Master of Business Administration

BUS 2C 11
Financial Management
Prepared By:
Mohammed Jasir PV
Asst. Professor
MIIMS
 Module 1
 Financial Management — objectives — profit maximization,
wealth maximization — finance function — role of finance
manager — strategic financial management — economic
value added — time value of money.
 Finance
 According to F.W.Paish, Finance may be defined as the
position of money at the time it is wanted.

 In the words of John J. Hampton, the term finance can be

defined as the management of the flows of money through an
organization, whether it will be a corporation, school, bank or
government agency.
 FINANCIAL MANAGEMENT

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
Financial Management – Definition

 According to Weston and Brigham,

financial management is an area of
financial decision making, harmonizing
individual motives and enterprise goals.
 In the words of Phillippatus,

financial management is concerned with the managerial

decisions that result in the acquisition and financing of long-
term and short-term credits for the firm.
As such it deals with the situations that require selection of
specific assets / combination of assets, the selection of specific
liability / combination of liabilities as well as the problem of
size and growth of an enterprise.
The analysis of these decisions is based on the expected
inflows and outflows of funds and their effects upon
managerial objectives.
 OBJECTIVES OF FINANCIAL MANAGEMENT

 Itsobjectives must be consistent with the overall objectives of

business.
 The overall objective of financial management is to provide
maximum return to the owners on their investment in the long-
term. This is known as wealth maximization.
 Wealth maximization means maximizing the market value of
investment in shares of the company.
In order to maximize wealth, financial management must
achieve the following specific objectives

(a) To ensure availability of sufficient funds at reasonable cost

(liquidity).
(b) To ensure effective utilization of funds (financial control).
(c) To ensure safety of funds by creating reserves, re-investing
profits, etc. (minimization of risk).
(d) To ensure adequate return on investment (profitability).
Contd..

(e) To generate and build-up surplus for expansion and growth

(growth).
(f) To minimize cost of capital by developing a sound and
economical combination of corporate securities (economy).
(g) To coordinate the activities of the finance department with
the activities of other departments of the firm (cooperation).
Profit Maximization
Very often maximization of profits is considered to be the main
objective of financial management.
Profitability is an operational concept that signifies economic
efficiency.
Some writers on finance believe that it leads to efficient allocation of
resources and optimum use of capital.
Itis said that profit maximization is a simple and straightforward
objective. It also ensures the survival and growth of a business firm.
But modern authors on financial management have criticized the
goal of profit maximization.
FUNCTIONS OF FINANCIAL
MANAGEMENT
 Estimating the Amount of Capital Required
 Determining Capital Structure
 Choice of Sources of Funds
 Procurement of Funds
 Utilizations of Fund
 Disposal of Profits or Surplus
 Management of Cash
 Financial Control
1. Estimating the Amount of Capital
Required:
 This is the foremost function of the financial manager.
 Business firms require capital for:

i) purchase of fixed assets,

ii) meeting working capital requirements, and
iii) modernization and expansion of business.
The financial manager makes estimates of funds required for
both short-term and long-term.
 2. Determining Capital Structure:
 Once the requirement of capital funds has been determined,
a decision regarding the kind and proportion of various
sources of funds has to be taken.
 For this, financial manager has to determine the proper mix
of equity and debt and short-term and long-term debt ratio.
 This is done to achieve minimum cost of capital and maximize
shareholders wealth
3. Choice of Sources of Funds

 Before the actual procurement of funds, the finance

manager has to decide the sources from which the funds
are to be raised.

 The management can raise finance from various sources

like equity shareholders, preference shareholders,
debenture- holders, banks and other financial institutions,
public deposits, etc.
4. Procurement of Funds:

 The financial manager takes steps to procure the funds required

for the business.
 It might require negotiation with creditors and financial
institutions, issue of prospectus, etc.
 The procurement of funds is dependent not only upon cost of
raising funds but also on other factors like general market
conditions, choice of investors, government policy, etc.
5. Utilizations of Funds:

 The funds procured by the financial manager are to be

prudently invested in various assets so as to maximize the
return on investment.
 While taking investment decisions, management should be
guided by three important principles, viz.,
 safety,
 profitability, and
 liquidity.
6. Disposal of Profits or Surplus:

 The financial manager has to decide how much to retain for

plugging back and how much to distribute as dividend to
shareholders out of the profits of the company.

