Introduction To Financial Management

Srinivas Methuku
Introduction to Financial
Management
Financial Management
Money itself is neither created nor destroyed,
its simply transferred from one perception to another.
What is finance??
What is Finance???
• Finance is the art & science of managing

'MONEY'.
• Finance is the life blood of Business (funds).
• “Finance v/s Money”

FINANCE
Financial
Financial Mgt
services
Advisory services Mgt of finance dept in a

firm
Designing Financial products
Financial/ non-
Investments, real estate & insurance financial/public/private/NG
O
Personal Financial planning
Budgeting
Forecasting
Cash & credit mgt
Invst analysis etc
Financial Management
• According to Ezra Solamn “Financial

management is concerned with the
efficient use of an important economic
resources viz capital funds”.
• Financial Management means planning,

organizing, directing and controlling the
financial activities such as procurement
and utilization of funds of the enterprise.
Meaning: Financial Management
• Financial Management is an operational activity,

which is accountable for the effective utilization
of funds necessary for operations. One of the
primary objectives of financial management is to
maintain enough money to meet the necessary
current and capital expenditure, apart from
maximizing profits.
Nature of Financial Management
 Financial management is mainly concerned with

the proper management of funds.
 The financial manager must see that the funds

are procured in a manner that there is risk, cost
and control considerations are properly
balanced in a given situation and there is
optimum utilization of funds.
Financial Management Process
• Assess Current Financial Position
• Define and Prioritizing Goals
• Financial and Investment Plan
• Implementation of the Plan
• Monitor, Evaluate and Adjust Performance

Scope of Financial Management
• Scope covers both acquisition & utilisation of
funds – efficient and wise allocation of funds to
various uses.
• Financial mgt involves providing solutions for

major financial operations of a firm
- Investment decisions
- Financing decisions
- Dividend policy decisions
Investment decision/ function
• Investment decisions relates to the selection of
assets (fixed & current assets) in which
funds will be invested by a firm.
• Invst in fixed & long term assets & projects is

called capital budgeting – volume of invst ,
risk & returns , cost of capital.
• Invst & mgt of current assets is called

working capital mgt –mgt of cash, inventory
& receivables, profitabilty & liquidity.
Financing Decision / Function
• Financing decisions are concerned with the

Capital structure decisions of a firm
( proportion of debt & equity).
• Creating proper mix between debt & equity –

optimum capital structure.
• Tradeoff between risk & return.

Dividend policy decisions /
functions
• Deciding the Dividend payout ratio considering
the benefit of shareholders & firm both.
• Dividend decision should be analysed in relation

to the financing decisions of the firm.
Duties / Roles / Responsibilities of
a Financial manager
• Performing Financial Analysis
• Making Investment decisions
• Making Financing decisions

Performing financial analysis &
planning
• Transforming financing data into form which

can be used for decision making.
• Determing need for additional (reducing)
finance.
Making investment decisions
• Determine the mix of current assets & fixed

assets to be held by a firm.
• Determine the type of asset in each category

Making Financing decisions
• Determining mix of short term & long term

financing.
• Indepth analysis of available financing

alternatives , their costs & long term
implications.
Risk Return Trade-Off
• Amount of Return = Amount of Risk Undertaken
• Amt X of Loss is more Epochal than Amt X of Gain
• Risk Averse Instrument have High Demand Raising

the Price and Lowering the Returns.
• Risk Premium is the Higher Return gained over

Risk Free Returns.
Emerging / Changing role of
Finance managers in India
• Post liberalisation the role of finance
manager has become more important,
complex & demanding.
• Industrial licensing abolished and scope of
private sector investment has increased.
• Abolition of MRTP
• Abolition of Capital issues control act –
freedom in designing and issuing securities.
• Market determined interest rate and
exchange rate volatality.
• Globalisation, FDI.
• Investors have become more demanding and
assertive.
Challenges for Financial Managers in a
Changing Economic Environment
• Regulations • Stakeholders
• Globalization Management
• Technology • Strategy
• Risk • Reporting
• Transformation • Talent and Capability
Nature of Financial Management
Company (Revenue Recent Investment Decision Recent Financing
in billion) Decision
Boeing ( $61) Began production of its 787 Dreamliner The cash flow from Boeing’s
aircraft, at a forecasted cost of more than operations allowed it to repay some
$10 billion. of its debt and repurchase $2.8
billion of stock.
Toyota (¥ 26,289) In 2008 opened new engineering and Returned ¥431 billion to
safety testing facilities in Michigan. shareholders in the form of
dividends.
Wal-Mart ($406) In 2008 announced plans to invest over a In 2008 raised $2.5 billion by an
billion dollars in 90 new stores in Brazil. issue of 5-year and 30-year bonds.
Union Pacific ($18) Acquired 315 new locomotives in 2007. Largely financed its investment in
locomotives by long-term leases.
Wells Fargo ($52) Acquired Wachovia Bank in 2008 for$15.1 Financed the acquisition by an
billion. exchangeof shares.
LVMH (€17) Acquired the Spanish winery Bodega Issued a six-year bond in 2007,
Numanthia Termes. raising 300 million Swiss francs.
Lenovo ($ 16) Expanded its chain of retail stores to cover Borrowed $400 million for 5 years
over 2,000 cities. from a group of banks.
Finance function
• Finance function involves the task of
procurement of funds needed by the enterprise
and its effective utilization.
Organisation of Finance function
Board of Directors
Managing Director /
Chairman
VP/ Director (Finance)/ Chief Finance officer (CFO)
Treasurer Controller
Cash Manager Cost Accounting

