GMODULE # 1 Introduction to

Financial Management

TIME ALLOTMENT 1 Week

INSTRUCTOR Mr. Jaime A. Berbano, LPT, MBA

FACEBOOK james berbano

EMAIL [email protected]
CELL NUMBER 09193919946

I. OVERVIEW

This module will walk you through the Concepts, definition and application of Financial
Management.

II. TARGETED COURSE LEARNING OUTCOME

This part will enable you to:

CLO1. Provide in-depth understanding of the link between company decision-making and the
operation of financial and capital markets

III. TARGETED TOPIC LEARNING OUTCOME

At the end of this module you could:
TLO1. Discuss the nature of financial management;
TLO2. Explain the importance of financial management;
TLO3. Identify various fundamental concepts of financial management; and
TLO 4. Recognize the role of the financial manager in a business entity

IV. LESSON PROPER

This module will walk you through the Concepts, definition and application of Financial
Management.

Introduction to Financial Management

What is the definition of Financial Management?

Scope/Elements Financial Management.

What are its objectives and Functions?

Financial Planning Definition, objectives and importance.

What the Roles of a Financial Manager?

Financial Management means planning, organizing, directing and controlling the financial activities such as
procurement and utilization of funds of the enterprise. It means applying general management principles to
financial resources of the enterprise.

Scope/Elements

1. Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in
current assets are also a part of investment decisions called as working capital decisions.
2. Financial decisions - They relate to the raising of finance from various resources which will depend upon
decision on type of source, period of financing, cost of financing and the returns thereby.
3. Dividend decision - The finance manager has to take decision with regards to the net profit distribution.
Net profits are generally divided into two:
a. Dividend for shareholders- Dividend and the rate of it has to be decided.
b. Retained profits- Amount of retained profits has to be finalized which will depend upon
 expansion and diversification plans of the enterprise.

Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and control of financial
resources of a concern. The objectives can be-

1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market
price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum
possible way at least cost.
4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of
return can be achieved.
5. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance
is maintained between debt and equity capital.

Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to make estimation with regards to capital
requirements of the company. This will depend upon expected costs and profits and future programmes
and policies of a concern. Estimations have to be made in an adequate manner which increases earning
capacity of enterprise.
2. Determination of capital composition: Once the estimation have been made, the capital structure have
to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the
proportion of equity capital a company is possessing and additional funds which have to be raised from
outside parties.
3. Choice of sources of funds: For additional funds to be procured, a company has many choices like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source and period of financing.

4. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so
that there is safety on investment and regular returns is possible.
5. Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done
in two ways:
a. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.
b. Retained profits - The volume has to be decided which will depend upon expansional,
innovational, diversification plans of the company.
6. Management of cash: Finance manager has to make decisions with regards to cash management. Cash
is required for many purposes like payment of wages and salaries, payment of electricity and water bills,
payment to creditors, meeting current liabilities, maintenance of enough stock, purchase of raw
materials, etc.
7. Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also
has to exercise control over finances. This can be done through many techniques like ratio analysis,
financial forecasting, cost and profit control, etc.

Financial Planning - Definition, Objectives and Importance

Definition of Financial Planning

Financial Planning is the process of estimating the capital required and determining it’s competition. It is the
process of framing financial policies in relation to procurement, investment and administration of funds of an
enterprise.

Objectives of Financial Planning

Financial Planning has got many objectives to look forward to:

 a. Determining capital requirements- This will depend upon factors like cost of current and fixed assets,
promotional expenses and long- range planning. Capital requirements have to be looked with both
aspects: short- term and long- term requirements.
b. Determining capital structure- The capital structure is the composition of capital, i.e., the relative kind
and proportion of capital required in the business. This includes decisions of debt- equity ratio- both
short-term and long- term.
c. Framing financial policies with regards to cash control, lending, borrowings, etc.
d. A finance manager ensures that the scarce financial resources are maximally utilized in the best
possible manner at least cost in order to get maximum returns on investment.

Importance of Financial Planning

Financial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding the
financial activities of a concern. This ensures effective and adequate financial and investment policies. The
importance can be outlined as-

1. Adequate funds have to be ensured.

2. Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that
stability is maintained.
3. Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise
financial planning.
4. Financial Planning helps in making growth and expansion programmes which helps in long-run survival
of the company.
5. Financial Planning reduces uncertainties with regards to changing market trends which can be faced
easily through enough funds.
6. Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the
company. This helps in ensuring stability an d profitability in concern.

Role of a Financial Manager

Financial activities of a firm is one of the most important and complex activities of a firm. Therefore in order to
take care of these activities a financial manager performs all the requisite financial activities.

A financial manger is a person who takes care of all the important financial functions of an organization. The
person in charge should maintain a far sightedness in order to ensure that the funds are utilized in the most
efficient manner. His actions directly affect the Profitability, growth and goodwill of the firm.

Following are the main functions of a Financial Manager:

1. Raising of Funds

In order to meet the obligation of the business it is important to have enough cash and liquidity. A firm
can raise funds by the way of equity and debt. It is the responsibility of a financial manager to decide the
ratio between debt and equity. It is important to maintain a good balance between equity and debt.

2. Allocation of Funds

Once the funds are raised through different channels the next important function is to allocate the funds.
The funds should be allocated in such a manner that they are optimally used. In order to allocate funds in
the best possible manner the following point must be considered

 The size of the firm and its growth capability

 Status of assets whether they are long-term or short-term
 Mode by which the funds are raised

These financial decisions directly and indirectly influence other managerial activities. Hence formation
of a good asset mix and proper allocation of funds is one of the most important activity

3. Profit Planning
 Profit earning is one of the prime functions of any business organization. Profit earning is important for
survival and sustenance of any organization. Profit planning refers to proper usage of the profit generated
by the firm.

Profit arises due to many factors such as pricing, industry competition, state of the economy, mechanism
of demand and supply, cost and output. A healthy mix of variable and fixed factors of production can
lead to an increase in the profitability of the firm.

Fixed costs are incurred by the use of fixed factors of production such as land and machinery. In order to
maintain a tandem it is important to continuously value the depreciation cost of fixed cost of production.
An opportunity cost must be calculated in order to replace those factors of production which has gone
thrown wear and tear. If this is not noted then these fixed cost can cause huge fluctuations in profit.

4. Understanding Capital Markets

Shares of a company are traded on stock exchange and there is a continuous sale and purchase of
securities. Hence a clear understanding of capital market is an important function of a financial manager.
When securities are traded on stock market there involves a huge amount of risk involved. Therefore a
financial manger understands and calculates the risk involved in this trading of shares and debentures.

Its on the discretion of a financial manager as to how to distribute the profits. Many investors do not like
the firm to distribute the profits amongst share holders as dividend instead invest in the business itself to
enhance growth. The practices of a financial manager directly impact the operation in capital market.
 V. ASSESSMENT
Explain each statement comprehensively. Cite specific examples to support your claim.
1. Ddiscuss the scope, functions and goals of financial management.
2. Why financial management is important?
3. Distinguish the unique role a financial manager from any other roles in a corporate entity.
4. Explain the different types of financial management decisions and the nature of their
duties.
5. Cite major agency problems, why do they exist within a corporation?

ESSAY RUBRIC