fm-lecture 1.ppt
Post on 03-Apr-2018
231 Views
Preview:
TRANSCRIPT
-
7/27/2019 FM-Lecture 1.ppt
1/23
FINANCIAL MANAGEMENT
Financial Management is that specialised function ofgeneral management which is related to the procurement of
finance and its effective utilisation for the achievement of
common goal of the organisation.
Financial Management is the operational activity of a businessthat is responsible for obtaining and effectively, utilizing the
funds necessary for efficient operations.- Joseph and Massie.From the above definitions, it is clear that financial
management is that specialised activity which is responsible for
obtaining and affectively utilizing the funds for the efficient
functioning of the business and, therefor, it includes financial
planning, financial administration and financial control.
7/23/2013 1
-
7/27/2019 FM-Lecture 1.ppt
2/23
SCOPE OF FINANCIAL MGMT.
1. Financial Management in New Companies: A new company spendslarge amount on production and marketing but it should not ignoreproper use of its fund by managing cash, inventory, debtors and fixedassets
2. Financial Management in Old Companies: Old company can survivein long run, if it is capable to pay debt timely, to pay salary on time
and to pay other daily expenses. Because old company has goodreputation in financial market, so financial managements some partlike working capital management is very significant
3. Financial Management in NGO: Only NGO are working not for profitaim. Its aim is not to earn money but to survive. For long runexistence NGO need to properly manage its cost
7/23/2013 2
-
7/27/2019 FM-Lecture 1.ppt
3/23
Scope of financial mgmt. Contd.
Financial management, at present is not confined to raising andallocating funds. The study of financial institutions like stock exchange,
capital, market, etc. is also emphasized because they influenced under
writing of securities & corporate promotion. Company finance was
considered to be the major domain of financial management. The scope
of this subject has widened to cover capital structure, dividend policies,
profit planning and control and depreciation policies. It covers areas like:
Determining financial needs:- Funds are needed to meet promotional
expenses, fixed and working capital needs. The requirement of fixed
assets is related to types of industry. A manufacturing concern will
require more investments in fixed assets than a trading concern. The
working capital needs depend upon scale of operations. Larger the scale
of operations, the higher will be the needs for working capital.
7/23/2013 3
-
7/27/2019 FM-Lecture 1.ppt
4/23
Choosing the sources of funds:- A number of sources may be available for
raising funds. A concern may be resort to issue of share capital and
debentures. Financial institutions may be requested to provide long-termfunds. The working capital needs may be met by getting cash credit or
overdraft facilities from commercial bands.
Financial analysis and interpretation:- The analysis & interpretation of financial
statements is an important task of a finance manager. He is expected to know
about the profitability, liquidity position, short term and long-term financialposition of the concern. For this purpose, a number of ratios have to be
calculated.
Cost-volume profit analysis:- This is popularly known as CVPrelationship. For
this purpose, fixed costs, variable costs and semi variable costs have to be
analyzed. Fixed costs are more or less constant for varying sales volumes.Variable costs vary according to the sales volume. Semi-variable costs are
either fixed or variable in the short-term. The financial manager has to ensure
that the income of the firm will cover its variable costs
7/23/2013 4
-
7/27/2019 FM-Lecture 1.ppt
5/23
Working capital management:- Working capital refers to that part offirms
capital which is required for financing short-term or current assets such as
cash, receivables and inventories. It is essential to maintain proper level of
these assets. Finance manager is required to determine the quantum ofsuch assets.
Dividend policy:- The investors are interested in earning the maximum
return on their investments whereas management wants to retain profits
for future financing. These contradictory aims will have to be reconciled in
the interests of shareholders and the company. Dividend policy is animportant area of financial management because the interest of the
shareholders and the needs of the company are directly related to it.
Capital budgeting:- It is an expenditure the benefits of which are expected
to be received over a period of time exceeding one year. It is expenditure
for acquiring or improving the fixed assets, the benefits of which areexpected to be received over a number of years in future. Capital budgeting
decisions are vital to any organization. Any unsound investment decision
may prove to be fatal for the very existence of the concern
7/23/2013 5
-
7/27/2019 FM-Lecture 1.ppt
6/23
DECISIONS BY A FINANCIAL MANAGER
FM is concerned with the acquisition, financing, and management
of assets with some overall goal in mind.
Investment Decisions deal with questions like:
What is the optimal firm size?
What specific assets should be acquired?
What assets (if any) should be reduced or eliminated?
Financing Decisions: Determine how the assets (LHS of balance
sheet) will be financed (RHS of balance sheet)What is the best type of financing?
What is the best financing mix?What is the best dividend policy (e.g., dividend-payout ratio)?
How will the funds be physically acquired?
Asset Management Decisions
7/23/2013 6
-
7/27/2019 FM-Lecture 1.ppt
7/23
OBJECTIVES OF FINANCIAL MGMT.
