Principles of Financial

Management
By Dr. Gouri Kalagond
 Meaning
• Financial management means planning, organizing, directing and
controlling the financial activities such as procurement and utilization of
funds which fetch returns to the enterprise.
 Definition
• “Weston and Brigham”
“Financial management is an area of financial decision making,
harmonizing, individual motives and enterprise goals.”
 Nature of Financial Management
• Goal Oriented • Continuous Monitoring &
• Strategic Decision Making Evaluation

• Time Value of Money • Ethical Considerations

• Risk & Return Trade-off • Global Perspective

• Liquidity & Profitability • Technological Advancements

• Integration with other Business • Regulatory Compliance

Functions • Dynamic and Evolving
 Objectives of Financial Management
• Profit Maximization
• Wealth Maximization.
• Balanced Assets Structure
• Liquidity Maintenance
• Judicious Planning of Funds
• Efficiency in Utilizing the Funds
• Financial Discipline
Importance of Wealth Maximization
Creditors,
bankers,
lenders

Shareholders, Workers,
investors, BUSINESS employee
owners, s
management

Society,
customers,
Government,
Public
 Decisions in Financial Management
• Investment Decisions
• Financing Decisions
• Dividend Decisions
• Working Capital Decisions
 Business Firms & their Financing
• Equity Financing
• Debt Financing
• Bank Loans
• Venture Capital
• Angel Investors
• Initial Public Offering
• Private Equity
• Crowdfunding
 Types of Business Units
• Strategic Business Units • Division
• Product-Based Business Units • Subsidiary
• Geographic Business Units • Joint Venture
• Functional Business Units • Franchise
• Customer Based Business Units • Project Team
 Sources of Capital
• Equity Capital • Debt Capital
 Equity Shares  Bank Loans
 Preference Shares  Bonds
• Retained Earnings  Debentures
 Capital Structure
The capital structure defines the mix of debt and equity used to finance the
business activities.
Capital structure means the total combined finance of a business consisting
of equity shares, preference shares, debentures, retained earnings and other
long term borrowed funds.
While deciding the capital structure of the company a fair balance should be
maintained between two types of securities, i.e. fixed cost bearing securities
and variable cost bearing securities.
 Capital Structure
• Debt based Capital Structure
• Equity based Capital Structure
• Balanced Capital Structure
 Optimum Capital Structure
The optimum capital structure is the ideal mix of debt and equity that a
company uses to finance its operations and investments.
The concept of optimum capital structure revolves around finding the point
where the cost of capital is minimized, leading to an increase in the firm's
overall value.
 Key Considerations for Optimum Capital
Structure
• Cost of Capital (WACC)
• Tax Shield
• Financial Leverage
• Business Risk and Volatility
• Flexibility and Adaptability
• Investor Preferences and Market Conditions
• Company Size and Growth Prospects
• Regulatory Environment
• Risk Tolerance
 Marginal Cost of Capital
The marginal cost of capital (MCC) is a financial metric that represents the
additional cost a company incurs for raising one more unit of capital.
It is the cost associated with obtaining additional funds, either through debt
or equity, to finance new projects or investments.
Query is a gift !

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