Introduction to

Financial Management
Management – What managers does
• Financial management – Management of Finances --- Planning
, Organizing, Directing & Controlling of Finances.

• Subject of recent origin – still leans heavily on principles of

economics.

• Objectives of existence of an organisation?

• (raison de etre)
• Commercial?
• Non Profit Organisations?
• Firms – Finance, produce and market .

• Simultaneous and not consecutive

• Cannot define where one ends and another starts.
 Pervasiveness of Finance

• There is financial implication of every activity,

be it marketing, strategic or manpower.
• While functions are inseparable , finance
functions themselves can be identified
Finance Functions
Managerial Require great management abilities
Routine Do not so require assist managerial functions

Managerial finance functions

1.Investment decisions
2.Financing decisions
3.Dividend decisions
4.Working Capital Decisions
 Investment decisions/Capital
budgeting decisions

Committing resources to a profitable investment

Allocation of Capital & Committing of funds - Involves
large outlays
Benefits over long period of time
 Related to future - characterised by risk-
uncertainty
Projects evaluated against expected return &risk
Involves selection of hurdle rate - Ko
 Appraisal criteria- Traditional &
Sophisticated
1.Pay back method
2.Accounting rate of return
3.DCF techniques
-- NPV
-- IRR
-- B/C Ratio
-- Terminal Value method
 Financing decisions
Acquisition of funds to meet investment
needs
Crux is debt – equity mix
 Optimum capital structure lowest ko or
highest value of the firm V
 Decide which is optimum and raise through
optimum sources
 Capital structure decisions
Also called Leverage decision and Financing
decision
Objective to minimise the overall cost of
capital to the firm.
Various sources are available

Owned funds Borrowed funds

Hybrid type
Main Questions:
 Debt Equity Ratio
Specific instruments for equity & debt
Which capital market to access
When to raise finances
At what price should securities be offered
 Owned Funds
1.Equity Paid up capital + Free Reserves
2.Internal equity Vs. External equity

Pros &cons
Borrowed Funds
1.Bonds
2.Debebtures - Pros & cons
3.Institutional Finance - Pros &cons
4.Commercial banks
Hybrid Convertibles
Preference
Venture capital
5.Lease financing
 Short –term sources
I. Commercial bank borrowings
II. Factoring
III. Inter – corporate deposits
IV. Commercial papers
V. Fixed deposits
 Dividend decisions
Management of surplus
Maximise the value of shares
Retain surplus or Distribute surplus
whole/in what proportions ?
Reinvestment
When to retain / when to distribute
 Relevance / irrelevance
 Tax Implications
Capital appreciation
Bird in hand
Signaling
Stability, bonus issue etc.
Liquidity decisions/ Working Capital
Decision/ Working Capital
Management
 Current asset management
 Dilemma between solvency and profitability
 Forecasting, planning, allocating& monitoring
 Routine financial functions
1.Supervision of cash receipts and payments and
safeguarding of cash balances.
2.Custody of securities, insurance policies and
other valuable papers.
3.Taking care of mechanical details of outside
financing.
4.Record keeping and reporting
 Changing role of financial manager

Traditionally Raising funds till mid- fifties- in USA

FM dealt with instruments, institutions, practices
 Concerned mainly with mergers, consolidations,
reorganizations etc.
Day to day financial management was ignored
Investment decisions were ‘given’ to FM
Contemporary – raising funds, wise allocation,
distribution of earnings
 Financial manager forms integral part of top
management.
 Goals of Financial Management

Market Economics – most desirable goods

produced.
However, imperfections do exist so profit will
not serve the best interests of the society.
 Financial Management to achieve
financial goals
What is the financial goal of a company ?
Profit Maximisation?
Ambiguity
Time value of money
Quality of benefits
Wealth maximisation
Solves all the above problems
Economic welfare of the owners reflected in the
Market Value of the share.
The broad objective of wealth
maximisation could be broken into:

 Short - term goals

 Long - term goals
 Short – term goals
Maintain adequate liquidity
Minimise idle resources
Liquidity Vs illiquidity
Short – term goals can be achieved by
managing Cash Inventory Receivables
Payables.
 Long – term goals
-- Committing resources to worthwhile projects
Capital budgeting decisions
--- raising finances to meet the a bore needs
Financing/capital structure decisions
--- distribution of surplus to share holders
Dividend decisions
 Market Value of the share- many
Criticisms
1. Capital market skeptics, Stock market myopic:
Managers best know the price, financial
economists say there is empirical evidence that
developed capital markets are least biased.
2.Strategic Visionaries
• Pursue Product management marketing
goal, customer satisfaction minimising costs etc.
• True but when customer Vs. shareholder.
Shareholder is better for long-term viability.
3.Balancers: should balance interests of various
stakeholders
 Right balance is relative, no clear guidelines
when subjectivity is allowed there will be chaos

4.Social Responsibility Advocates :

 Mandated by society
 Enlightened self – interest
 CSR obviates – regulation
Leads to competitive encroachment
Undermines the very foundations of business
philosophy
Personal choice of the shareholder.
 Plan should provide for control
Funds flow Analysis
Ratio Analysis
Industry Analysis
Cross section Analysis
Inter – firm comparison
 Organization for finance function
Board of Directors

Managing Director

Production Personnel Financial Marketing

Director Director Director Director

Treasurer Controller

Auditing Credit Planning and Inventory

Management Budgeting Management

Retirement Cost Control Performance Accounting

Benefit Evaluation
Organization for finance function in a multi-divisional
Indian company

Board of Directors

President

Vice President Finance

Chief Internal Controller of Financial Controller

Auditor Accounts Controller Operations