Dr. P. R.

Kulkarni 7/31/2010

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[ Financial Management ²Prasanna Chandra

[ Financial Management ²Khan and Jain

[ Financial Management ²I.M.Panday

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 Dr. P. R. Kulkarni 7/31/2010

Chapter 1

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[ Mature and objective of Financial Management

[ Role of Finance Manager.
[ Interface between Finance and other Functions.
[ Environment of corporate Finance.

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 Dr. P. R. Kulkarni 7/31/2010

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½ Financial Management is that managerial activity which is

concerned with the planning and controlling of the firm·s
financial resources.
½ As a separate activity or discipline , it is of recent origin.
½ The subject is still developing and there are certain areas
where controversies exist.
½ The subject is getting importance because among most
crucial decisions of the firm are those relates to finance.
½ And understanding of theory of the financial management
provides them with conceptual and analytical insight to
make those decision skillfully.

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 Dr. P. R. Kulkarni 7/31/2010

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[ The financial management can be defined as
´Management of the finance of business/organization
to achieve financial objectives.µ

[ Taking a commercial business as most common

organizational structure ,the objective of the financial
management would be :
* Create wealth for the business.
* Generate the cash and

[ Provide adequate return on the investment bearing in

the mind the risk that business is taking and the
resources invested.
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‰ Centre for Financial Management , Bangalore

 Dr. P. R. Kulkarni 7/31/2010

    

Ñ There are three key elements to the process of

Financial Management.

(A)Financial Planning :
Î Enough funds should be made available at the right
time to meet the need of the business.
Î The funds may required for short, medium or long
term

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 Dr. P. R. Kulkarni 7/31/2010

[ (B) Financial Controls :

Î It helps to business ensure that the business
is meeting its objectives.
Î Financial control address the questions such
as :
Î Are assets being used effectively?

Î Are business assets secure?

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 Dr. P. R. Kulkarni 7/31/2010

[ ( C )Financial Decision Making :

Î The key aspects of financial decision making

relates to investment and dividends
Î Investment must be financed at low cost and
alternative that can be considered.
Î In regard to dividend ² a financial decision is
whether profits earned by the business should be
retained rather than distributed to shareholders .

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[ Firms create manufacturing capacities for production

of goods and services to consumers.
[ They sell their goods and services to earn profit.
[ Funds are required to acquire manufacturing and
other facilities.
[ The three important activities of the business firm are
: a)finance, b) production c) marketing.
[ All these department are headed by the executives.

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 Dr. P. R. Kulkarni 7/31/2010

[ The common thread running through all decisions

taken by the various managers is money.
[ The R&D manager has to justify the money spent
on research by coming up with new products.
[ Material manager has to manage inventory-
working capital.
[ He has to achieve balance between too much and
too little inventory.
[ The finance manager as his designation implies,
should be involved in all financial matters of the
organization since almost all activities in the
organization have financial implication.
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[ The finance manager make available the required

funds at an acceptable cost and invested according
to plan.
[ The finance manager also look into utilization of
profits, payment of dividends ,prices of the share in
stock exchanges.
[ The objective of the manager is to increase or
maximize the wealth of the owners by increasing
value of the firm

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[ The objective of the financial management is therefore,

maximization of wealth of its current shareholders.
[ What is meant by wealth maximization?
[ Wealth maximization means maximizing the net present
value (MPV)or.
[ wealth of the course of action is difference between the
present value of benefits and present value of cost.
[ The objective of wealth maximization takes care of the
questions of the timing and risk of expected benefits

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[ everal alternative objectives of financial management
has been suggested by the experts. They are:
[ Maximization of profits, a maximization of earning per
share and maximization return on equity.
[ It is argued that profit maximization assume the perfect
competition which never exist and it is business objective.
[ The precise meaning of the profit maximization is unclear.
[ Does it means short term or long term profit? Does it refer
to profit before tax?
[ Profit maximization objective does not make distinction
between return received different time period

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 Dr. P. R. Kulkarni 7/31/2010

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[ Finance manager is a person who is responsible to

carry out the financial functions.
[ He is responsible for shaping the fortunes of the
enterprise and involved in allocation of resources.
[ He must see that the funds of enterprise are
utilized most effectively.
[ The finance manager is engaged in the following
activities.

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[ The finance manager has to plan for and mobilize the

required funds from various sources when they are
required.
[ For this purpose he will be liaising with the banks/Fis,
merchant banking firms and other agencies.
[ He has to consider the cost of the funds and
conditions for raising the funds.

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[ There are always many competing needs for allocation

of funds.
[ In consultation with various departments the finance
manager decides the manner of allocation of funds.
[ ome time investment committee is formed for
allocation of resources.

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[ The finance manager has to monitor the utilization
of funds.
[ He has to act as financial controller and report to
top management.
[ The reporting may, utilization of bank credit,
receivable and fund requirement at different point
of time.
[ All such reports are called ´control Reports and
whole process constitutes control because it helps
management to take timely corrective action to
ensure that planned results are achieved.

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[ Financial decisions often involves alternative course of

action.
[ hould firm set-up a plant which has a capacity of one
million tone or two million tones.
[ hould debt: equity ratio of the firm be 2:1 or 1:1
[ hould the firm pursue a generous credit policy
[ hould the firm carry a large inventory or a small one?
[ The alternative course of action typically have
different risk return implications.

