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Financial Financial Management Management

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  • Financial Management

  • Meaning of Finance:Arrangement and Management of funds required for organizationIt is blood of organizationArt and Science of Managing Money

  • What is Financial Management?1.Concerns the acquisition, financing, and management of assets with some overall goal in mind.2.Procurement of Finance and its Effective utilization for achievement of common goal

  • Differences Between Accounting and FinanceFinancial accounting involves recording and classifying financial information.Completion of accounting cycleCompilation of financial statementsManagerial accounting applies tools to financial information to generate new information.Ratio analysisBreakeven analysis

  • Differences Between Accounting and FinanceFinancial management involves a number of different areas such as: Stock valuationBond valuationAsset diversificationProperty appraisal and valuationWorking capital management

  • What Is Financial Management?Financial management is used to help make three major decisions:1. Which assets should we invest in?2.How will we pay for these assets?3.What should we do with the earnings generated by the assets? These are called the investment, financing, and dividend decisions.

  • Decision in Financial Management

    Investment DecisionFinancing DecisionAsset Management Decision

  • 1.Investment DecisionsWhat is the optimal firm size?What specific assets should be acquired?What assets (if any) should be reduced or eliminated?Most important of the three decisions.

  • 2. Financing DecisionsWhat is the best type of financing? What is the best financing mix?What is the best dividend policyHow will the funds be physically acquired?Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet).

  • 3. Asset Management DecisionsHow do we manage existing assets efficiently?Financial Manager has varying degrees of operating responsibility over assets.Greater emphasis on current asset management than fixed asset management.

  • 3.Asset Management Decisions1.Capital budgetingWhat long-term investments or projects should the business take on?2. Capital structureHow should we pay for our assets?Should we use debt or equity?3.Working capital managementHow do we manage the day-to-day finances of the firm?*

  • Role of Finance ManagerOverall financial Planning & controlRaising of funds by different sourcesSelection of fixed assetsAny other individual financial event

  • Goals or Objectives of Financial Management1.Profit MaximizationProfit is barometer of progressMaximizing a firms earnings after taxes.Effective utilization of firms resourcesInterest of stakeholders cannot bye ignored

  • 2.Maximization of Shareholder Wealth!Financial decision will be taken such a way that shareholders can get highest returnsCombination of return and increase of share priceShares are traded in capital market hence true value can analysed Market price of share shows all future benefits flows from firm to investors

  • Function of Financial ManagerForecasting of financial needsAcquiring the capitalInvestment DecisionCash ManagementInterrelation with other departments

  • Modern Approaches of Financial Management1.The investment decision:Allocation of capital. It has to show the funds can be invested in assets which would yield benefit in future 2.The financial decisionAcquisition of finance.3. The dividend policy decisionThe determination of the percentage of profit earned by the enterprise which is paid to the shareholders 4.The funds requirement decisionCurrent assets to have liquidity in the business. Investment of funds in current assets reduces the profitability of the firm

  • Financial Mgt. & Other AreasFM & Production Dept.:Production facilities,Skilled labour, Production cycle,Finished Goods, Capacity utilizationSafety devicesAll decisions have financial implications therefore these are evaluated in light objective of maximization of shareholders wealth

  • 2.FM & Material Dept.:ProcurementStorageMaintenanceSupplyNeighter Excess nor Shortage of materialFinancial manger & Material manager think about EOQ, Safety level, Danger level of stock, store personnel requirement

  • 3.FM & Personnel Dept.:RecruitmentTraining & placementManpower managementWelfare of employee and their familyDifferent Decisions need to be taken. out of some are compulsory under LegislativePersonal Dept with Finance Manger has to prepare Incentive schemes, pay scale, training program,

  • 4.FM & Marketing Dept.:Marketing plansDiscounts and offersAdvertisement budgetCredit and Cash Sales policies

  • Key Strategies of FMPreparation of Vision StatementStatement about the companys values, purpose, and future direction2. Preparation of Mission StatementTarget customers and markets; main products and services; geographic domain; core technologies; commitment to survival, growth.3.Analysis:An analysis of the firms business trends, external opportunities, internal resources.4. Strategy Formulation:To formulate a long-term strategy 5.Strategy Implementation and Management

  • The Modern CorporationThere exists a SEPARATION between owners and managers.Modern CorporationShareholdersManagement

  • Role of ManagementAn agent is an individual authorized by another person, called the principal, to act in the latters behalf.Management acts as an agent for the owners (shareholders) of the firm.

  • Board of DirectorsTypical responsibilities:Set company-wide policy;Advise the CEO and other senior executives;Hire, fire, and set the compensation of the CEO;Review and approve strategy, significant investments, and acquisitions; andOversee operating plans, capital budgets, and financial reports to common shareholders.

  • Organization of the Financial Management Function Board of DirectorsPresident(Chief Executive Officer)Vice PresidentOperationsVice PresidentMarketingVP ofFinance

  • TreasurerCapital BudgetingCash ManagementCredit ManagementDividend DisbursementFin Analysis/PlanningPension ManagementInsurance/Risk MngmtTax Analysis/PlanningOrganization of the Financial Management Function VP of FinanceControllerCost AccountingCost ManagementData ProcessingGeneral LedgerGovernment ReportingInternal ControlPreparing Fin StmtsPreparing BudgetsPreparing Forecasts

    ****Provide some examples of capital budgeting decisions, such as what product or service the firm will sell, should old equipment be replaced with newer, more advanced, equipment, etc.

    Be sure to define debt and equity.

    Provide some examples of working capital management issues, such as: whom to grant credit, how much inventory should be carried, when should suppliers be paid, etc.