FINANCIAL

MANAGEMENT:
AN OVERVIEW
ACMAS 2338 FINANCIAL MANAGEMENT FUNDAMENTALS
LEOPOLDO D. MEDINA, CPA, MSA
LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338
What is Financial Management?
 “Financial Management deals with procurement of
funds and their effective utilization in the business”.

- S.C. Kushal
 Financial Management “is an area of financial decision-
making, harmonizing individual motives and enterprise
goals”.
- Weston and Brigham
 Financial Management “is the operational activity of a
business that is responsible for obtaining and effectively
utilizing the funds necessary for efficient operations”
LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338

- Joseph and Massie

Financial Management

 is critical to any company, whether small or big.

 is like the lifeline of the business ; a vital activity that
must be performed in any organization.
 entails the process of planning, organizing, monitoring and
also controlling the financial resources of an organization.

LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338

Financial Management

 a regular practice in a business environment.

 involves managing a company’s financial resources to
ensure there is little or no wastage.
 controls every single thing regarding the company’s
financial activities which includes the procurement of
funds, use of funds, payments, accounting,
risk assessment and other things that are related to
finances.

LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338

Financial Management

 an integral part of the company because, without proper

use of funds, the business can go down.

 is like the engine room of the company and can affect

every other department if not handled properly.

In order to eliminate any form of barrier that may hinder the

growth of the business, firms must ensure that the right
financial management mechanism is put in place.
LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338
Objectives of Financial Management

There are objectives or reasons firms implement these

management strategies to grow their business.

1. Profit Maximization
2. Proper Mobilization of Finance
3. The Company’s Survival
4. Proper Coordination
5. Lower Cost of Capital
LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338
Profit Maximization

 One of the reasons a company employs a financial

manager is to maximize profit while managing the finance
of the company.
 The gain can be in the short or long-term.
 But the main focus is that the individual or department
handling the financial issues of the company must ensure
that the company in question is making sufficient profit.

LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338

Proper Mobilization of Finance

 The collection of funds to run the business is also an

integral part of financial management that the manager
needs to handle appropriately.
 Once the manager concludes the estimation of the amount
needed for a business process, the required amount can
then be requested from any legal sources such as
debenture, shares or even request for a bank loan.
 There should be a proper balance between the money the
firm has and the amount borrowed.
LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338
The Company’s Survival

 The survival of the company is essential.

 That is one of the reasons the management considers
hiring financial managers in the first place.
 The manager has to make adequate financial decisions to
ensure the company is successful.

LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338

Proper Coordination

 There must be a proper understanding and cooperation

among the various departments.
 The finance department must understand and agree with
other departments within the company for the business to
function smoothly.

LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338

Lowers Cost of Capital

 Financial managers also try their very best to reduce the

cost of capital, which is something that is vital to the
business.
 They ensure money borrowed attracts little interest rates
so the company can maximize profit.

LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338

Financial Management Functions

 1. Financial Planning and Forecasting

 2. Determination of capital composition
 3. Fund Investment
 4. Maintain Proper Liquidity
 5. Disposal of Surplus
 6. Financial Controls

LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338

Financial Planning and Forecasting
 It is the financial manager’s responsibility to plan and
estimate the business’s financial needs.
 He needs to provide details regarding the amount of
money that would be required to purchase different assets
for the company.
 The management through the financial manager needs to
know what they need to spend on working capital and
fixed assets for the business too.
 Another vital duty of the financial manager is to make
future plans for funds that the company would need, and
the manner in which the funds will be realized and used,
is also of utmost importance to the financial manager.
LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338
Determination of capital composition

 Once the Planning and Forecasting have been made, the

capital structure has to be decided.
 The mix of debt and equity used to finance the company’s
future profitable investment opportunities is referred to
as capital structure.

LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338

Fund Investment

 The financial manager has to ensure that funds made

available to the business are used adequately to grow the
business.
 The cost of acquiring the said fund and value of the
returns need to be compared and balanced.
 The financial manager also needs to look into the channels
of the business that is yielding higher returns and improve
them.
LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338
Maintain Proper Liquidity

 Cash is the best source for maintaining liquidity.

