MODULE 1 : INTRODUCTION TO FINANCIAL MANAGEMENT

What is Financial Management?

- “Is the application of the planning and control functions to the finance function.” Howard and Uptown
- “Financial Management is concerned with the procurement of funds and their effective utilization in business.” M C Kuchhal
- “Is the process of putting the available funds to the best advantage from the long-term point of view of the business objectives.”
Richard A. Brealey
- It is a process that systematically provides the necessary and important financial information helping a business produce and
distribute goods and services in a way that will make the most profit.
- It also gives feedback about how well the organization is doing or operating.

NATURE OF FINANCIAL MANAGEMENT

1. Estimates Capital Requirements
Financial management facilitates in anticipation of funds needed for running the business. It gives estimation on working and fixed
capital requirements for carrying out all business activities.
It involves preparation of a budget of all possible expenses and revenues for a particular time period on the basis of which capital
requirements are determined.
2. Decides Capital Structure
Deciding optimum capital structure for an organization is necessary for attaining efficiency and earning better profits. It involves
determining and deciding the proper portion of different securities like common equity, preferred equity, and debt. There should be
proper balance between debt and equity to minimize the cost of capital.
3. Select Sources of Fund
Choosing the source of funds is one of the crucial decisions for every firm to make. There are various possible sources available for
raising funds like shares, bonds, debentures, venture capital, financial institutions, retained earnings, owner investment, etc. Every
business must properly analyze different sources of funds available and choose one which offers lower interest, cheapest and
involves minimal risk.
4. Selects Investment Pattern
Once funds are obtained it is important to allocate them among profitable investment avenues. The investment proposal should be
properly planned and analyzed regarding its safety, profitability, and liquidity. Before investing any amount in it all risk and return
associated with it should be properly evaluated.
5. Raises Shareholders Value
Financial management works towards raising the overall shareholders value. It intends at increasing the amount of return to
shareholders by reducing the cost of operations and increasing the profits. The finance manager concentrates on raising cheap funds
from different sources and invest them in the most profitable avenues.
6. Management of Cash
Financial management monitors all movement of the fund in an organization. Finance managers supervise all cash movements
through proper accounting of all cash inflows and outflows. They ensure that there is no situation like deficiency or surplus of cash in
an organization.
7. Apply Financial Controls
Implying financial controls in business is a beneficial role made by financial management. It helps in keeping and ensuring the
company actual cost of operation within the limit and earning the expected profits. There are various processes involved in this like
developing certain standards for business in advance, comparing the actual cost or performance with pre-established standards, and
taking all required remedial measures.
OBJECTIVES OF FINANCIAL MANAGEMENT
The financial management is generally concerned with procurement or acquisition, allocation and control of financial resources of a
concern. The objectives can be:
1. To ensure regular and enough supply of funds to the concern.
2. To ensure enough returns to the shareholders which will depend upon the earning capacity, market price of the share,
expectations of the shareholders.
3. To ensure maximum funds utilization. Once the funds are procured or obtained, they should be utilized in maximum possible way
at least cost.
4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that expected adequate rate of return can be
achieved.
5. To plan a sound capital structure. There should be sound and fair composition /combination of capital so that a balance is
maintained between debt and equity capital.