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[ In general when you take the financial decisions

you have to answer the question like :

[ What is expected return? What is expected

exposure?

[ Given the risk return character tics of the decision

How would it influence value.

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[ Õne of the common factor among all managers

(Marketing, production and top management ) is
that they are concerned about the resources.
[ ince the resources has the cost it should be
effectively utilized.
[ Therefore there is need to have interface between
the finance and other functions.

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[ Marketing manager takes many decisions which have

impact on profitability.
[ To achieve the sale target he may extend the credit to
customer on liberal term.
[ He may maintain large inventory of finished goods.
[ All these decisions will have financial implications.
[ Õther key decisions of the marketing manager which
have financial implication are pricing, product
promotion and advertisement, choice of product mix
and distribution policy.

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[ Production manager controls a major part of the

investment in the form of equipments, materials, and
men.
[ He has to effectively utilize the equipments, inventory
of spares, semi finished goods should be ideal and
work stoppages are minimized.
[ He has to hold cost of outputs under control.
[ imilarly he has to take a decision regarding make or
buy, buy or lease which has financial implication.

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[ Top management is interested in ensuring that firm·s

long term goals are met.
[ The financial statements are the means for
understanding overall performance of the firms.
[ trategic planning and management control are the
two important functions of top management.
[ Finance function provides basic inputs needed to
undertake these activities.

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Environment and Corporate Finance

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[ Finance Manager·s job is to understand the

external environment in which he operates.
[ In India investment and financing activities are
subjects to government control and legislations.
[ For example there are more than 600 item
reserved for MEs
[ The private limited company can not issue the
share capital.
[ The finance manager has to also take in to
consideration the fiscal policy

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 Dr. P. R. Kulkarni 7/31/2010

[ The finance Manager has to operate in

external as well as internal constraints to
maximize the wealth
[ There are four aspects of external
environment. They are :
A. Forms of Business organization.
B. Regulatory Frame work
C. Financial system
D. Tax aspects.

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[ All firms face the basic problems of capital

budgeting capital structure, dividend policy,
working capital cte.

[ However these issues tend to be more complex for

company than other form of organizations.

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[ Õwned by the single person. The rewards and

liabilities of the business is to him.
[ The advantage of the sole proprietorship are :

1. Easy and inexpensive to set up.

2. Few government regulations
3. Mo firm tax
[ The disadvantage are ²limited life, high tax rate,
unlimited personal liabilities.

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[ The business is owned by two or more persons and

they are partners in the business.
[ There will be partnership agreement or partnership
deed.
[ The advantages are:
1. Inexpensive and can be set up easily.
2. Relatively free from government regulations.
3. The partnerships are governed by Indian partnership
Act 1932.

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[ A group of persons working together towards a common

objective is a company.
[ A company is collectively owned by the shareholders who
entrust the task of management to their directors.
[ The company is distinct legal person separate from its owners.
[ The liability of the shareholders of a company is limited to the
share capital subscribed by them.
[ A company must pay taxes on its profits.
[ A company may be private limited or public limited company.
[ A private limited company must have at lest two shareholders
and public limited company must have seven shareholders

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 Dr. P. R. Kulkarni 7/31/2010

[ A public limited company invites member of public

to subscribe to its shares where private limited
company can-not do so.

[ A public limited company permits free transfer of

shares where private limited company usually
impose the restrictions

[ According to sec 3(1) (IV)of the company Act 1956

a public company means a company which has a
minimum paid up capital of five lakhs.

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 Dr. P. R. Kulkarni 7/31/2010

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[ Corporate investment and financing decisions are

governed by a regulatory framework.
[ The important elements of these framework are:

1. Industrial policy.
2. Industrial licensing provision and procedures.
3. Foreign exchange management Act.
4. MRTP Act
5. Companies Act
6. EBI

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 Dr. P. R. Kulkarni 7/31/2010

[ Finance manager must be aware of the provisions

of the industrial policy
[ The first industrial policy resolution was
announced in 1948.Given importance to both
private and pubic sector. Industrial sector divided
into 4 categories (1) state monopoly 2.mixed sector
3. field of government control 4.private enterprises.
[ IDR Act was passed in 1951. First five year plan
completed ( 1951-56) and there was need for new
industrial policy.
[ Industrial policy resolution was announced in 1956
which emphasis for rapid industrial growth,
development of heavy industries, development of
cooperative sector and regional development
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[ Resolution divided industries into three categories. a.

monopoly of the state-17 industries, b. mixed sector
public and private- 12 industries , c. industries lift for
private sector.
[ Mew Industrial policy 1991- it is part liberalization
policy. It consist abolition licensing for 18 industries.
[ Public sector role diluted. Emphasis on the
development of ME sector and regional development .
[ Encouragement of foreign investment.
[ Industries were grouped in three schedule.
[ chedule one list of industries reserved for public
sector.
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 Dr. P. R. Kulkarni 7/31/2010

[ chedule II- list of the industries which are subject to

compulsory licensing.
Î chedule iii list of the articles reserved for ME.

[ MRTP Act 1969.

Î The act was passed to control monopolies and
regulate monopolistic trade practices.
Î To prohibit restrictive trade practices and
Î To regulate unfair trade practices.
Î Restrictions on monopoly houses have been removed.
Î However power of MRTP commission widen to control
the unfair practices.

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