 The business requires it to buy raw materials, pay salaries
and tackle other financial needs of the company.
 However, the financial manager has to determine if there
is a demand for liquid assets.
 He also has to arrange these assets in a manner that the
business won’t experience scarcity of funds.

LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338

Disposal of Surplus

 Selling surplus assets and investing in more productive

ways will increase profitability and therefore increase the
ROCE Return on Common Equity.

LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338

Financial Controls

 This be construed as the analysis of a company’s actual

results, approached from different perspectives at
different times, compared to its short, medium and long-
term objectives and business plans.

LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338

TYPES OF FINANCIAL DECISION

There are four main financial decisions in order to

accomplish goal of the firm  to maximize shareholder’s
wealth.
 Capital Budgeting or Long term Investment decision
(Application of funds)
 Capital Structure or Financing decision (Procurement of
funds)
 Dividend decision (Distribution of funds) and
 Working Capital Management decision
LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338
 Capital Budgeting Decision

 The process of planning and managing a firm’s long-term

investments is called capital budgeting.
 In capital budgeting, the financial manager tries to identify
profitable investment opportunities, i.e., assets for which
value of the cash flow generated by asset exceeds the cost
of that asset.
 Evaluating the size, timing, and risk of future cash flows
(both cash inflows & outflows) is the essence of capital
budgeting.
LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338
Capital Structure Decision

 A firm’s capital structure or financing decision is concerned with

obtain­ing funds to meet firm’s long term investment requirements.
 It refers to the specific mixture of long-term debt and equity, which
the firm uses to finance its assets.
 The finance manager has to decide exactly how much funds to raise,
from which sources to raise and when to raise.
 Different feasible combinations of raising required funds must be
carefully evalu­ated and an optimal combination of different sources
of funds should be selected.
 The optimal capital structure is one which minimizes overall cost of
capital and maximizes firm’s value.
 Capital structure decision gives rise to financial risk of a firm.
LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338
Dividend Decision

 Dividend decision involves two issues-whether to

distribute dividends and how much of profits to
distribute as dividends.
 A finance manager has to decide what percentage of
after-tax profit is to be retained in the business to meet
future investment requirements and what proportion has
to be distributed as dividend among shareholders.
 Should the firm retain all profits or distribute all profits
or retain a portion and distribute the balance?

LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338

 Proportion of profits distributed as dividend is called
dividend pay-out ra­tio and the proportion of profits
retained in the business is retention ratio.
 Finance manager here is concerned with determining the
optimal dividend pay-out ratio which maximizes
shareholder’s wealth.
 However, the actual decision is affected by availability of
profitable investment opportunities, firm’s financial
needs, shareholder’s expectations, legal constraints,
liquidity position of the firm and other factors.
LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338
Working Capital Management Decision

 Working capital management is concerned with

management of a firm’s short-term or current assets, such
as inventory, cash, receivables and short-term or current
liabilities, such as creditors, bills payable.
 Assets and Liabilities which mature within the operating
cycle of business or within one year are termed as current
assets and current liabilities, respectively.

LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338

Working capital management involves
following issues:

 What are the possible sources of raising short term funds?

 In what proportion should the funds be raised from
different short term sources?
 What should be the optimum levels of cash and inventory?
 What should be the firm’s credit policy while selling to
customers?

LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338

COVERAGE OF ACMAS 2338
FINANCIAL MANAGEMENT FUNDAMENTALS
02_FINANCIAL STATEMENT ANALYSIS
03_CAPITAL BUDGETING
04_COST OF CAPITAL
05_RISK AND RATES OF RETURN
06_STOCKS AND THEIR VALUATION
07_CAPITAL STRUCTURE AND LEVERAGE
08_DISTRIBUTION TO SHAREHOLDERS: DIVIDENDS AND SHARE REPURCHASE
09_WORKING CAPITAL MANAGEMENT
10_CASH, RECEIVABLES AND INVENTORY MANAGEMENT
11_FINANCIAL PLANNING AND FORECASTING
12_SHORT TERM FINANCING
LEOPOLDO D. MEDINA, CPA, MSA ACMAS 2338