FINANCIAL MANAGEMENT

Syllabus
Introduction: Definition, Scope and Objective of Financial Management. Basic Financial Concepts Long Term Sources Of Finance

Capital Budgeting Principal Techniques

Concept and Measurement of Cost of Capital Cash Flows For Capital Budgeting

Financial Statement and Analysis

Leverage and Capital Structure Decision Working Capital Decision Dividend Policy

Introduction
I am saving for retirement. Should I use a pension fund, mutual fund, direct stock market investment ? I want that new car. Should I use my cash saving, lease, borrow?

Which is the best way to pay for my holidays, for my house?

Im thinking about starting a new business. Will it reward me adequately?

Mr. A has asked for major project financing. Should my organization provide the funds?

Why study finance

To manage your personal resources To deal with the world of business

To pursue interesting and rewarding career opportunities

To make informed public choices as a citizen For the intellectual challenge

Syllabus
Introduction: Definition, Scope and Objective of Financial Management. Basic Financial Concepts Long Term Sources Of Finance

Capital Budgeting Principal Techniques

Concept and Measurement of Cost of Capital Cash Flows For Capital Budgeting

Financial Statement and Analysis

Leverage and Capital Structure Decision Working Capital Decision Dividend Policy

 Despite of the variations between businesses the basic finance issues they face are essentially the same.

Introduction

The most important activities of a business firm are

Financial Management is concerned with the finances of an organization.

 Financial Management performs facilitation, reconciliation and controls functions in an organization. All the decision having monetary implications comes under the purview of financial management. Financial decision making involves procurement of funds and their optimal utilization through investment, financing dividend and working capital decisions.

Defining Finance

The key issue in finance are

Finance function reconciles the conflicting interest of the varied stakeholders.

Where to raise financial resources from Where to invest the resources How to best manage the production distribution function How much of profit to distribute and how much to retain

Defining Finance
Finance is analytical. Finance is based on economic principles. Finance uses accounting information as an input for decision-making. Finance is international in perspective. Finance is constantly changing. Finance is the study of how to invest and raise money productively Finance is the study of how people allocate scarce resources over time - costs and benefits are distributed over time but the actual timing and size of future cash flows are often known only probabilistically

1. Investment or Long Term Asset Mix Decision

Finance Functions

Function of investing raised funds in assets are known as investment decision. Examples include Expansion, Modernization, Replacement of Long Term Assets, R & D (having long term implications). The 2 important aspect of investment decision are (a) Evaluation of the prospective profitability of new investments (b) The measurement of a cut-off rate; against that the prospective return of new investments could be compared. Decisions are taken in the light of their impact on the wealth of shareholders. The decision involve huge capital outlay, have long term implications, and are usually irreversible. Investment decision also referred as Capital Budgeting decisions.

2. Financing or Capital Mix Decision

Finance Functions

Financing decisions are mainly concerned with the identification of potential sources of funds and tapping of these sources. Main issue involved in such decisions are Where from to procure the requisite funds? How much should be the proportion of short term and long term funds? How do the expectations of providers of each source of capital change with alteration in capital mix? What should be the optimal mix of debt and equity in capital? The mix of debt and equity is known as the firms capital structure. They determine the financial risk profile of the business. The thrust of financing decision is on bringing down the cost of financing keeping the risk constant.

3. Dividend or Profit Allocation Decision

Finance Functions

Distributing returns earned from assets to shareholders are known as dividend decision. The financial manager must decided whether the firm should distribute all profits, or retain them, or distribute a portion and retain the balance. Such a decision depends on trade off between the future financing needs of the firm and current consumption requirement of shareholders. The proportion of profits distributed as dividends is called the dividend payout ratio and the retained portion of profits is known as retention ratio. Normally firms follow a policy of stable dividend, but firms with high growth rate generally offers a high retention and low payout ratio. Dividends are generally paid in cash, but it can also be given in form of bonus shares.

4. Working Capital Decision/ Liquidity Decision

Finance Functions

Working Capital decisions are related to the management of current assets. The two key decision points in working capital management are level of investment in current assets and financing of such assets. Current asset management affect the firms liquidity. A firm attempts to balance cash inflows and outflows while performing these functions. These are called liquidity decisions. A conflict exists between profitability and liquidity while managing current assets. Hence, a proper trade-off must be achieved between profitability and liquidity.