Unit II

Introduction to Financial Management

PROF. MANISHA SANGHVI
Derivatives Market
Cash Market / Stock market Derivatives

Rs 100*10 shares=Rs 1000 Market lot

100*10shares=Rs 1000
Margin @10% Rs 100
Price of SBI will go up: Buy BUY: Sell
Price of SBI will down : SELL 100:105
SELL: Buy
100: 95
Physical settled Cash settled
Stock for any of days years Expiry : 1m,2m,3m- Sept, oct, Nov
1300 142 stocks

07/10/2024 BASICS OF FINANCIAL MANAGEMENT- PROF. MANISHA SANGHVI

AY Avinash bearish
SBIN stock will go up SBIN stock will go down
BUY SBIN 24th Sept SELL SBIN FC 24th Sept
19th Sept: RS 192*3000= Rs 5,76,000 19th Sept: RS 192*3000= Rs 5,76,000
Margin Amt : % 57,600 Margin Amt 10% -57,600

22nd Sept: 200 22nd Sept: 200

Profit: +8*3000= Rs 24000 -8*3000= Rs 24000 loss
Margin BAL: 57600+24000 Margin :57600-24000
SELL: BUY

BUY: SELL
23rd Sept
24th sept 3.20 PM

07/10/2024 BASICS OF FINANCIAL MANAGEMENT- PROF. MANISHA SANGHVI

Unit II Learning objective
To understand need for the financial management
Success vs failure cases of company

07/10/2024 BASICS OF FINANCIAL MANAGEMENT- PROF. MANISHA SANGHVI

Meaning and Scope of Financial Management
Financial Management means planning, organizing, directing and controlling the financial activities such as
procurement and utilization of funds of the enterprise. It means applying general management principles
to financial resources of the enterprise.
1.Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in
current assets are also a part of investment decisions called as working capital decisions.
2.Financial decisions - They relate to the raising of finance from various resources which will depend upon
decision on type of source, period of financing, cost of financing and the returns thereby.
3.Dividend decision - The finance manager has to take decision with regards to the net profit distribution.
Net profits are generally divided into two:
i. Dividend for shareholders- Dividend and the rate of it has to be decided.
ii. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion
and diversification plans of the enterprise.

07/10/2024 BASICS OF FINANCIAL MANAGEMENT- PROF. MANISHA SANGHVI

Scope of Financial Management

Financing Decision-

Management
Disinvestment

Financial Investment Decision

NPA
Dividend Decision
Bonus Shares,Cash

07/10/2024 BASICS OF FINANCIAL MANAGEMENT- PROF. MANISHA SANGHVI

Venture capital, PE, AI
Vodafone+ Idea Vi….JIO
20%....17%...2016
25000 cr…..2019 Right issue/FPO/IPO/Offer to sale
TCS 100
Right issue :
Disc price: 80, 10:1
50 shares…5 share @Rs 80

07/10/2024 BASICS OF FINANCIAL MANAGEMENT- PROF. MANISHA SANGHVI

Objectives of Financial Management
To ensure regular and adequate supply of funds to the concern.
To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price
of the share, expectations of the shareholders.
To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum
possible way at least cost.
To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of
return can be achieved.
To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is
maintained between debt and equity capital

07/10/2024 BASICS OF FINANCIAL MANAGEMENT- PROF. MANISHA SANGHVI

 Functions of Financial Management
Estimation of capital requirements
Determination of capital composition
Choice of sources of funds
Investment of funds
Disposal of surplus
 Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.
 Retained profits - The volume has to be decided which will depend upon expansional, innovational, diversification
plans of the company.

Management of cash
Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise
control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit
control, etc.

