1 INTRODUCTION TO FINANCIAL MANAGEMENT. 2 JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,...

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INTRODUCTION TO INTRODUCTION TO FINANCIAL FINANCIAL

MANAGEMENT MANAGEMENT

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JOIN KHALID AZIZJOIN KHALID AZIZECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.B.COM.FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.ICAP MODULE B, B.COM, BBA, MBA & PIPFA.COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.

CONTACT:CONTACT:0322-33857520322-3385752R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,

KARACHI, PAKISTAN.KARACHI, PAKISTAN.

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Objectives of the Objectives of the modulemodule

To define and understand the To define and understand the concept of financial management. concept of financial management. To appreciate the functions of a To appreciate the functions of a Financial manager.Financial manager. To appreciate the major financial To appreciate the major financial management decisions.management decisions.To assess the tax environment.To assess the tax environment.To appreciate the basic tools of To appreciate the basic tools of financial analysis and planning.financial analysis and planning.

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FINANCIAL FINANCIAL MANAGEMENT DEFINEDMANAGEMENT DEFINED

This is the business management This is the business management function that is concerned with function that is concerned with managing a business’ finances. managing a business’ finances.

It refers to the application of It refers to the application of financial management tools and financial management tools and techniques to coordinate all the techniques to coordinate all the financial functions in the business.financial functions in the business.

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Functions of a Financial Functions of a Financial ManagerManager

Spearheading the process of capital Spearheading the process of capital budgetingbudgetingManaging the liquidity of the firm.Managing the liquidity of the firm.Sourcing and utilization of fundsSourcing and utilization of fundsFinancial analysis and planning.Financial analysis and planning.Taking custody of company’s valuable Taking custody of company’s valuable documentsdocumentsPaying suppliersPaying suppliersMonitoring the banking operations Monitoring the banking operations Budgeting and forecastingBudgeting and forecastingProper earnings managementProper earnings management

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Importance of Proper Importance of Proper Financial ManagementFinancial Management

FINANCIAL MANAGEMENT

Make sound business decisions

Max

imum

use

of

res

ourc

es

Mea

sure

bu

sine

ss

perf

orm

ance

Evaluate new business

opportunities

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Importance of FM Contd…Importance of FM Contd…

Maximize use of Maximize use of financial resourcesfinancial resourcesFM allows you to identify FM allows you to identify and plan for the use of your and plan for the use of your financial resources.financial resources.It provides information for It provides information for financial decision making.financial decision making.

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Evaluate new business opportunitiesEvaluate new business opportunitiesFM provides the key information and answer FM provides the key information and answer questions of whether to exploit such questions of whether to exploit such opportunities or not.opportunities or not.

That is, entrepreneurs can effectively That is, entrepreneurs can effectively analyze a business opportunity and analyze a business opportunity and

determine whether it is worthwhile ordetermine whether it is worthwhile or not. not.

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Measuring business Measuring business performanceperformance

FM helps the investor to monitor FM helps the investor to monitor the progress of their business the progress of their business towards achieving business towards achieving business goals and to take corrective goals and to take corrective action where necessary.action where necessary.

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Making sound business decisions Making sound business decisions The financial information systems provides a The financial information systems provides a wide range of information that can be used wide range of information that can be used to make better decisions. to make better decisions. This is done using financial ratios, break This is done using financial ratios, break even analysis etc.even analysis etc.

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MAJOR FINANCIAL MAJOR FINANCIAL MANAGEMNET MANAGEMNET

DECISIONS DECISIONS Investment decisionInvestment decision

Working capital decisionWorking capital decision

Financing decisionFinancing decision

Earnings management decisionEarnings management decision

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1.1. Investment decisionInvestment decisionThis is also known as the Capital budgeting, and it refers to the decision to invest in long term assets.

The assets are expected to be used over a long period of time e.g. when a firm acquires plant and equipment or replaces an old equipment or when you invest in research and development.

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Importance of Capital Importance of Capital Budgeting:Budgeting:

It determines the asset mix and It determines the asset mix and hence the business risk.hence the business risk.

It involves heavy initial outlays It involves heavy initial outlays of the business resources.of the business resources.

Benefits accrue in future which Benefits accrue in future which future is associated with risk future is associated with risk and uncertainty.and uncertainty.

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Practical Financial Management Practical Financial Management Problem.Problem.

Investment appraisal using NPV, Investment appraisal using NPV, IRR, Pay back period.IRR, Pay back period.

Cost of capitalCost of capital

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2.2. Working capital Working capital decisiondecision

This is the decision concerned with the This is the decision concerned with the short term assets/resources an short term assets/resources an organization uses to meet its day to day organization uses to meet its day to day obligations.obligations.

Such assets include:Such assets include:

Cash reserves of the organisationCash reserves of the organisation

Funds collected from debtors of the Funds collected from debtors of the organization.organization.

InventoriesInventories

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3.3. Financing decisionFinancing decisionThis is the decision concerned with the This is the decision concerned with the sourcing of funds that are utilized under the sourcing of funds that are utilized under the investment decision.investment decision.Much management time and effort is Much management time and effort is devoted to trying to ensure the adequacy of devoted to trying to ensure the adequacy of the company's profit flow. the company's profit flow. However, it is just as important that a However, it is just as important that a company has an adequate flow of funds if it company has an adequate flow of funds if it is to remain in business and very much less is to remain in business and very much less management time and effort is devoted to management time and effort is devoted to this need. this need.

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Financing decision Contd…Financing decision Contd…

As companies expand, they require As companies expand, they require growing amounts of cash to finance growing amounts of cash to finance acquisitions of fixed assets. They also acquisitions of fixed assets. They also require growing amounts of cash to require growing amounts of cash to finance their growing working capital finance their growing working capital (net current assets) requirements.(net current assets) requirements.Some of this funding requirement will Some of this funding requirement will come from come from INTERNALINTERNAL sources, whilst sources, whilst some will need to come from some will need to come from EXTERNALEXTERNAL sources. sources.

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4.4. Earnings Earnings management management decisiondecisionThe Financial Manager has to decide on what The Financial Manager has to decide on what to do with the earnings once they have been to do with the earnings once they have been realised. There are three options,realised. There are three options,

To declare and pay all dividends to To declare and pay all dividends to shareholdersshareholders

To retain all the earnings and hence declare To retain all the earnings and hence declare and pay no dividendsand pay no dividends

To decide on what proportion to be paid and To decide on what proportion to be paid and what to be retained.what to be retained.

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Considerations in Considerations in dividends paymentdividends payment

Internal restrictions that do not favour Internal restrictions that do not favour dividend paymentdividend paymentLegal considerations.Legal considerations.Level of the firm’s leverage position.Level of the firm’s leverage position.Ease of raising additional capital.Ease of raising additional capital.Will payment of dividends disadvantage the Will payment of dividends disadvantage the shareholders or investors?shareholders or investors?The preferences of the majority shareholders.The preferences of the majority shareholders.Existence of profitable investment portfolio.Existence of profitable investment portfolio.The levels of control desired by the The levels of control desired by the shareholdersshareholders

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1 INTRODUCTION TO FINANCIAL MANAGEMENT. 2 JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,...

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