Profit Maximization: Profit maximization is considered as
the goal of financial management. In this approach, actions thatIncrease profits should be undertaken and the actions that
decrease the profits are avoided. The term 'profit' is used in two
senses
As per first concept it refers to the amount and share of nationalIncome that is paid to the owners of business. The second way is
an operational concept i.e. profitability. This concept signifies
economic efficiency. It means profitability refers to a situation
where output exceeds Input. It means, the value created by the
use of resources is greater that the Input resources. Thus in all
the decisions, one test is used I.e. select asset, projects and
decisions that are profitable and reject those which are not
profitable.
7/23/2013 7
-
7/27/2019 FM-Lecture 1.ppt
8/23
OBJECTIVES OF FINANCIAL MGMT. Contd.
Wealth Maximization: Wealth maximization decisioncriterion is also known as Value Maximization or Net Present-
Worth maximization.
This involves increasing the Earning per share of the shareholders and to
maximize the net present worth. Wealth is equal to the difference
between gross present worth of some decision or course of action and the
investment required to achieve the expected benefits.
The Wealth Maximization approach is concerned with the amount of cash
flow generated by a course of action rather than the profits.
Value of business = EPS (EPS = Net Earnings / Outstanding Shares ) /Capitalization rate
7/23/2013 8
-
7/27/2019 FM-Lecture 1.ppt
9/23
An equation for net income
Net sales revenue
Cost of goods sold (O/P Inventory + Purchases C/L Inventory)
= Gross profit SG&A expenses (selling, General and Administrative Expenses)
= EBITDA
Depreciation & amortization(writing off an intangible asset that is being)
= EBIT
Interest expense (cost of borrowing money)
= EBT
Tax expense = Net income (EAT)
7/23/2013 9
-
7/27/2019 FM-Lecture 1.ppt
10/23
Wealth Maximization versus Profit Maximization
Timing profit maximization does not take into account
the timing of earnings, while wealth maximization does
Risk wealth maximization takes risk into account the
associated risk but profit maximization does not
Dividend payments if profit maximization was the goal,
a firm would never pay dividends
Qualitative factors profit maximization does not take
into account future activities such as sales growth, stability
and diversification.
Stock price maximization since investors want to
maximize their own wealth, they prefer the firm adopt
strategies that will maximize stock price
7/23/2013 10
-
7/27/2019 FM-Lecture 1.ppt
11/23
Profit maximization features1. Profit maximization is also called as cashing per share
maximization. It leads to maximize the business operation for
profit maximization
2. Ultimate aim of the business concern is earning profit, hence, it
considers all the possible ways to increase the profitability of the
concern
3. Profit is the parameter of measuring the efficiency of the
business concern. So it shows the entire position of the business
concern
4. Profit maximization objectives help to reduce the risk of the
business
7/23/2013 11
-
7/27/2019 FM-Lecture 1.ppt
12/23
Favourable Arguments for Profit MaximizationMain aim is earning profit
Profit is the parameter of the business operationProfit reduces risk of the business concern
Profit is the main source of finance
Profitability meets the social needs also
Unfavourable Arguments for Profit MaximizationProfit maximization leads to exploiting workers and consumers
Profit maximization creates immoral practices such as corrupt practice, unfair
trade practice, etcProfit maximization objectives leads to inequalities among the sake holders
such as customers, suppliers, public shareholders, etc
7/23/2013 12
-
7/27/2019 FM-Lecture 1.ppt
13/23
Drawbacks of Profit Maximization
(i) It is vague: In this objective, profit is not defined precisely or
correctly. It creates some unnecessary opinion regarding earning
habits of the business concern
(ii) It ignores the time value of money: Profit maximization doesnot consider the time value of money or the net present value of
the cash inflow. It leads to certain differences between the actual
cash inflow and net present cash flow during a particular period
(iii) It ignores risk: Profit maximization does not consider risk of thebusiness concern. Risks may be internal or external which will affect
the overall operation of the business concern
7/23/2013 13
-
7/27/2019 FM-Lecture 1.ppt
14/23
Favourable Arguments for Wealth Maximization
1. Wealth maximization is superior to the profit maximization because
the main aim of the business concern under this concept is to
improve the value or wealth of the shareholders
2. Wealth maximization considers both time and risk of the business
concern3. Wealth maximization provides efficient allocation of resources
4. It ensures the economic interest of the society as total cost of
project undertaken is compared to its value for the organization and
the society as whole
7/23/2013 14
-
7/27/2019 FM-Lecture 1.ppt
15/23
Unfavourable Arguments for Wealth Maximization
Wealth maximization is nothing, it is also profit maximization, it is the
indirect name of the profit maximization
Wealth maximization creates ownership-management controversy
The ultimate aim of the wealth maximization objectives is to
maximize the profit
Wealth maximization can be activated only with the help of the
profitable position of the business concern
7/23/2013 15
-
7/27/2019 FM-Lecture 1.ppt
16/23
AGENCY PROBLEM---Management versus Stockholders
Management serves as an agent to the stockholders (owner)
Stockholders delegate authority to management to act on their
behalf and are expected to act in their best interest
Managements objectives may differ from those of stockholders
In many large corporations, where ownership is largely diversified,the situation arises where management may act in their own best
interests rather than in the best interests of the stockholders
Management may attempt to amass income, power and prestige
Appropriate incentives such as stock options, bonuses andperquisites, should be given to managers to ensure they act in the
best interest of the stockholders
7/23/2013 16
-
7/27/2019 FM-Lecture 1.ppt
17/23
ROLE/FUNCTIONS OF FINANCE MANAGER
Finance manager is one of the important role players in the field of finance
function. He must have entire knowledge in the area of accounting, finance,
economics and management. His position is highly critical and analytical to
solve various problems related to finance.