07/10/2024 BASICS OF FINANCIAL MANAGEMENT- PROF. MANISHA SANGHVI

Profit maximisation and Shareholders’ Wealth
Management
Profit maximization, in financial management, represents the process or the approach by which
profits Earning Per Share (EPS) is increased.
In simple words, all the decisions whether investment or financing etc. are focused on
maximizing the profits to optimum levels

07/10/2024 BASICS OF FINANCIAL MANAGEMENT- PROF. MANISHA SANGHVI

Benefits of Profit Maximization:

• Economic Existence: The foundation of the profit maximization theory is profit and profit is a must for the economic existence of any company or
business.

• Performance Standard: Profit determines the standard of performance of any business or company. When a business is unable to make profits it fails
to fulfill its chief target and causes a risk to its existence.

• Economic and Social Well-being: Profit maximization theory indirectly plays a role in economic and social well-being. When a business makes a
profit, it utilizes and allocates resources properly which in turn results in the payments for capital, fixed assets, labor and organization. In this way,
economic and social welfare is performed.

Drawbacks of Profit Maximization:

• The Vagueness of the Profit Concept: The concept of profit is indefinite because different people may have a different idea about profit, such as
profit can be EPS, gross profit, net profit, profit before interest and tax, profit ratio, etc. Particularly, no definite profit-maximizing rule or method
exists in reality.

• Does Not Consider Time Value of Money: The profit maximization theory only states that higher the profit better the performance of the business.
The theory only considers profit without considering the time value of money. The concept of the time value of money tells that a certain unit of
money today will not be equal to the same unit of money a year later.

• Does Not Consider the Risk: Any business decision only considering profit maximization model ignores the involved risk factor which may be harmful
to the existence of the business in the long-run. Because if the business is incapable of handling the higher risk, it’s survival will be in question.

• Does Not Consider the Quality: Intangible benefits e.g. image, technological advancements, quality, etc. are not considered in the profit
maximization approach which is considered as one of the biggest drawbacks. These intangible assets have a mentionable role in creating value for
the business which cannot be ignored. Profit maximization theory is based on a traditional viewpoint but the modern business and financial concept
value wealth maximization much more than profit maximization.

07/10/2024 BASICS OF FINANCIAL MANAGEMENT- PROF. MANISHA SANGHVI

 How to Achieve Profit Maximization?

1.Increasing Sales-revenue:
• Increasing sales quality by applying better marketing strategies, quality improvement, a thorough market study to assess that from
which segment more money is coming to the business and concentrate in making more sales from those products or services. You
can also borrow the best marketing strategy from your competitors, or similar businesses.
• Insisting existing customers to buy extra services or products.
• Diversification by selling a wider variety of products or services.
• Revising pricing of products or services
• Motivating employees
• educating all customers both existing and potential for your product or service

2. Cost-cutting:
• Analysis of the full expenditure of money to different sectors.
• Negotiate with suppliers for cheaper prices especially when buying in large quantities.
• Manufacturing process should be more efficient to reduce wastage. Technologies which saves time and expands
production should be applied.
• Looking for a new cost-effective energy supplier because a large amount of money is spent on the energy sector.
• Outsourcing

07/10/2024 BASICS OF FINANCIAL MANAGEMENT- PROF. MANISHA SANGHVI

Shareholder Wealth Maximization
Shareholder wealth maximization
When business managers try to maximize the wealth of their firm, they are actually
trying to increase the company's stock price. As the stock price increases, the value
of the firm increases, as well as the shareholders' wealth.
Wealth maximization is also known as value maximization or net present worth
maximization

07/10/2024 BASICS OF FINANCIAL MANAGEMENT- PROF. MANISHA SANGHVI

Case study
Jet airways
Yes Bank
Jio
Future Group
Vodafone idea
Ruchi soya
Star bucks
HDFC bank
ITC
IL&FS

07/10/2024 BASICS OF FINANCIAL MANAGEMENT- PROF. MANISHA SANGHVI

http://jrajeshfm.blogspot.com/2017/04/financial-management-and-its-objectives.html

07/10/2024 BASICS OF FINANCIAL MANAGEMENT- PROF. MANISHA SANGHVI