SCOPE OF FINANCIAL MANAGEMENT

1. Investment Decision / Capital Budgeting
Financial management is involved in managing or handling all investment decisions of an organization.
Investment ordinarily means utilization of money for profits or returns. This could be done by creating physical assets with the
money and carrying on business or purchasing shares or debentures of a company. Managers are tasked for deciding how available
funds should be invested in fixed or current assets to earn maximum returns.
2. Working Capital Decision
Making working capital decisions properly is another important scope of financial management. These typical decisions are
concerned with investment in current assets or current liabilities. Working capital decisions revolve around working capital and
short-term financing. Current assets include cash, inventories, receivables, short-term securities, etc. whereas current liabilities
include creditors, bank overdraft, bills payable.
3. Financing Decision
Financing decisions involves deciding how the required funds should be raised from available long term or short term sources. A
financial manager is required to form a proper finance mix or optimum capital structure of the firm to raise its value. They are
required to maintain a proper balance between equity and debt to provide maximum returns.
4. Dividend Decision
Financial management involves taking all dividend decisions of the company. These decisions involve developing a proper dividend
policy regarding the distribution or retaining of company profits. The finance manager should decide an optimum dividend payout
ratio out of available profit. He should consider all expansion and growth opportunities available to the organization and should avail
them by retaining a proper amount of profit or return to shareholders.
Meaning, the financial manager must decide whether the firm should distribute all profits or retain them or distribute a portion and
retain the balance.
5. Ensures Liquidity
Maintaining proper liquidity in a firm is another important role played by financial management. The finance manager ensures that
there should be a regular supply of funds in an organization. A financial manager monitors all cash-inflows and cash-outflows and
avoids any underflow or overflow like situations. Ensuring the optimum level of liquidity in an organization is one of the significant
scopes of financial management.
Liquidity is an important concept in financial management and is defined as ability of the business to meet its short-term obligations.
It shows the quickness with which a business/company can convert its assets into cash to pay
what it owes in the near future. According to Ezra Soloman, it measures a company’s ability to meet expected as well as unexpected
requirements of cash to expand its assets, reduce its liabilities and cover up any operating losses. Liquidity, as a decision criterion, is
widely used in financial management. It is used for managing liquid resources or current assets or near cash assets so as to enhance
the effectiveness with which they are utilized with a view to minimizing costs. It also focuses attention on the availability of funds.
Enhancement of liquidity enables a corporate body to have more funds from the market.
6. Profit Management
Financial management aims at increasing the profit of an organization. It works towards reducing the cost of various activities
through proper monitoring and setting up proper price policy. The finance manager measures the cost of capital and selects cheap
sources of capital by properly analyzing different sources available.

TYPES OF FINANCIAL DECISION

1. Investment Decision:
A financial decision which is concerned with how the organizational funds are invested in different assets is known as investment
decision. Investment decision can be long-term or short-term.
A long-term investment decision is known as capital budgeting decisions which involve huge amounts of long-term investments and
are irreversible except at a huge cost. Short-term investment decisions are known as working capital decisions, which affect day to
day working of a business. It includes the decisions about the levels of cash, inventory and receivables.
An unhealthy capital budgeting decision normally has the capacity to severely damage the financial fortune of a business.
An unhealthy working capital decision affects the liquidity and profitability of a business.
Investment decision is more important than the other two decisions. It starts with a determination of the total amount of assets
needed to be held by the firm. In other words, investment decision relates to choosing of assets, on which a firm will invest funds.

The required assets fall into two groups:

(i) Long-term Assets (or Fixed assets – plant & machinery land & buildings, etc.,) which involve huge investment and yield a return
over a period of time in future. Investment in long-term assets is commonly known as “capital budgeting”. It may be defined as the
entity’s decision to invest its current funds most efficiently in fixed assets with an expected flow of benefits over a series of years.
(ii) Short-term Assets (or Current assets – raw materials, work-in-process, finished goods, debtors, cash, etc.,) that can be converted
into cash within a financial year without diminution in value. Investment in current assets is popularly called as “working capital
management”. It relates to the managing of current assets.
It is a significant decision of a firm, as short-survival is the prerequisite for long-term success. Ideally, Firm should not maintain more
or less assets. More assets reduce return and there will be no risk, but having less assets is more risky and more profitable. Thus, the
main aspects of working capital management are the trade-off between risk and return.
Managing working capital involves two aspects. One is determining of the amount required for running of business and second is
financing these assets.

Investment decisions encompass wide and complex matters involving the following areas:
– Capital budgeting
– Cost of capital
– Measuring risk
– Management of liquidity and current assets
– Expansion and contraction involving business failure and re-organizations
– Buy or hire or lease an asset

2. Financing Decision:
A financial decision which is 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. is called financing decision. In other words, it is a decision a financial manager
has to make on the ‘capital structure’ of the firm.
Capital Structure Owner’s Fund + Borrowed Fund
Financial Risk
Is the risk of default on payment of periodical interest and repayment of capital on borrowed funds.
After estimating of the amount required and selecting of assets required to be purchased, the next financing decision comes into the
picture. Financial manager is concerned with makeup of the right-hand side of the balance sheet (Assets = Liabilities + Capital). It is
related to the financing mix or capital structure or leverage. Financial manager has to determine the proportion of debt and equity in
capital structure.
It should be on maximum finance mix, which maximizes shareholders’ wealth. A proper balance will have to be struck between risk
and return. Debt involves fixed cost (interest), which may help in increasing the return on equity but also increases risk. Raising of
funds by issue of equity shares is one permanent source, but the shareholders will expect higher rates of earnings.
1. Dividend Decision:
A financial decision which is concerned with deciding how much of the profit earned by the company shall be distributed among
shareholders (dividend) and how much shall be retained for the future contingencies (retained earnings) is called dividend decision.
Dividend is part of the profit which is distributed to shareholders. The decision regarding dividend should be taken keeping in view
the overall objective of maximizing shareholders’ wealth.
This is the third financial decision, which is associated to dividend policy. Dividend is a part of profits or income, which are available
for distribution to equity shareholders. Payment of dividends should be properly analyzed in relation to the financial decision of an
organization.
There are two options available in dealing with net profits of a firm:
A. Distribution of profits as dividends to the ordinary shareholders where there is no need of retention of earnings.
B. Retention of profits or earnings in the firm itself if they are required for financing of any business activity.
However, distribution of dividends or retaining should be determined in terms of its impact on the shareholders’ wealth. Financial
manager should determine the optimum dividend policy, which maximizes market value of the share thereby market value of the
firm. Considering the factors to be taken into account while determining dividends is another aspect of dividend policy.