1.Forecasting Financial Requirements He should estimate, how much
finances required to acquire fixed assets and forecast the amount needed to
meet the working capital requirements in future
2. Acquiring Necessary Capital After deciding the financial requirement, the
finance manager should concentrate how the finance is mobilized and
where it will be available
3.Investment Decision The finance manager must carefully select best
investment alternatives and consider the reasonable and stable return from
the investment. He must be well versed in the field of capital budgeting
techniques to determine the effective utilization of investment
7/23/2013 17
-
7/27/2019 FM-Lecture 1.ppt
18/23
ROLE/FUNCTIONS OF FINANCE MANAGER Contd.
4. Cash Management Proper cash management is not only essential for
effective utilization of cash but it also helps to meet the short-term
liquidity position of the concern
5. Interrelation with Other Departments Finance manager deals with
various functional departments such as marketing, production, personnel,research & development, etc. Finance manager should have sound
knowledge not only in finance related area but has to be well versed in
other areas too. He must maintain a good relationship with all the
functional departments of the business organization
7/23/2013 18
-
7/27/2019 FM-Lecture 1.ppt
19/23
IMPORTANCE OF FINANCIAL MANAGEMENT
Financial Planning Long-term profit planning aimed at generating greater
return on assets, growth in market share, and at solving foreseeable
problems
Acquisition of Funds Financial management involves the acquisition of
required finance to the business concern. Acquiring needed funds play a
major part of the financial management, which involve possible source of
finance at minimum cost
Proper Use of Funds Proper use and allocation of funds leads to improve
the operational efficiency of the business concern. When the finance
manager uses the funds properly, they can reduce the cost of capital and
increase the value of the firm.
Financial Decision Financial decision will affect the entire business
operations of the concern because there is a direct relationship with
various department functions such as marketing, production personnel, etc
7/23/2013 19
-
7/27/2019 FM-Lecture 1.ppt
20/23
IMPORTANCE OF FINANCIAL MGMT. Contd.
Improve Profitability Financial management helps to improve the
profitability position of the concern through effectiveness utilization of
funds with the help of strong financial control devices such as budgetary
control, ratio analysis and cost volume profit analysis
Increase the Value of the Firm Ultimate aim of any business concern is to
achieve maximum profit. Higher profitability leads to the maximization of
the wealth of investors as well as the nation
Promoting Savings Savings are possible only when the business concern
earns higher profitability and maximizing wealth. Effective financial
management helps to promoting and mobilizing individual and corporate
savings. Nowadays
financial management is also popularly known as business finance or
corporate finances. The business concern or corporate sectors cannot
function without the importance of the financial management.
7/23/2013 20
-
7/27/2019 FM-Lecture 1.ppt
21/23
Areas of financial Mgmt.
1. Financial Management and Economics Economic concepts like microand macroeconomics are directly applied with the financial management
approaches. Financial management also uses the economic equations like
money value discount factor, economic order quantity etc.
2. Financial Management and Accounting Accounting records include the
financial information of the business concern. Hence, we can easily
understand the relationship between the financial management and
accounting. In the olden periods, both financial management and
accounting are treated as a same discipline and then it has been merged
as Management Accounting because this part is very much helpful tofinance manager to take decisions. But nowadays financial management
and accounting discipline are separate and interrelated.
7/23/2013 21
-
7/27/2019 FM-Lecture 1.ppt
22/23
Areas of financial Mgmt. Contd.
3. Financial Management and Mathematics Economic order quantity,discount factor, time value of money, present value of money, cost of capital,
capital structure theories, dividend theories, ratio analysis and working
capital analysis are used as mathematical and statistical tools and techniques
in the field of financial management
4. Financial Management and Production Management Profit of theconcern depends upon the production performance. Production
performance needs finance, because production department requires raw
material, machinery, wages, operating expenses etc. These expenditures are
decided and estimated by the financial department and the finance manager
allocates the appropriate finance to production department.
7/23/2013 22
-
7/27/2019 FM-Lecture 1.ppt
23/23
Areas of financial Mgmt. Contd.
5. Financial Management and Marketing Produced goods are sold inthe market with innovative and modern approaches. For this, the
marketing department needs finance to meet their requirements. The
financial manager or finance department is responsible to allocate the
adequate finance to the marketing department
6.Financial Management and Human Resource Financialmanagement is also related with human resource department, which
provides manpower to all the functional areas of the management.
Financial manager should carefully evaluate the requirement of
manpower to each department and allocate the finance to the human
resource department as wages, salary, remuneration, commission,bonus, pension and other monetary benefits
7/23/2013 23
top related