencies (retained earnings) is called dividend decision

Aim: Maximize the shreholder's wealth through maximization of the firm's wealth

Significance of Financial Management

Broad Applicability - The principles of finance is applicable wherever there is cash flow.

Reduction of Chances of Failure - The strength of business lies in its financial discipline.

Measurement of Return on Investment - It considers the amount of cash flows expected to be

generated for the benefit of owners, the timing of these cash flows and the risk attached to
these cash flows.

Relationship Between Financial Management and Accounting

 Accounting
Accounting relates to booking of the historical transaction of an organization
and it leads to preparation of financial status of the company stating that asset and
what liabilities are held by the entity as on the day when relevant period like a year ends
i.e. Balance Sheet.
 Financial Management
Financial management uses the financial reports that are produced by
accounting in order to manage the financial health of the organisation. Financial
management assesses the financial health of the organisation.
Financial statements help managers to make business decisions involving the
best use of cash, the attainment of efficient operations, the optimal allocation of funds
among assets, and the effective
financing of investment and operations. The interpretation of financial statements is
achieved partly by using financial ratios, pro forma and cash flow statement.

Relationship Between Financial Management and Economics

 Economics
Economics is a social science that studies the broader management of goods
and services, including their production and consumption, and also the factors affecting
them
Micro Economics - Microeconomics studies the behavior of individual
households and firms in making decisions on the allocation of limited resources.
Macro Economics - Macroeconomics is the study of economies on the national,
regional or global scale. It deals with the issues such as growth, inflation, and
unemployment
 Financial Management
Financial management uses the financial reports that are produced by
accounting in order to manage the financial health of the organisation. Financial
 management assesses the financial health of the organisation. For example, economic
theory teaches us to seek the best allocation of resources. To this end, financial
managers are given the responsibility to find the best and least expensive sources of
funds and to invest these funds into the best and most efficient mix of assets. In doing
so, they try to find the mix of available resources that will achieve the highest return at
the least risk within the confines of an expected change in the economic climate.

LESSON 2: RELATIONSHIP OF FINANCIAL OBJECTIVES TO

ORGANIZATIONALSTRATEGY AND OTHER
ORGANIZATIONAL OBJECTIVES

Financial Accountant
Goal: Faithful representation
Financial Manager
Goal: Maximization of the owner’s wealth

-Acts as an AGENT of the company

Long-Range Planning / Strategic Planning

- Usually consist of general statement or a series

of statement in general statements

Significance of Objective Setting

- It is an important phase in the business enterprise since upon correct objectives setting will the
entire structure of the strategies, policies, and plans of a company rest.
Need for Objective Setting
• It provides a yardstick to measure performance
• It serves as a motivating force
• It helps to pursue organization's vision and mission
• It provides basis for decision making.

Strategic Financial Management

 Strategic financial management is the study of finance with a long term view considering
the strategic goals of the enterprise.
 Strategic financial management is about the management of the finances of any company
in such a manner that it enables the meeting of the long-term goals.
STRATEGIC FINANCIAL PLANNING

 Strategic financial planning involves financial planning, financial forecasting, provision of

finance and formulation of finance policies which should lead the firm's survival and success.
 The strategic financial planning should enable the firm to judicious allocation of funds,
capitalization of relative strengths, mitigation of weaknesses, early identification of shifts in
environment, counter possible actions of competitor, reduction in financing costs, effective use of
funds deployed, timely estimation of funds requirement, identification of business and financial
risk, and so forth.
 The strategic planning should concentrate on multidimensional objectives like profitability,
expansion growth, survival, leadership, business success, positioning of the firm, reaching global
markets and brand positioning.
 Historical financial statements provide insight into the success of a company's strategic plan and
are an important input of the planning process.
 These statements highlight portions of the strategic plan that proved profitable and, thus, warrant
additional capital investment.
 They also reveal areas that are less effective and provide information to help managers develop
remedial action

Short-Term and Long-Term Financial Objectives

of a Business Organizations
SHORT AND MEDIUM-TERM
 Maximization of return on capital employed or return on investment
 Growth in earnings per share and price/earnings ratio through maximization of net income or profit
and adoption of optimum level of leverage
 Minimization of finance charges
 Efficient procurement and utilization of short-term, medium-term, and long-term funds

LONG-TERM
 Growth in the market value of the equity shares through maximization of the firm's market share and
sustained growth in dividend to shareholders
 Survival and sustained growth of the firm

Primary and Secondary Financial Objectives

✗ The owner's perspective which holds that the only appropriate goal is to maximize shareholder or
owner's wealth, and;
✗ The stakeholders' perspective which emphasizes social responsibility over profitability (stakeholders
include not only the owners and shareholders, but also include the business's
customers, employees and local commitments).
Responsibilities to Achieve the Financial Objectives
✗ INVESTING
 Because the firm has numerous alternative uses of funds, the financial manager strives to allocate
funds wisely within firm. This task requires both the mix and type of assets to hold.
 The investment decisions should aim at investments in assets only when they are expected to earn
a return greater than a minimum acceptable return which is also called as hurdle rate.

✗ FINANCING
 The finance manager is concerned with the ways in which the firm obtains and manages the
financing it needs to support its investments.
 The financing objective asserts that the mix of debt and equity chosen to finance investments
should *maximize the value of investments made.

✗ OPERATING
 The term working capital refers to a firm short-term asset (i... inventory, receivables, cash, and
short-term investments) and its short-temp liabilities (i.e., accounts payable, short-term loans).
Managing the firm's working capital is a day-to-day responsibility that ensures that the firm has
sufficient resources to continue its operations and avoid costly interruptions.

LESSON 3: FUNCTIONS OF FINANCIAL MANAGEMENT

RELATIONSHIP WITH OTHER KEY FUNCTIONAL

MANAGERS IN THE ORGANIZATION
• Since finance is concerned with all of the monetary aspects of a business, the financial manager must
interact with other managers to ascertain the goals that must be met, when and how to meet them. Thus,
finance is an integral part of total management and cuts across functional boundaries.

Corporate Governance
• Corporate governance refers to the rules, processes, and laws by which companies are operated,
controlled, and regulated. It defines the rights and responsibilities of the corporate participants such as the
shareholders, board of directors, officers and managers, and other stakeholders, as well as the rules and
procedures for making corporate decisions

JOBS IN FINANCE
• Finance prepares students for jobs in banking, investments, insurance, corporations and the government.
• Accounting students need to know finance, marketing, management and human resources; they also
need to understand finance, for it affects decisions in all those areas.
• It is also worth noting that finance is important to individuals regardless of their jobs.

ETHICAL BEHAVIOR
• Ethics are of primary importance in any practice of finance.
• It refers to a set of rules that describes what is acceptable conduct in society.
• Knowing the difference between right and wrong and choosing what is right is the foundation for ethical
decision making.
• Violations of these standards in finance involve a variety of actions: “creative accounting,” earnings
management, misleading financial forecasts, insider trading, fraud, excessive executive compensation,
options backdating, bribery, and kickbacks.