SIGNIFICANCE OF FINANCIAL MANAGEMENT

Financial management provides pathways to attain goals and objectives of a firm. The main responsibility of a financial manager is to
measure organizational efficiency through proper allocation, acquisition and management.

The importance of financial management:

• It provides guidance in financial planning.

• It facilitates in acquiring funds from different sources.
• It helps in investing an appropriate amount of funds.
• It increases organizational efficiency.
• It reduces delay production.
• It cuts down financial costs.
• It reduces cost of fund.
• It ensures proper use of fund.
• It helps business firm to take financial decisions.
• It prepares guideline for earning maximum profits with minimum cost.
• It increases shareholders’ wealth.
• It can control the financial aspects of the business.
• It provides information through financial reporting.
• It makes the employees aware of saving funds.

Relationship between Financial Management, Accounting and Economics

Financial Management and Accounting

Accounting
- Is the measuring, processing, and recording of financial transactions of an organization. The process is to summarize, analyze, and
record such information to be reported to management, creditors, shareholders, investors, and the oversight officials or tax officials.
- The primary objective is reporting transactions.
Financial management
- It is about managing the organization’s economic activities efficiently to achieve financial objectives. It helps to manage the
finances and economic resources of the organization. It aids management in better decision-making.
- The key objective of financial management is to create wealth for the business and investors, generate cash, and earn good returns
at adequate risk by using the organizational resources efficiently.
They are the two separate functions where accounting requires reporting past financial transactions, whereas the other requires
planning about future transactions.

Financial Management and Economics

Economics
- Focuses on the creation, use, and transfer of commodities. Microeconomics specifically focuses on individuals and business
decisions. Macroeconomics focuses more on a broader view of the economy and government implications on said economy.
MODULE 2: RELATIONSHIP OF FINANCIAL OBJECTIVES TO ORGANIZATIONAL STRATEGY AND OTHER
ORGANIZATIONAL OBJECTIVES

STRATEGIC MANAGEMENT
- is defined as the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an
organization to achieve its objectives.
- As this definition implies, strategic management focuses on integrating management, marketing, finance/accounting,
production/operations, research and development, and information systems to achieve organizational success.
- The term strategic management is synonymously termed as strategic planning.
-Strategic Management is more often used in the business context, whereas strategic planning is often used in academia.
- Sometimes the term strategic management is used to refer to strategy formulation, implementation, and evaluation, while
strategic planning refers only to strategy formulation.
- The purpose of strategic management is to exploit and create new and different opportunities in the future long-range planning, in
contrast, tries to optimize for tomorrow the trends of today.

The strategic-management process consists of three stages:

1. Strategy formulation
- Strategy-formulation issues include deciding what new businesses to enter, what businesses to abandon, how to allocate
resources, whether to expand operations or diversify, whether to enter international markets, whether to merge or form a joint
venture, and how to avoid a hostile takeover.
- Because no such organization has unlimited resources, strategists must decide which alternative strategies will the firm benefit
most.
- Strategy-formulation decisions commit an organization to specific products, markets, resources, and technologies over an
extended period of time. Strategies basically determine long-term competitive advantages.

Strategy formulation includes activities such as:

1. Developing a vision and mission

2. Identifying an organization’s external opportunities and threats
3. Determining internal strengths and weaknesses
4. Establishing long-term objectives
5. Generating alternative strategies
6. Choosing particular strategies to pursue

2. Strategy implementation

- Requires a firm to establish yearly objectives, devise policies, motivate employees, and allocate resources so that formulated
strategies can be executed.
- It is called the “action stage” of strategic management.
- To implementing strategy means mobilizing employees and managers to put formulated strategies into action.
- This is often considered to be the most difficult stage in strategic management.
- It requires personal discipline, commitment, and sacrifice.
- Successful strategy implementation hinges upon managers’ ability to motivate employees, which is more an art than a science.
- Strategies formulated but not implemented serve no useful purpose.