 The factors which influence these decisions include the trend of

earnings of the company, the trend of the market price of its
shares, the requirements of funds for self- financing the future
programmers’ and so on.
7. Management of Cash:

 Management of cash and other current assets is an important

task of financial manager.
 It involves forecasting the cash inflows and outflows to ensure
that there is neither shortage nor surplus of cash with the
firm.
 Sufficient
funds must be available for purchase of materials,
payment of wages and meeting day-to-day expenses.
8. Financial Control

 Evaluation of financial performance is also an important

function of financial manager.
 The overall measure of evaluation is Return on Investment
(ROI).
 The other techniques of financial control and evaluation include
budgetary control, cost control, internal audit, break-even
analysis and ratio analysis.
 The financial manager must lay emphasis on financial planning
as well.
Basic Financial Decisions

 Investing Decision
 Financing Decision
 Dividend Decision
 Investing Decision
 Related to investment
 Both long-term and short-term
 Long Term
Capital Budgeting
Investment in Long-term
Fixed Asset
 Short-term
W/c mgt
Cash, bank, deposits, receivables.
 Financing Decision
 Related to collection of fund (Source)
 Debt – equity mix
 Rising of fund both
 Long-term fund
 Capital Structure
 Short-term fund
 Working capital
 Mainly two type
 Financial Planning (Estimating the requirement)
 Capital structure Decision (Identifying the sources)
 Dividend Decision

 Decision related to profit

 Distributing profit as dividend
 Retained Earnings – Surplus – Reserve – Plugging
back
ROLE OF FINANCE MANAGER
ROLE OF FINANCIAL MANAGER
 Fund rising
 Fund allocation
 Profit planning

(it refers to operating decision in areas in

pricing
costs volume of output and
the firms selection of product lines. it is a bonus for
optimizing investment and financing decisions )
 Understanding the capital market
Contd…
 Prepare financial statements, business activity reports,
and forecasts
 Monitor financial details to ensure that legal
requirements are met
 Supervise employees who do financial reporting and
budgeting
 Review company financial reports and seek ways to
reduce costs
 Analyze market trends to find opportunities for
expansion or for acquiring other companies
 Help management to make financial decisions.
Broadly speaking, financial managers have to have
decisions regarding 4 main topics within a company

 Investment decisions / Capital Budgeting Decision - (long

and short term investment decisions). For example: the most
appropriate level and mix of assets a company should hold.
 Financing decisions / Capital Structure - The optimal levels
of each financing source - E.g. Debt - Equity ratio.
 Liquidity decisions - Involves the current assets and liabilities
of the company - one function is to maintain cash reserves.
 Dividend decisions - Disbursement of dividend to shareholders
and retained earnings
Functions of Finance Manager
1. Forecasting Of Cash Flow.
2. Raising Funds
3. Managing The Flow Of Internal Funds
4. To Facilitate Cost Control
5. To Facilitate Pricing Of Product, Product Lines And
Services
6. Forecasting Profits
7. Measuring Required Return
8. Managing Assets
9. Managing Funds
10. Make Arrangements For The Purchase Of Assets
1. Forecasting of Cash Flow. This is necessary for the
successful day to day operations of the business so
that it can discharge its obligations as and when
they rise. In fact, it involves matching of cash
inflows against outflows and the manager must
forecast the sources and timing of inflows from
customers and use them to pay the liability

2. Raising Funds: the Financial Manager has to plan for

mobilising funds from different sources so that
the requisite amount of funds are made available to
the business enterprise to meet its requirements for
3. Managing the Flow of Internal Funds: Here the
Manager has to keep a track of the surplus in
various bank accounts of the organisation and
ensure that they are properly utilised to meet the
requirements of the business. This will ensure that
liquidity position of the company is maintained
intact with the minimum amount of external
borrowings.

4. To Facilitate Cost Control: The Financial Manager

is generally the first person to recognise when the
costs for the supplies or production processes are
exceeding the standard costs/budgeted figures.
Consequently, he can make recommendations to
5. To Facilitate Pricing of Product, Product Lines and
Services: The Financial Manager can supply
important information about cost changes and cost
at varying levels of production and the profit
margins needed to carry on the business
successfully. In fact, financial manager provides
tools of analysis of information in pricing decisions
and contribute to the formulation of pricing policies
jointly with the marketing manager.

6. Forecasting Profits: The Financial manager is

usually responsible for collecting the relevant data
to make forecasts of profit levels in future.
7. Measuring Required Return: The acceptance
or rejection of an investment proposal depends
on whether the expected return from the
proposed investment is equal to or more than
the required return. An investment project is
accepted if the expected return is equal or more
than the required return. Determination of
required rate of return is the responsibility of the
financial manager and is a part of the financing
decision.
8. Managing Assets: The function of asset
management focuses on the decision-making role of
the financial manager. Finance personnel meet with
other officers of the firm and participate in making
decisions affecting the current and future utilization
of the firm’s resources. As an example, managers
may discuss the total amount of assets needed by
the firm to carry out its operations. They will
determine the composition or a mix of assets that
will help the firm best achieve its goals. They will
identify ways to use existing assets more effectively
and reduce waste and unwarranted expenses.
The decision-making role crosses liquidity and
profitability lines. Converting the idle equipment into
9. Managing Funds: In the management of funds, the
financial manager acts as a specialised staff officer to
the Chief Executive of the company. The manager is
responsible for having sufficient funds for the firm to
conduct its business and to pay its bills. Money must
be located to finance receivables and inventories,

10. make arrangements for the purchase of assets,

and to identify the sources of long-term financing.
Cash must be available to pay dividends declared by
the board of directors. The management of funds has
therefore, both liquidity and profitability aspects.
 Functions of Finance
 According to Paul G. Hasings, “finance” is the management of the
monetary affairs of a company. It includes determining what has
to be paid for and when, raising the money on the best terms
available, and devoting the available funds to the best uses.

