FINANCIAL MANAGEMENT

COURSE : BBA.LL.B. B Y:
SEMESTER : VI SIMPY BANSAL
B AT C H : 2021-26
 INTRODUCTION
 Finance is a basic foundation of all
kinds of economic activities

 Backbone of any business

 Branch of Economics till 1890s

(Economics : efficient utilization of

scarce resources)

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MEANING OF FINANCE

• "The arrangement of cash and credit so that the user may have the means to carry
out its objectives as satisfactorily as possible”.
-Howard & Uptron
• Science of money
• It describes two related activities: the study of how money is managed and the
actual process of acquiring needed funds.
• Individuals, businesses and government entities all need funding to operate, the
field is often separated into three sub-categories:

Personal Corporate
Public Finance
Finance Finance
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CORPORATE FINANCE (1)
Imagine that you were to start your business. No matter what type you started, you
would have to answer the following three questions in some form or another.
1. What long –term investments should you take on?
That is, what lines of business will you be in and what sorts of buildings, machinery and
equipment will you need.
2. Where will you get the long–term financing to pay for your investment?
Will you bring in other owners or will you borrow the money?

3. How will you manage your everyday financial activities such as collecting from
customers and paying suppliers.
Corporate finance, is the study of ways to answer these three questions

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CORPORATE FINANCE (2)

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 MEANING OF CORPORATE FINANCE
• Finance is the activity concerned with the raising and administering of funds used
in business
• Acc to Wheeler, “Business finance is that business activity which concerns with the
acquisition and conversion of capital funds in meeting financial needs and overall
objectives of a business enterprise”.
• It deals with the source of funds and the channelization of those funds like the
allocation of funds for resources and increasing the value of the company by
improving the financial position
• Corporate finance can be defined as any decisions made by a business that affect
its finances. These decisions can be categorized into:

Investment decisions Financing decisions Dividend decisions

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FINANCIAL MANAGEMENT
 Financial management is an integral part of overall management
 “Financial management is concerned with the efficient use of an important
economic resource, namely capital funds”
- Solomon Ezra & J. John Pringle
 Financial management refers to entire gamut of managerial efforts devoted to the
management of finance - both mobilizations and deployment or uses of funds of the
enterprise
 Financial management is concerned with planning, organizing, directing and
control of financia1 activities in a business

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EVOLUTION OF FINANCIAL MANAGEMENT
 Initially a branch of Economics (till 1890s)
 With enterprises becoming big and requirement for huge funds resulted in promoting the study of Finance to
emphasise on investment, liquidity and financing of the firms. (Beginning of 20th Century)
 Traditional phase : (upto 1940s)
 It was concerned with procurement of funds only, therefore, required occasionally
 The Great Depression period
 Transitional phase : (upto mid 1950s)
 More emphasis was put on financial problems faced by managers in day-to-day operations hence leading to
increased focus on working capital management
 Modern phase (late 1950s) :
 A well-managed Finance department came into existence.
 The scope of financial management got broadened. It includes
 acquisition of funds required in the business at the least possible cost,
 investing the funds obtained in an optimum manner so as to maximize returns and
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 taking decisions relating to distribution of profits i.e., deciding the dividend policy and retention of profits.
RESPONSIBILITIES OF A FINANCE MANAGER
• Estimating the total requirements of funds for a given period.
• Raising funds through various sources, both national and international, keeping in mind the cost
effectiveness;
• Investing the funds in both long term as well as short term capital needs;
• Funding day-to-day working capital requirements of business;
• Collecting on time from debtors and paying to creditors on time;
• Managing funds and treasury operations;
• Ensuring a satisfactory return to all the stake holders;
• Paying interest on borrowings;
• Repaying lenders on due dates;
• Maximizing the wealth of the shareholders over the long term;
• Interfacing with the capital markets;
• Awareness to all the latest developments in the financial markets;
• Increasing the firm’s competitive financial strength in the market; and
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• Adhering to the requirements of corporate governance.
NATURE OR FEATURES OF FINANCIAL MANAGEMENT

 Pervasive
 An integral part of overall management, financial considerations are involved in all business decisions

 Focus on valuation of the firm

 Financial decisions are directed at increasing/maximization/ optimizing the value of the firm

 Involves risk-return trade-off

 Generally higher the risk, returns might be higher and vice versa.
 So, the financial manager has to decide the level of risk the firm can assume and satisfy with the
accompanying return.

