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Unit - 1

This document provides an introduction to financial management. It defines financial management as managing the finances of an organization to achieve its objectives. The scope of financial management has traditionally involved procuring funds but now also includes utilizing funds effectively. The roles of a financial manager include financial forecasting, acquiring and investing funds, and making financial decisions. Common objectives of financial management are profit maximization and wealth maximization.

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Nithya. M PSGCAS
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27 views

Unit - 1

This document provides an introduction to financial management. It defines financial management as managing the finances of an organization to achieve its objectives. The scope of financial management has traditionally involved procuring funds but now also includes utilizing funds effectively. The roles of a financial manager include financial forecasting, acquiring and investing funds, and making financial decisions. Common objectives of financial management are profit maximization and wealth maximization.

Uploaded by

Nithya. M PSGCAS
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Unit – 1

Introduction to Financial
Management
CONCEPTS
 FINANCE IT IS THE ART AND SCIENCE
OF MANAGING MONEY
 FINANCIAL MANAGEMENT IT IS
CONCERNED WITH THE DUTIES OF
THE FINANCIAL MANAGERS IN THE
BUSINESS FIRM
What Is Financial Management?
Definition:
Financial Management is management
of finances of an organisation in order
to achieve its objectives.
What is Financial
Management?
Concerns the acquisition,
financing, and management of
assets with some overall goal in
mind.
SCOPE OF FINANCIAL
MANAGEMENT
 SCOPE OF FINANCIAL MANAGEMENT
IS DIVIDED INTO 2 BROAD
CATEGORIES.
 TRADITIONAL APPROACH
 MODERN APPROACH
1.TRADITIONAL APPROACH
 Acc to this approach the scope of financial
management is confined to only
procurement of funds needed by a business.
 Utilization of funds was considered beyond
the purview of finance function.
Limitations of this approach
 Ignores internal decision making to the
proper utilization of funds.
 Focus of this approach was procurement of
long-term funds and ignores working
capital
 Issue and allocation of funds is ignored
 Does not lay focus on day-to-day financial
problems of an organization.
ii) Modern Approach
 IT includes both raising and effective
utilization of funds.
 Modern approach considers three basic
management decisions i.e., investment
decisions, financing decisions and dividend
decisions with the scope of the firm.
ROLE OF FINANCE MANAGER
 Financial forecasting and planning
 Acquisition of funds
 Investment of funds
 Making financial decisions
 Proper liquidity
Role of Financial Manager
Board of Directors

CEO

VP-Mktg VP-Finance VP-Production


•Planning
•Strategy
•Cash flow
Organization of the Financial
Management Function

Board of Directors

President
(Chief Executive Officer)

Vice President VP of Vice President


Operations Finance Marketing
Contd..
 Profit maximization criterion implies that
the investment, financing and dividend
policy decisions of a firm should be
oriented to the maximization of profits/EPS.
 There are arguments against and for
regarding this objective.
Contd..
 Arguments in favour of profit maximization:
i. When profit earning is the aim of business then
profit maximization should be the obvious
objective
ii. Profitability is the barometer for measuring
efficincy.
iii. Economic and business conditions do not
remain same, so the firm should earn more
profit.
Contd..
 Profit is considered as the main sources of
finance for the growth of the business.
 Profit is essential for fulfilling social
goals.
 Arguments against profit maximization
objective:
i. Profit maximization starts exploiting
workers and the consumers.
Contd..
ii. It will workout only in perfect competition
and not in imperfect competition today.
 Profit maximization is rejected because of
the following drawbacks:
Contd..
 Drawbacks:
1. It is vague.
2. Ignores time value of money.
3. It does not take into consideration the risk
of the prospective earnings stream.
4. The effect of dividend policy on the
market price of shares is also not
considered in the objective.
2. Wealth maximization
 This objective is considered as an
appropriate operational decision criterion
for financial management decisions.
 A stockholders current wealth of the firm is

(Number of shares owned) X ( Current stock


price per share)
i.e., Wo = NPo
Contd..
 Symbolically, NPV or wealth is
A1 A2 An
W =------ + ------+ -----------------+------ - C
2 n

(1+K) (1+K) (1+K)


Contd..
 Where A1,A2,………..An represents the
stream of cashflows expected to occur from
a course of action over a period of time.
 ‘K’ is appropriate discount rate to measure
risk and timing.
 ‘C’ is the initial outlay to acquire that asset
or pursue the course of action.
Contd..
 The objective of shareholder’s wealth
maximization is an appropriate and
operationally feasible criterion to choose
among the alternative financial actions. It
provides an unambiguous measure of what
financial management should seek to
maximise in making investment and
financing decisions on behalf of
shareholders.
Contd..
 Criticism of wealth maximization:
1. It is a prescriptive idea.
2. It is not socially desirable.
3. There is a controversy whether the
objective of wealth maximization includes
other claim holders such as debenture
holders, preference shareholders.
Contd..
 4.Objectives of wealth maximization face
difficulty when ownership and management
are separated.

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