FINANCIAL MANAGEMENT

DefinitionThe planning, directing, monitoring,

organizing, and controlling of the monetary resources of an organization.

• Taking a commercial business as the most common organizational structure, the key objectives of financial management would be to:

• • Create wealth for the business• • Generate cash, and• • Provide an adequate return on investment

bearing in mind the risks that the business is taking and the resources invested

• FINANCIAL PLANNING• Management needs to ensure that there is

enough funding available at the right time to meet business needs.

• Short term needs include equipment, stock, employees and cost of sales.

• Long term needs include significant additions to assets on the productive capacity .

• FINANCIAL CONTROL• In order to ensure that business meets its

objectives decisions have to be made on;• Are assets being used efficiently• Are the business Assets secure• Does management act in the best interest of

shareholders and according to business rules and mission?

• FINANCIAL DECISION MAKING• Critical decisions relate to investment,

financing and dividends.• Investments must be made in a particular as

envisioned• Finances can be raised from alternative

sources i.e. selling new shares, borrowing or taking credit from suppliers.

• A key decision to be made is whether profits earned by the venture should be retained to add value to net worth of business or be distributed to shareholders as dividends.

• If dividends are too high business may be starved of funding to reinvest and grow.

NEED OF FM FOR PROJECTS

• To plan agricultural projects we compare the stream of investment and production costs of an agricultural undertaking with the flow of benefits it will produce.

• The whole complex of activities in the undertaking that uses resources to gain benefits constitutes the agricultural project. If this definition seems broad, it is intentionally so.

• . This broad concept of project format capable of accommodating diverse agricultural endeavors. An enormous variety of agricultural activities may usefully be cast in project form.

• The World Bank itself lends for agricultural projects as different as irrigation, livestock, rural credit, land settlement, tree crops, agricultural machinery, and agricultural education, as well as for multisectoral rural development projects with a major agricultural component. In agricultural project planning, form should follow analytical content.

• Virtually every developing country has a systematically elaborated national plan to hasten economic growth and further a range of social objectives.

• This is captured by diverse projects in separate sectors impacting socially, economically and potically on the larger economy.

• Projects provide an important means by which investment and other development expenditures foreseen in plans can be clarified and realized.

• Sound development plans require good projects, just as good projects require sound planning. The two are interdependent.

• Financial Management can be defined as:• The management of the finances of a

business / organisation in order to achieve financial objectives

• Taking a commercial business as the most common organizational structure, the key objectives of financial management would be to:

• • Create wealth for the business• • Generate cash, and• • Provide an adequate return on investment

bearing in mind the risks that the business is taking and the resources invested

ROLE OF FM

• Financial management is the management of financial functions.

• Financial functions include obtain funds (raising of funds) and how to use these funds (allocation of funds).

• Financial managers are concerned with the determination of total assets worth of investments in various assets and choose the sources of funds to finance the asset.

• To obtain funds, financial managers can obtain it from within and outside the company. Sources from outside the company come from the capital market, may take the form of debt or equity capital.

• Financial management can be defined from the duties and responsibilities of financial manager.

• The main task of financial management, among others, include decisions to invest, financing business activities and the distribution of dividends a company, thus the task of financial managers is to plan to maximize shareholder value.

• Another important activity that should be the financial manager concerning the four aspects:

• 1. Financial managers must cooperate with other managers in charge of general planning company.

• 2. Financial managers must focus on various investment and financing decisions, and other aspects related to FM

• 3. Financial managers must cooperate with managers in the company so the company can operate as efficiently as possible

• Financial managers must be able to connect the company with the financial markets, where companies can obtain funds and corporate securities can be traded.

In terms of corporate goals and objectives

• If financial management leads to maximisation stock price, it needs good management and efficient in accordance with consumer demand.

• Companies that managed to always put efficiency and innovation as a priority, resulting in new products, new technological discoveries and expanding employment

• External factors such as environmental pollution, product safety assurance and safety becomes more important to consider.

• Fluctuations in all levels of business activity and the changes that occur in conditions of financial markets is an important aspect of the external environment.

• Cooperation between industry and government is needed to create regulations governing corporate behavior, and vice versa companies comply with these regulations.

• Corporate purpose is essentially value of the company with technical considerations.

• Basically, the purpose of financial management is to maximize corporate value.

• However, behind this goal is still there is a conflict between business owners with providers of funds as creditors.

• If the company running smoothly, then the value of the company’s stock will rise, while the value of corporate debt in the form of bonds is not affected at all.

• If the company running smoothly, then the value of the company’s stock will rise, while the value of corporate debt in the form of bonds is not affected at all.

• So it can be concluded that the value of stock ownership can be an appropriate index to measure the level of effectiveness of company..

• Based on that reason, the financial management objectives expressed in terms of maximizing the value of shares of corporate ownership, or maximize stock prices

• The purpose of maximizing the stock price does not mean that managers should attempt to seek capital appreciation of shares at the expense of bondholders.

• The main financial objective of the managers of a business is to maximise its value to its owners.

• To ensure that they have the right balance, managers set objectives in a number of areas, that affect the value of the business:

• Liquidity• Is the ability of an organisation to pay its

short-term obligations as they fall due.• A business must have sufficient cash flow to

meet financial obligations or convert current assets into cash quickly.

• Planning cash flow is essential in this goal.

• Profitability• Is the ability of an organization to maximise its

profits. • Profits satisfy owners and shareholders and

are important for long term sustainability.

• Efficiency• Is the ability of an organization to minimise its

costs and manage its assets so that maximum profit is achieved with the lowest possible level of assets.

• Control measures are essential here.

• Growth• An important aspect of profit maximisation is

the ability of an organization to maintain profits in the longer term.

• To do this growth is essential, and growth is the ability of the organization to increase its size in the longer term.

• Return on Capital• Is the amount of profit returned to owners or

shareholders as a percentage of their capital contribution.

• Owners have expectation profits will be maximised such that they can receive a share of them.

• .

• Managers will set different objectives on the return on capital for different projects depending on the risk associated

PRINCIPLES OF FM

• There are ten principles that form the basics of FINANCIAL MANAGEMENT.

• These can be called as the foundation of finance that plays significant role in decision making made by financial managers as follows;

• PRINCIPLE 1: The risk return trade off- investors wont take additional risk unless they expect to be compensated with additional return.

PRINCIPLE 2: Time Value of Money - a dollar received today is worth more than a dollar received a year from now.

• PRINCIPLE 3: CASH, not profits is KING - it is cash flows not profits that are actually received by the firm and can be reinvested.

PRINCIPLE 4: Incremental Cash Flows- It's only what changes that counts. The incremental cash flow is the difference between the cash flows if the project is taken on versus what they will be if the project is not taken on.

• PRINCIPLE 5: The Curse of Competitive Markets-Why it's hard to find exceptionally profitable projects.

PRINCIPLE 6: Efficient Capital Markets-the markets are quick and the prices are right. An efficient market is characterized by a large number of profit-driven individuals who act independently.

• PRINCIPLE 7: The Agency Problem-a problem resulting from conflicts of interest between the manager/agent and the stockholder.

PRINCIPLE 8: Taxes Bias Business Decisions

• PRINCIPLE 9: All Risk is not Equal-some risk can be diversified away, and some cannot.

PRINCIPLE 10: Ethical Behavior is doing the right thing, and ethical dilemmas are everywhere in finance.