 Affects the survival, growth and vitality of the firm

 Finance is said to be the life blood of business. The amount, type, sources, conditions and cost of
finance squarely influence the functioning of the unit. 10
FUNCTIONS OF FINANCIAL MANAGEMENT

Financial
Decisions

Investment Dividend Financing

Decisions Decisions Decisions

Working
Capital Cost of Capital
capital
Budgeting capital structure
management
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INVESTMENT DECISIONS
 Investment ordinarily means utilisation of money for profits or returns
 Could be done by creating physical assets and carrying on business or purchasing shares or
debentures of a company
 Investments involve uncertainty, and are therefore risky
 The Investment decision relates to selection of asset in which funds will be invested by the
firm
 All investment proposals have to be evaluated in relation to expected return and risk
 The assets that are to be aquired may be long term or short term
 Decision with respect to long term assets is known as capital budgeting and with respect to
short run assets is known as working capital management

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CAPITAL BUDGETING
 Capital Budgeting means the long-range planning of allocation of funds among the various
investment proposals
 Choice is required to be made amongst available resources and avenues for investment
 This involves huge investment and yield a return over a period of time
 Since the future is uncertain therefore there are difficulties in calculation of expected return
 Along with uncertainty comes the risk factor which has to be taken into consideration
 Therefore while considering investment proposal it is important to take into consideration
both expected return and the risk involved

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WORKING CAPITAL MANAGEMENT
 Investment in current assets and their management is termed as 'working capital management
 The financial manager has to determine the degree of liquidity that a firm should possess
 There is a conflict between profitability and liquidity of a firm
 Working capital management refers to a trade – off between liquidity (Risk) and profitability.
 Insufficiency of funds in current assets results liquidity crunch and possessing of excessive
funds in current assets reduces profits.
 In order to achieve this objective, the financial manager must equip himself with sound
techniques of managing the current assets like cash, receivables and inventories etc.

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FINANCING DECISIONS
 Financing decisions essentially relate with the arrangement of funds to fulfil the
requirements of the firm, the best capital structure for executing the investment
decision is known as financing decisions
 An enterprise may obtain finances from shareholders, ordinary or preference,
debentureholders on long-term basis, financial institutions as long-term loans, banks
and others as short-term loans and the like
 Financing decisions are concerned with the determination of how much funds to procure
from amongst the various avenues available i.e. the financing mix or capital structure
 The Financial Manager must decide whether to raise more money by equity or debt or
by a combination of these finance sources
 Use of each type of finance has certain costs and benefits attached with it. The main
concern while selecting the finance source is its cost to the firm.
 Firm should select an optimum capital structure, it’s the capital structure at which the
cost of the capital is lowest for the firm. 15
DIVIDEND DECISIONS
• These decisions are related to the distribution of earnings

• The financial manager must decide whether the firm should distribute all profits, or
retain them, or distribute a portion and retain the balance

• The proportion of profits distributed as dividends is called the dividend-payout ratio

and the retained portion of profits is known as the retained earnings

• The dividend policy should be determined in terms of its impact on the shareholders’
value

• The optimum dividend policy is one that maximizes the market value of the firm’s
shares
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OBJECTIVE OF FINANCIAL MANAGEMEMT
 Process of decision making by the finance manager must be goal oriented
 The objective provide a framework for optimum financial decision making
 The evaluation of alternatives or opportunities available and the decision taken by a
finance manager depend a great deal on the goal of financial decision making
 All the decisions taken by him are made in pursuit of that goal
 Generally, maximisation of economic welfare of its owners is accepted as the financial
objective of the firm. But, the question is, how does one maximise the owners’ economic
welfare?
 Financial experts differ while finding a solution to this problem. There are two well
known criteria in this regard:

Profit Wealth
maximi maximi
zation zation

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 PROFIT MAXIMIZATION
• The basic objective of every business enterprise is the welfare of its owners
• It can be achieved by the maximisation of profits
• Therefore, according to this criterion, the financial decisions (investment, financing and
dividend) of a firm should be oriented to the maximisation of profits (i.e. select those assets,
projects and decisions which are profitable and reject those which are not profitable)
• Favorable Arguments for Profit Maximization
• The main aim of a firm is to earn profit
• Profit is the indicator of success of the business operation
• Sufficient profits reduce risk of the business concern
• Profit is the main source of finance for a firm in the form of internal equity
• Profitability meets the social needs of a business also

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 CRITICISMS OF PROFIT MAXIMIZATION
 Profit maximization is vague concept as the term profit is not defined precisely
 Profit may be short term or long-term profit; it may be before tax profit or after-tax profit

 Profit maximization does not consider the time value of money or the net present value of the cash
inflow

 Profit maximization does not consider risk of the business concern. Risks may be internal

 or external which will affect the overall operation of the business concern.

 The goal of profit maximization may lead to the exploitation of workers and consumers.

 Profit maximization may create immoral practices such as corrupt practice, unfair trade practice, etc.

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WEALTH MAXIMIZATION
• It means maximization of shareholders wealth

• This goal is generally expressed in term of maximization of the value of a share of a

firm

• The separation of ownership from management and the increase in intensity of

competition has led to the redefinition of profit maximisation objective of a firm
• Wealth maximization means maximizing the ‘net present value’ of a course of action or
investment project
• The net present value of a course of action is the difference between the present value of
its benefits and the present value of its costs
• It is the versatile goal of the company and highly recommended criterion for evaluating
the performance of a business organization 20
WEALTH MAXIMIZATION VS. PROFIT
MAXIMIZATION
Favorable Arguments for Wealth Maximization:
 Contrary to profit maximization objective, wealth maximization is based on cash flows, and
not on profits.
 The objective of wealth maximization focuses on the long run picture.
 Wealth maximization considers the time value of money.

 Wealth-maximization criterion considers the risk and uncertainty factor.

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 THANK YOU

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