NATURE AND SCOPE

OF
FINANCIAL MANAGEMENT

DR. R.S.AURORA
NATURE OF FINANCE:

 Finance is the issuance of, distribution of and

purchase of liability and equity claims issued for
the purpose of generating revenue-producing
assets.

 Finance is the management of the monetary

affairs of a company

 Includes:

* Identifying the sources of money

* Collecting financial resources

* Putting the resources to use

FINANCIAL MANAGEMENT IS…

Application of general management principles to a

particular financial operation.
THE TESTAMENTS INCLUDE…
 Identifying suitable sources of finance

 Raising funds economically

 Planning future operations

 Controlling current performances

 Identifying investment opportunities

 Achieving adequate rate of ROI

 OBJECTIVES OF
FINANCIAL MANAGEMENT:

Profit Wealth
Maximization Maximization

PROFIT MAXIMIZATION IS ALL ABOUT:

• How funds are procured and used
 Maximizing long-run earnings and while optimizing
short-run earnings
 Effective use of financial resources
THE ESSENCE OF PROFIT
MAXIMIZATION
PRINCIPLE:

 Barometer of performance

 Maximum welfare to stakeholders

 Encourages expansion and diversification

 Attracts investors
THE TRIBULATIONS OF PROFIT
MAXIMIZATION:
 Term “profit” is vague
 Encourages corrupt practices to increase profits
 Ignores risk element
 Ignores time value of money
 Attract cut-throat competition
 Attracts government intervention
 Invites labour related problems
 Society feels exploited
 Profit need not reflect liquidity
WEALTH MAXIMIZATION IS ALL
ABOUT:

A dislike for “getting rich-quick principle”

THE AIM IS TO:

 Increase in profits

 Reduction in cost

 Judicious choice of funds

 Minimized returns

 Long-run value
THE ACES UP THE SLEEVE:

 Present cash flow considered

 Time value of money considered

 Takes care of stakeholders interest

 Assures consistent returns

 Considers impact of risk factor

THE ILLS THAT CAUSE PAIN:

 Concept differs from one entity to another

 Immediate rewards lacking

 Investors looking for short-run gains shy away

 Interest of employees may be ignored

 FINANCIAL MANAGEMENT – A BOON:

 Anticipating financial needs

 Acquiring financial resources

 Allocating funds

 Administering funds

 Analyzing performance of funds

 Accounting and Reporting

 Inflation
Economics Corporate Accounting
Finance

Responsibility Cost
Accounting Accounting
FINANCE
Financial HR
Accounting Accounting

Business
Transactional Finance Management
Accounting Accounting
THE SPHERE OF FINANCIAL
MANAGEMENT:
(A) LIQUIDITY:

 Forecasting cash flows

 Raising funds

 Managing the flow of internal fund

(B) PROFITABILITY:

  Cost control and pricing

 Forecasting future profit

   Measuring cost of capital

FINANCIAL MANAGEMENT
FACILITATES:

(A)  INVESTMENT DECISIONS:

  Allocation of funds to capital and current

assets

 Balance long term and short term sources

 Capital budgeting and CVP analysis 

(B)  FINANCING DECISIONS:

• Identifying sources of funds

• Funds raised through primary markets

• Financial institutions and international markets

• Cost of capital is prime consideration

(C) DIVIDEND DECISIONS:

 Paying regular and assured returns

   Stakeholders evaluate company based on

returns paid

 Creation of sufficient reserves

 Helps attain wealth maximization

THE ENDEAVOURS OF FINANCIAL
MANAGEMENT:

   Supervise the overall working

 Ensure adequacy of funds

 Ensure timely disbursement without creating

shortages

 Analyze, plan and control use of funds

 Maintain liquidity

 Economize acquisition and holding cost of funds

THE ENDEAVOURS ………..

  Make allowances for uncertainties

  Administer cash, receivables and inventory

  Analyze financial aspects of external growth

 Develop means to rejuvenate and revitalize the

enterprise
FINANCIAL MANAGEMENT IN A
NUTSHELL:

   Determine financial needs

 Determine sources of funds

   Financial analysis

 Determine optimal capital structure

    CVP analysis

    Profit Planning and Control

    Fixed Asset Management

IN A NUTSHELL ………
 

 Project planning and evaluation

 Capital budgeting

 Working capital management

 Dividend policy

 Acquisitions and Merger

 Corporate taxation
THE POSTSCRIPT: THE LIMITS OF
CORPORATE FINANCE:

 Failure of corporate due to over-dependence

 Excessive emphasis on bottom line

 Ignores ethical considerations

FINANCIAL MANAGEMENT – THE
BUZZ WORD……

 International competition

   International finance

  Fluctuating Exchange Rates

 Mergers, takeovers and restructuring

  Financial innovations

 Buy- back, ESOP’s, disinvestment, etc.

  Increased use of computers

FINANCIAL MANAGEMENT AXIOMS………

• Risk – return trade-off

• Time value of money

• Cash is king

• Incremental cash flows count

• It’s hard to find really profitable projects

• Efficient capital markets do the trick

AXIOMS……

 The agency problem

• Taxes bias business decisions

 All risk is not equal

 Ethical dilemmas are present in finance

 FINANCIAL FORECASTING:

 Appraising the real worth of a growing concern

 Provides insight into return on investment and

soundness of the company’s financial position

 Reveals profitability, liquidity and solvency

 Based on financial analysis

 Analysis may be internal or external

 Financial Income Balance
Statements Statement Sheet

Projected Comparative
Balance sheet Balance
Sheet
TOOLS OF FINANCIAL
FORECASTING
Common size Statement
Statement of Working
Capital

Changes Cash Flow Funds Flow

in Owner’s Statement Statement
Equity
 FORECASTING – THE RELIABLE TOOL

 Funds requirement can be estimated

 Technique of control

 Evaluate performance

 Facilitate comparison

 Facilitates decision making such as product pricing,

product mix, capital budgeting, etc.
FORECASTING – A BITTER PILL

 No single technique is full proof

 Longer the period lesser the reliability

 Based on assumptions

 Failure to learn from past mistakes

 Lack of managerial skills

 Failure to understand the functioning of the

business world
Your Questions
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Thank You