This process includes:

1. Developing a strategy-supportive culture
2. Creating an effective organizational structure
3. Redirecting marketing efforts
4. Preparing budgets
5. Developing and utilizing information systems
6. Linking employee compensation to organizational performance
3. Strategy evaluation

- is the final stage in strategic management.

- Managers desperately has to know when particular strategies are not working well.
- This stage is the primary means for obtaining this information.
- All strategies are subject to future modification because external and internal factors are constantly changing.

Three fundamental strategy-evaluation activities:

(1) Reviewing external and internal factors that are the bases for current strategies
(2) Measuring performance
(3) Taking corrective actions.

Strategy evaluation has to be done because today's success does not guarantee of the organization's success
in the future. Success always creates new and different problems; complacent organizations often experience demise.

Strategists
- Strategists are the individuals who are most responsible for the organizational success or failure.

Strategists have various job titles such as:

1. Chief Executive Officer

2. President
3. Owner
4. Chair of the Board
5. Executive Director
6. Chancellor
7. Dean
8. Entrepreneur

- Jay Conger, professor of organizational behavior at the London Business School and author of Building Leaders, says, “All strategists
have to be chief learning officers. We are in an extended period of change. If our leaders aren’t highly adaptive and great models
during this period, then our companies won’t adapt either, because ultimately leadership is about being a role model.”

Strategists Jobs:
1. Help an organization gather, analyze, and organize information.
2. They track industry and competitive trends
3. Develop forecasting models and scenario analyses
4. Evaluate corporate and divisional performance
5. Spot emerging market opportunities
6. Identify business threats
7. Develop creative action plans

Strategic planners usually serve in a support or staff role. Usually found in higher levels of management they typically have
considerable authority for decision making in the organization. The CEO is the most visible and critical strategic manager. Any
manager who has responsibility over a unit or division, responsibility for profit and loss outcomes, or direct authority over a major
piece of the business is a strategic manager (strategist).

Vision
- Statement that answers the question “What do we want to become?”
- Developing a vision statement is most often considered the first step in strategic planning.
- Many vision statements are a single sentence.

Example of Vision Statements:

1. The P. J. Lhuillier Group of Companies seeks to become the best and preferred micro financial and
business - business solutions partner with a heart. (P. J. Lhuillier Group)
2. To be the firm of choice for clients and top-quality professionals. (BDO)
Mission
- statement identifies the scope of a firm’s operations in product and market terms.”
- It addresses the basic question that faces all strategists: “What is our business?”
- A clear mission statement describes the values and priorities of a business organization.
- Developing a mission statement convince strategists to think about the nature and scope of present operations and to assess the
potential attractiveness of future markets and activities.
- It broadly charts the future direction of an organization.
- It is a constant reminder to its employees of why the organization exists and what the founders envisioned when they put
their fame and fortune at risk to breathe life into their dreams.

Example of Mission Statements:

1. To enable more Filipinos to have access to financial solutions. (P. J. Lhuillier Group)
2. To provide exceptional, quality service to our clients and an environment where our people can pursue a challenging, fulfilling and
rewarding career. (BDO)

Objectives

- is defined as specific results that an organization seeks to achieve in pursuing its basic mission.
- These are the aims that organizations strive to achieve.
- They often known as organizational objectives.
- Short-term objective means less than a year, Long-term means more than one year.

Why objectives are essential for an organizational success:

1. They state direction

2. Aid in evaluation
3. Create synergy
4. Reveal priorities
5. Focus coordination
6. Provide a basis for effective planning, organizing, motivating and controlling activities.

Examples of Objectives:

1. Target markets that will provide us with the greatest market penetration.
2. Offer products and service packages that are priced appropriately for each segment of our market.
3. Provide our customers with the variety of brand and products.
4. Our store will also be-well design and located and our product well-advertised.

- Objectives should be challenging, measurable or quantative, consistent, realistic or reasonable, consistent or time-bounded, clear
and prioritized.
- They should be established at the corporate, divisional, and functional levels in a large organization.

Annual objectives should be stated in terms of the accomplishments of the following:

1. Management
2. Marketing
3. Finance/Accounting
4. Production/0perations
5. Research and Development
6. Management Information systems (MIS) accomplishments.
7. Human Resources
- A set of annual objectives is needed for each long-term objective.
- Annual objectives are especially important in strategy implementation
- Long-term objectives are particularly important in strategy formulation.
- Annual objectives represent the basis for allocating resources.