Manager
Credit Manager
Tax Manager
Foreign Exchange Manager Financial accounting
mgr
Financial planning & Data processing mgr
fund raising manager
Internal Auditor
Capital Budgeting manager
Portfolio manager
Functions of a Treasurer
• Treasurer is mainly responsible for financing

& Investment activities.
• The main functions of a treasurer are
- Obtaining finance
- Investor relationship
- short term financing
- cash & credit mgt
- Investments & insurance
Functions of a Controller
• Controller is concerned with Accounting &
Control.
• The main functions of a Controller are
- Financial Accounting
- Internal audit
- Taxation
- Management accounting & control
- Budgeting & planning
Objectives of financial Management
a. Financial objectives
b. Non-Financial Objectives
Financial objectives or Financial Goals
 Profit maximization (profit after tax)

 Maximizing EPS(earnings Per Share)
 Wealth Maximization.
Profit Maximization
Maximizing the Rupee Income of Firm

Resources are efficiently utilized
Appropriate measure of firm performance
Serves interest of society also
Objections to Profit Maximization
• It is Vague
• It Ignores the Timing of Returns
• It Ignores Quality of benefits
Shareholders’ Wealth Maximization
• Maximizes the net present value.

• Fundamental objective — maximize the
market value of the firm’s shares
Maximizing EPS
• Ignores timing and risk of the expected

benefit.
• Maximizing EPS will not result in highest
price for company's shares.
Non financial Objectives
 General welfare of employees

 General welfare of society
 Fulfillment of responsibilities towards
customers, suppliers etc.
 Leadership in R&D.
 Effective utilization of funds
Interface of Financial Mgt with other
functional areas of Mgt
• Finance and Production
• Finance and Marketing
• Finance and Personnel ( Human resource)
• Finance and Research & Development
Finance and Production
• Finance is the basis of production and is

needed at every stage of production
• Planning & preparation of project report
• Acquiring raw materails, plant & machinery,
tools & spares, technological know how etc.
• Hold stocks of RM, WIP and FG .
Finance and Marketing
• Finance is needed in all vital areas of

marketing such as
• Sales promotion & Advertising
• Introduction of new products, diversification
of existing lines to satisfy customers changing
needs.
• Physical distribution of goods.
Finance and Personnel ( Human
resource)
• Finance in personnel is required for
• Recruitment
• Selection
• Training
• Promotion Schemes.
FINANCE AND RESEARCH &
DEVELOPMENT
• Finance in R& D is used for

• Innovation
• Technological up gradation
• To meet and cater the demands of changing
needs & preferences of customers
• To stay competitive
Functional Areas of Finance
• Personal Finance
• Corporate Finance
• Public Finance
• Personal Finance
▫ Financial Position
▫ Adequate Protection
▫ Tax Planning
▫ Investment and Accumulation Goals
▫ Retirement Planning
▫ Estate Planning
• Corporate Finance
▫ Balancing Risk and Profitability

▫ Maximizing Entity’s Wealth and Stock Value
▫ Managing the Working Capital
▫ Measure the Performance of Portfolio
• Public Finance
▫ Related to Sovereign States & its entities

▫ Identification of required expenditure
▫ Source of that entities revenue
▫ Debt Issuance for Public Works Projects
Agency problem
• In corporate finance, the agency
problem usually refers to a conflict of interest
between a company's management and the
company's stockholders. The manager, acting as
the agent for the shareholders, or principals, is
supposed to make decisions that will maximize
shareholder wealth
Thank You
References:
Principles of Corporate Finance

(Brealy, Myers & Alen)
MIT OCW – Finance Theory 1
Financial Management – I M
Pandey
Financial Management M Y Khan

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Srinivas Methuku

• Finance is the art & science of managing

• Finance is the life blood of Business (funds).

• “Finance v/s Money”

Advisory services Mgt of finance dept in a

• According to Ezra Solamn “Financial

• Financial Management means planning,

• Financial Management is an operational activity,

 Financial management is mainly concerned with

 The financial manager must see that the funds

• Define and Prioritizing Goals

• Financial and Investment Plan

• Implementation of the Plan

• Monitor, Evaluate and Adjust Performance

• Financial mgt involves providing solutions for

• Invst in fixed & long term assets & projects is

• Invst & mgt of current assets is called

• Financing decisions are concerned with the

• Creating proper mix between debt & equity –

• Tradeoff between risk & return.

• Dividend decision should be analysed in relation

• Performing Financial Analysis

• Making Investment decisions

• Making Financing decisions

• Transforming financing data into form which

• Determine the mix of current assets & fixed

• Determine the type of asset in each category

• Determining mix of short term & long term

• Indepth analysis of available financing

• Amt X of Loss is more Epochal than Amt X of Gain

• Risk Averse Instrument have High Demand Raising

• Risk Premium is the Higher Return gained over

VP/ Director (Finance)/ Chief Finance officer (CFO)

Cash Manager Cost Accounting

• Treasurer is mainly responsible for financing

 Profit maximization (profit after tax)

Maximizing the Rupee Income of Firm

• Maximizes the net present value.

• Ignores timing and risk of the expected

 General welfare of employees

• Finance is the basis of production and is

• Finance is needed in all vital areas of

• Finance in R& D is used for

▫ Balancing Risk and Profitability

▫ Related to Sovereign States & its entities

Principles of Corporate Finance

MIT OCW – Finance Theory 1

Financial Management M Y Khan

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