Unit 1

--Financial Management – Meaning and Objectives,

--Goals of Financial Management,
--Scope and Functions of Financial Management
--Approaches to FM
--Finance and its relation with other disciplines
--Functions of finance manager
--Key strategies of FM

References
1. Financial Management – I.M.Pandey
2. Financial Management – Khan & Jain
3. Financial Management – S.M.Inamdar
4. Financial Management – N.M.Wechlekar
5. www.icwai.org.
6. www. icai.org.in.
7. NSE
8. BSE
FINANCIAL MANAGEMENT NATURE & SCOPE:
 Meaning: according to Solomon” financial
management is concerned with management
decisions that result in acquisition and financing of
long term and short term credits of a firm. As such
it deals with the situations that organization
 Requires selection of specific assets as well as the
problems of size and growth of an enterprise. The
analysis of these decisions is based on expected
inflows and outflows of funds and their effects upon
managerial objectives’
F.M. IS IMPORTANT FOR THE FIRM FOR THE FOLLOWING REASONS:

 Smooth running of organization

 Provides coordination between various functional areas such
as purchases, sales etc.
 Helps management to evaluate profitability of organization
 Helps in decision making in light of profitability
 Improves credit worthiness of organization.
 Helps in determining financial worthiness of the firm
Areas of working:
 Estimating capital requirements of firm
 Determining capitalization & capital structure of firm.
 Finalizing sources of alternatives
 Decision making for investments of funds
 Effective & judicious distribution of funds.
 Efficient management of current assets.
 Making use of financial control.
GOALS / OBJECTIVES OF FINANCIAL MANAGEMENT:

Profit maximization decision

Wealth maximization decision
Other important decisions
Profit maximization decision:
Profit is a test of economic efficiency.
 It is a yard stick by which economic decisions can be
judged.
Leads to economic efficiency of allocation of resources
It leads to growth of the firm
It
leads to total economic welfare and it is to be
maximized
Itserves as basic criterion for privately owned and
controlled firms.
It
is simple and most accepted decision for
measurement.
MORE OBJECTIVES OF F.M:

To provide reasonable return to shareholders

To ensure maximum utilization of resources.
To plough back of profits for growth and expansion.
To ensure financial discipline in the organization
To ensure optimum level of leverage.
Minimization of financial charges.
To ensure growth of E.P.S & M.P.S.
APPROACHES TO FM
Traditional view:
 Getting short term, medium& long term funds for
organization.
 Funds are raised through financial instruments like
equity shares, debentures, bonds etc.
 Looking after legal and accounting relation between
firms
 Redistribution of income & assets among resources.
-- CONTD-
 Modern approach:
 Investment decisions 2. Financing decisions 3. Dividend policy
decisions.
 Investment decisions: A. determining total investment
employed. B. Determining Investment in fixed assets. C.
allocation of funds to each investment proposals. D. deciding
optimal capital structure. E. deciding finance performance of
each activity. F. estimating firm’s investment opportunity
regarding mergers & amalgamations.
 Financial decisions: this shows how total funds will be
made available through financial instruments or raising loans
etc.
 A.Determining best finance mix. B. optimum proportion of
equity n debt. C. optimum level of cash flow requirements. D.
borrowing policies e. negotiating for finances. F. deciding on
cost of risks, financing, repayment etc.
 Dividend decisions: this is in relation to decision in respect
of part of profit given to share holders in form of cash
dividend and the amount that shall be retained for the
purpose of development.
F.M AND OTHER RELATED DISCIPLINES
 Primary disciplines: accounting, macroeconomics,
macroeconomics
 Other related ---marketing, production, Quantitative
methods
 The above two are related to investment analysis, working
capital management, sources & cost of capital, determination
of capital structure, dividend policy, analysis of risks n returns.
 When the above take place ultimately it results in
shareholders wealth maximization.
 Organization of financial management:
 Board of directors
 Treasures
Controller
 Manager capital MGR credit MGR portfolio Mgr cash
MGR accounts mgr cost control mgr taxation
MGR operation
 Treasurer works for getting money and controller works for
controlling and distributing the amounts.
FUNCTIONS OF FINANCIAL MANAGER:
 Primary functions: 1.Financial analysis &planning
2.management of firm’s asset structure
3. Management of firm’s financial structure.
Financial analysis &planning :
 To monitor firm’s financial soundness
 To establish financial goals and objectives using profit
forecast.
 To plan future financing in current and non-current assets
 To evaluate requirements to increase productivity.
 To determine additional capital required
 To ensure long term stability
 To forecast sources of income & expenditure
 To fix responsibilities to get targets and actual together
 To select best methods for raising funds
 To formulate policies for pricing and dividend
 To help and execute capital expenditure.
FIXING FIXED ASSET STRUCTURE:

 To determine type of assets found in statements.

 To determine optimum level of assets

 To identify the best sources of long term finance by

which firm can grow
 Proper allocation of funds

 To find if assets are to be purchased or hired

 To evaluate utilization of assets

 Estimation of funds for exiting and expansion purposes

MANAGEMENT OF FIRM’S FINANCIAL STRUCTURE:

 Determine mix of long term n short term financing

 Evaluation of finances and risk factors in it

 Determine firm’s return on investment and overall

liquidity
 Determine sources of long n short term & medium
term capital
 Evaluation of expected outcomes of various
alternatives their costs and long run implications.
 Choosing alternatives best suitable for purpose of
organization
 Get effective control over finances

 Determine profit earning capacity to capital

employed
ROUTINE FUNCTIONS:
 Maintain good relations with banks
 Preparation of cash and fund flow statements.
 Provide information to top management
information regarding implications of all decisions
 Maintain optimum level of working capital to meet
day to day working
 Ensure effective management of corporate activity
 To ensure effective management of credit control
 Knowledge about legal aspects regarding raising of
funds.
 Complete knowledge about taxation laws
 Ensure effective investment management.
 Complete knowledge and updated information
about stock exchange
CHANGING SCENARIO REGARDING FINANCIAL MANAGEMENT:

 Interest rates freed from regulation

 Rupee has become fully convertible on current
account
 Optimum debt equity possible

 Firms taking financial leverage to increase

shareholders wealth
 Shares buyback and book building is possible.

 Raising resources through globally raised ADR’s and

GDR’s (American /global depository receipts)
 Treasury receipts
KEY STRATEGIES OF FM :
 Investment strategy 2. Conduct of financial operations
strategy 3. Disposition of profit strategy
 Financing strategy.

Investment strategy :
 1. Capital budgeting 2. Demand and sale value 3. Cash
inflow & outflow 4. Inflation rates, stock of inventory
5. Types of investment 6. Investment planning and
forecasting 7. Financial relation with institutes 8.
Emphasis on growth n development 9.Disinvestments
CONTD
Conduct of financial operations strategy :
 1. Assets utilization 2. Market selection
3.Competitive position 4. Pricing strategy 5. Cost
effectiveness 6. Operating leverage 7. Liquidity 8.
General inflation.
Disposition of profit strategies: deals with
 a. dividend to owners b. interest to lenders c. tax
payment d. reinvestment of profits e. match
revenues & expenses
Financing strategy :
 1. Types of equity 2. Types of debt 3. Financial
leverages 4. Financial changes 5. Achievement of
financial objective. 6. Equilibrium in the capital.
EXPECTED QUESTIONS
 Discuss in detail the functions and duties of Finance
Manager in a Multinational company.

 Define Financial Management? Discuss its importance

and scope?

 Discuss the functional areas of Financial Management,

along with functions, duties of financial manger?

 Explain objectives of Financial Management along with

A’s of Financial Management?