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Module 1

1. The document provides an introduction to financial management, outlining its objectives such as ensuring adequate funding and returns, optimum utilization of funds, and maintaining a balanced capital structure. 2. It describes the three key financial decisions of investment, financing, and dividends. Investment decisions involve allocating funds to capital assets, working capital, or financial assets. Financing decisions cover determining funding needs and sources. Dividend decisions balance profitability, cash flow, and shareholder expectations. 3. The objectives of financial management are introduced as maximizing shareholder wealth and profits, while some organizations aim to "satisfice" by achieving an acceptable profit level with minimum risk. Profit maximization and its limitations are also discussed

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Sunitha Ram
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43 views

Module 1

1. The document provides an introduction to financial management, outlining its objectives such as ensuring adequate funding and returns, optimum utilization of funds, and maintaining a balanced capital structure. 2. It describes the three key financial decisions of investment, financing, and dividends. Investment decisions involve allocating funds to capital assets, working capital, or financial assets. Financing decisions cover determining funding needs and sources. Dividend decisions balance profitability, cash flow, and shareholder expectations. 3. The objectives of financial management are introduced as maximizing shareholder wealth and profits, while some organizations aim to "satisfice" by achieving an acceptable profit level with minimum risk. Profit maximization and its limitations are also discussed

Uploaded by

Sunitha Ram
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Module 1

Introduction to Financial Management


Financial Management
• Management of all matters associated with the cash flow of the
organisation- both short and long term
• 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.
Objectives of Financial
Management

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


• To ensure adequate returns to the shareholders which will depend upon the
earning capacity, market price of the share, expectations of the shareholders.
• To ensure optimum funds utilization. Once the funds are procured, they
should be utilized in maximum possible way at least cost.
• To ensure safety on investment, i.e, funds should be invested in safe ventures
so that adequate rate of return can be achieved.
• 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.
Three Key Decisions
1. Investment Decision
• Invest in one of the three basic areas:
• Capital Assets
• Return, risk, cash flow and profit
• Working capital
• Inventory and receivables
• Financial Assets
• Risk, liquidity and return
Three Key Decisions
2. The Financing Decision
• Total funding required
• Determined by assessment of application and source of funds

Existing asset base Existing funding


New assets Redemption of existing debt

Disposals Funds generated through trading Change in working capital

• Internally generated vs externally sourced


• Debt or equity
• Long-term or short-term debt
Three Key Decisions
3. The Dividend decision
• Profitability
• Cash flow
• Growth/Investment opportunities
• Legal restrictions
• Shareholder expectations
Possible dividend policies
• Constant dividend payout
• Constant payout ratio
• Residual dividend policy
• Zero dividend policy
Financial Objectives
Maximising Shareholder’s wealth
• Create and sustain shareholder’s wealth
• No time period to wealth and is determined by relative risk/return
balance of the business
• All aspects of financial management are based on this basic premise
Financial Objectives
2. Maximising profits
• Reward management on some measure of profit such as ROI
• Close relationship between profit and shareholder’s wealth
• But conflicts in ways such as
• Short-termism
• Cash vs accruals
• Risk
Financial Objectives
3. Satisficing
• Many organisations do not maximise profit but instead aim to satisfice
• This means that they attempt to generate an acceptable level of profit
with a minimum of risk
• It reflects the fact that many organisations are more concerned with
surviving than growth
Financial Objectives
4. Objectives of not-for-profit organisations
• Pursue non-financial aims but provide service to the community
• Need funds to finance their operations
• Major constraint is to raise funds
• Should seek to use the limited funds to obtain value for money

Economical
Efficient
Effective
Profit Maximization
• Profit maximization is one of the fundamental assumptions of economic
theory.
• It will be achieved when a firm reaches the stage of equilibrium. A firm is
said to have reached equilibrium when it has no need to change its level of
output, either an increase or decrease, in order to maximise profit.
• If a business faces tough competition sometimes the only way it can survive
is to pay extra attention to revenues and costs – and to adjust them
accordingly.
• Profit maximization is a good thing for a company but can be a bad thing for
consumers if the company starts to use cheaper products or decides to raise
prices to maximise profits.
Types of Finance-Long term
• EQUITY
• Ordinary Shares
• Owning a share confers part ownership
• High risk investments offering higher returns
• Permanent financing
• Post-tax appropriation of profit, no tax efficient
• Marketable if listed
• Preference shares
• Fixed dividend
• Paid in preference to(before) ordinary shares
• Not very popular, it is worst of both worlds, i.e
• Not tax efficient
• No opportunity for capital gain
• DEBT
• Bank Finance
• Unlisted companies
• Confidential agreement by negotiation
• Traded investments
• Denominated in units of $100, called the par value
• Fixed interest
• Lower risk than ordinary shares- protected by covenants
Types of debt
• Debentures
• Charge against assets
• Low risk debt offering the lowest return
• Unsecured loans
• No security –riskier requiring a higher return
• Mezzanine finance
• High risk finance raised by companies with limited or no track record and
• For which no other source of debt finance is available
Other sources
• Sale & Leaseback
• Selling good quality fixed assets and leasing them back
• Grants
• Regional assistance, job creation or for high tech companies
• Retained earnings
• Warrants
• Option to buy shares at a specified point in the future
• Convertible loan stock
• Converted to shares, at the option of the debt holder
Types of Finance-Short term
• Factoring
• Outsourcing credit control department to a third party
• Invoice discounting
• Selected invoices are used as security against which the company
• Trade credit
• Delay of payment to suppliers
• Overdrafts
• Used to fund fluctuating working capital requirements
• Bank loans
• Term loans between one and three years
• Bills of exchange
• Promissory note exchanged for goods
Asset specific sources of finance
• Hire purchase
• Structured financial agreement
• Finance lease
• Operating lease

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