FINANCIAL MANAGEMENT

Dr. Ashish Garg

Financial Management

Traditional Approach

(Outsider –Looking in Approach)

Financial management is a subject which deals with the procurement of the finance. It basically deals with basically three aspects:

1. Institutional arrangement

2. Finding financial instrument

3. Legal and accounting relationship between a firm and its source of finance

Modern Approach

Financial management is concerned with the acquisition, financing and management of assets with some overall foal of mind. It basically deals with three issues:

1. Investment Decision

2. Financing Decision

3. Dividend Decision

Scope of the Financial Management

Investment Decision

Long Term Investment

• Calculation of Cash Flows

• Time Value of Money

• Capital Budgeting

Short Term Investment

• Working Capital Management

• Cash Management

• Inventory Management

• Receivable Management

Financing Decision

• Find the alternative Source of Finance

• Cost of Capital

• Capital Structure

Dividend Decision

• Dividend Policy

The Balance-Sheet Modelof the Firm

The Net Working Capital Investment Decisions

Net Working Capital

Shareholders’ Equity

Current Liabilities

Current Assets

Fixed Assets

1 Tangible

2 Intangible

Long-Term Debt

Investment Decisions

“Capital Budgeting”

Financing Decisions

“Capital Structure”

Objective of Financial Management

Profit Maximization

Maximization of Firm’s profit.

Problem in Approach

1. Ambiguity

2. Timing of Benefits

3. Quality of Benefits

Wealth Maximization

Maximization of the market value of the share.

ABN AMRO: “We aim to maximize long-term shareholder value.”

Cadbury: “Cadbury Schweppes growing objective is growth in shareowner value”.

Dow Chemical Co.: “Our ultimate objective remains what s has always been to maximize long-term shareholder value”.

Finance – Interface with other areas

Economics

Accounting

Marketing

Production

Human Resource

Research & Development

Finance

Role of The Financial Manager

Primary Functions:

1. Performing Financial Analysis and Planning

2. Investment Decision

3. Financing Decision

4. Dividend Decision

Emerging Roles:

1. Financial Engineering

2. Foreign Exchange Management

3. Treasury Operators

4. Investors Communication

5. Management Control

6. Investment Planning

7. Pension Fund Management

8. Credit Manager

9. Tax Management

10. Insurance Risk Management

Financial

managersFirm's

operations

Financial

markets

(1) Cash raised from investors

(1)

(2) Cash invested in firm

(2)

(3) Cash generated by operations

(3)

(4a) Cash reinvested

(4a)

(4b) Cash returned to investors(5) Taxes

(4b)

The Role of The Financial Manager

GovernmentGovernment

(5)

Agency Problem

Agency Conflicts I: Stock Holders versus Managers Managerial Compensation Direct Intervention by Shareholders Threat of Firing Threat of Takeovers

Agency Conflicts II: Stock Holders versus Creditors

World of Finance

How you are

Feeling?

Thank You