Strategies

- Are the means by which long-term objectives will be achieved.

Sample of Business strategies:

1. Geographic Expansion
2. Diversification
3. Acquisition
4. Product Development
5. Market Penetration
6. Retrenchment
7. Divestiture
8. Liquidation
9. Joint ventures

- Strategies are potential actions that require top management decisions and large amounts of the firm’s resources.

Three important questions to answer in developing a strategic plan:

1. Where are we now?

2. Where do we want to go?
3. How are we going to get there?

- Identifying an organization’s existing vision, mission, objectives, and strategies is the logical starting point for strategic
management because a firm’s present situation and condition may preclude certain strategies and may even dictate a particular
course of action.
- Every organization has a vision, mission, objectives, and strategy, even if these elements are not consciously designed, written, or
communicated.
- The answer to where an organization is going can be determined largely by where the organization has been.
- The strategic-management process is dynamic and continuous.

Benefits of Strategic Management

1. It allows for identification, prioritization, and exploitation of opportunities.

2. It represents a framework for improved coordination and control of activities.
3. It minimizes the effects of adverse conditions and changes.
4. It allows major decisions to better support established objectives.
5. It allows more effective allocation of time and resources to identified opportunities.
6. It allows fewer resources and less time to be devoted to correcting erroneous decisions.
7. It creates a framework for internal communication among personnel.
8. It provides a basis for clarifying individual responsibilities.
9. It encourages forward thinking.
10. It provides a cooperative, integrated, and enthusiastic approach to tackling problems and opportunities.
11. It encourages a favorable attitude toward change.

The financial objectives

- These are objectives that most people think of for companies and they involve profits, costs etc.
- Financial objectives are created to help firms make projections for profits, shape budgets and measure costs for their
organization.
- Allow a company to focus on the monetary needs of their organization with specific steps to increase or decrease costs, re-evaluate
spending, analyze revenue trends and plan for financial growth.
Financial Objective Examples:

1. To increase turnover to over P5 million in the next 10 years

2. To increase total revenue by 10% annually for the next 5 years
3. To decrease marketing expenses by 5% annually for the next 5 years
4. To increase net profit by 15% annually

- The first two examples are associated to financial growth, since the objectives are concerned with increasing some financial area of
the organization, like turnover or revenue.
- The second two relate to financial efficiency, regarding controlling the costs, which in turn, will have a positive effect on profits.
- Although the objectives are long-term, some financial objectives stipulate an annual targeted figure, rather than a total over a long
period.

Examples of financial strategies:

• Increase internal revenue over the next three years

• Decrease overhead spending
• Budget additional funds for marketing initiatives
• Increase stockholder shares every year for the next five years
• Reduce waste over the next year
• Create more diverse revenue streams
• Increase market position
• Attract more sales
• Increase investment portfolio
• Create an initial public offering within two years
• Lower incurred expenses

Non-Financial Objective Examples

• Training/learning strategic objectives (HR)

• Increase professional development offerings to staff
• Initiate monthly lunch-and-learn seminars
• Create digital learning platforms
• Fund advanced degree studies
• Participate in a leadership summit
• Conduct safety training
• Implement leadership training

Examples of business processes/operations strategic objectives:

• Prioritize innovation
• Increase productivity throughout the year
• Reorganize production processes
• Reduce energy usage across facilities
• Diversify digital marketing strategies (Marketing)
• Increase brand partnerships (Marketing)
• Create new research and development structures (Research & Development)
Examples of Customer Strategic Objectives:

• Create excellence in customer service

• Increase five-star ratings
• Offer competitive pricing
• Start a new product offering
• Create a customer retention initiative
• Increase repeat customers
• Initiate customer satisfaction surveys
• Shorten delivery time
• Offer more cross-sale products

The following are examples of strategic Marketing objectives:

• A bigger market shares

• Quicker design-to-market times than rivals
• Higher product quality than rivals
• Lower costs relative to key competitors
• Broader or more attractive product line than rivals
• A stronger reputation with customers than rivals
• Superior customer service
• Recognition as a leader in technology and/or product innovation
• Wider geographic coverage than rivals
• Higher levels of customer satisfaction than rivals

Relationship:

1. Organizational objectives will play a crucial role in resource allocation; they are associated to financial resources or capacity of the
organization.
2. Business requires both financial and strategic objectives, the organization is supposed to select the objectives based on its current
performance.
3. Research shows that organizations using strategic-management concepts are more profitable and successful than those
organization that do not.
4. Businesses using strategic-management concepts show significant improvement in sales, profitability, and productivity compared
to firms without systematic planning activities.