 Kenneth Midgley and Ronald Burns state: “Financing is the

process of organising the flow of funds so that a business can
carry out its objectives in the most efficient manner and meet its
obligations as they fall due.”
 Functions of Finance
 It is the process of acquiring and utilizing funds of a business.
 These are related to overall management of an organization.
 It is concerned with the policy decisions such as like of
business, size of firm, type of equipment used, use of debt,
liquidity position.
 These policy decisions determine the size of the profitability
and riskiness of the business of the firm
 Finance functions can be grouped as outlined
below:

 Financial planning
 Financial control
 Financing decisions
 Investment decision
 Management of income and dividend decision
 Incidental functions
Finance Function – Objectives

1. Assessing the Financial Requirements

2. Proper Utilisation of Funds
3. Increasing Profitability
4. Maximising Value of Firm
 Strategic Financial
Management

The term "strategic" refers to financial management

practices that are focused on long-term success, as
opposed to "tactical" management decisions, which
relate to short-term positioning.
 Strategic Financial
Management
It refers to specific planning of the usage and
management of a company's financial resources
to attain its objectives as a business concern
and return maximum value to shareholders over
the long run.
Breaking down the definition

 It’s a planning
 Related to finance of a company
 How to use or manage the finance of
company
 For a long-term
 For attain maximum value to shareholders
Wealth maximisation
 Strategic financial management involves
precisely defining

A company's business objectives or goals,

 Identifying and quantifying its available or
potential resources, and
 Prepare a plan for utilizing finances and other
capital resources to achieve its goals
 Afterthe initial planning phase, strategic
management requires
 Establishingongoing procedures for collecting
and analyzing data,
 Making consistent financial decisions,
 Tracking and analysing differences, between
budgeted and actual results
 To identify problems and,
 Take appropriate corrective actions as A
dynamic process of adjustment and fine-tuning.
Key Elements Of Strategic Financial
Management

 Budgeting
 Risk management
 Ongoing review and evaluation.
Strategic financial
management
 It is the study of finance with a long term view
considering the strategic goals of the enterprise.
 Financial management is nowadays increasingly
referred to as "Strategic Financial Management" so
as to give it an increased frame of reference.
 To understand what strategic financial management
is about, we must first understand what is meant by
the term "Strategic".
 Which is something that is done as part of a plan
that is meant to achieve a particular purpose.
 Therefore, Strategic Financial Management are
those aspect of the overall plan of the organisation
that concerns financial managers.
 This
includes different parts of the business plan, for
example marketing and sales plan, production plan,
personnel plan, capital expenditure, etc.
 These
all have financial implications for the financial
managers of an organisation.
 Theobjective of the Financial Management is the
maximisation of shareholders wealth.
 To satisfy this objective a company requires a "long
term course of action" and this is where strategy fits
in.
 STRATEGIC FINANCIAL PLANNING

 It involving financial policy has direct interact

with scope and resources
deployment .financial policies –investment and
financial choices- should there for be
considered at the corporate level ,and should
not be treated as functional area policy
decisions to be decided at lower level
STEPS IN FINANCIAL PLANNING

 Analyzing the past performance

 Analyzing the operating characteristics
 Determine the corporate strategic and
investment needs
 Forecasting the cash flow from operations
 Analyzing financing alternatives
 Analyzing the consequences of financial plan
 Evaluating consistency of financial policies
 ECONOMIC VALUE ADDED (EVA)
 It is a residual measure of financial performance.
 itis defined as the operating profit after tax less
the charge for the capital, both equity and
debt ,used in a business.
 itrepresents the value added to the share holders
by generating operating profits in excess of the
cost of capital employed in the business .
 EVA increases if operating profits can be made to grow
without enquiry more capital, greater efficiency it is a
management tool that disclose the impact of both
strategic and both operational decision of the
management.
 It can prove as an effective tool for increasing share
holders wealth by integrating EVA in for key areas such
as
1 measuring business performance
2 guiding managerial decision making
3 aligning managerial incentives with share holders interest
4 improving financial and business literacy
TIME VALUE OF MONEY

 The discounted cash flow criteria of investment

evaluation are based on the concept of time value
of money.
 The time value of money have its logic in the fact
that investors have ample investment opportunity
available to them.
 Thereforethe one rupee received today is not of the
same in the value as one rupee received after a
period of time ,since one rupee received can be
invested at a rate of interest there are basically to
Thank You