Introduction to FM

8/3/2019 Introduction to FM

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Introduction toIntroduction to

Financial ManagementFinancial Management


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Financial ManagementFinancial Management

Financial Management is thatFinancial Management is thatmanagerial activity which ismanagerial activity which is

concerned with planning andconcerned with planning andcontrolling of the firms financialcontrolling of the firms financialresources so that organizationalresources so that organizationalobjectives can be achieved.objectives can be achieved.


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DEFINITION OF FINANCIALDEFINITION OF FINANCIAL

MANAGE

ME

NTMANAGE

ME

NTFinancial Management is theFinancial Management is the

management of fund in such a waymanagement of fund in such a way

that funds are procured at minimumthat funds are procured at minimumcost and they are utilized in bestcost and they are utilized in bestopportunitiesopportunities


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Financial DecisionsFinancial Decisions

Financing DecisionsFinancing Decisions

(Capital Structure Decision)(Capital Structure Decision)

Long term Investment DecisionLong term Investment Decision(Capital Budgeting Decision)(Capital Budgeting Decision)

Short Term Investment DecisionShort Term Investment Decision

( Liquidity Decision )( Liquidity Decision )Dividend DecisionDividend Decision

(Distribution Decision)(Distribution Decision)


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Function/ Role of a FinanceFunction/ Role of a Finance

ManagerManager Funds RaisingFunds Raising

Funds AllocationFunds Allocation

Profit PlanningProfit Planning

Understanding Capital Market & BusinessUnderstanding Capital Market & Businessenvironmentenvironment


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Objectives of FinancialObjectives of Financial

ManagementManagement

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Profit maximization (profit after tax)Profit maximization (profit after tax)

Maximizing earnings per shareMaximizing earnings per share

Wealth maximizationWealth maximization


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Profit MaximizationProfit Maximization

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Maximizing the rupee income of firmMaximizing the rupee income of firmResources are efficiently utilizedResources are efficiently utilized

Appropriate measure of firm performanceAppropriate measure of firm performance

Serves interest of society alsoServes interest of society also


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Objections to ProfitObjections to Profit

MaximizationMaximization

8

44It is VagueIt is Vague

44It Ignores the Timing of ReturnsIt Ignores the Timing of Returns

44It Ignores RiskIt Ignores Risk44In new business environment profitIn new business environment profit

maximization is regarded asmaximization is regarded as UnrealisticUnrealistic

DifficultDifficult InappropriateInappropriate

ImmoralImmoral


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EPS MaximizationEPS Maximization

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MaximisingMaximising EPSEPS meansmeans maximizingmaximizingprofitprofit (( earningearning )) perper shareshare


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Objections to EPS MaximizationObjections to EPS Maximization

1010

MaximisingMaximising EPSEPS doesdoes notnot maximisemaximisethethe economiceconomic welfarewelfare of of thetheownersownersMarketMarket valuevalue isis notnot aa functionfunctionofof EPSEPS..

IgnoresIgnores timingtiming andand riskrisk of of thetheexpectedexpected benefitbenefit

MaximizingMaximizing EPSEPS impliesimplies thatthat thethe firmfirmshouldshould makemake nono dividenddividend paymentpaymentsoso longlong asas fundsfunds cancan bebe investedinvested atatpositivepositive raterate ofof returnreturnsuchsuch aa policypolicymaymay notnot alwaysalways workwork..


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Shareholders WealthShareholders Wealth

MaximizationMaximization

1111

MaximizesMaximizes thethe netnet presentpresent valuevalue ofof aacoursecourse ofof actionaction toto shareholdersshareholders..

AccountsAccounts forfor thethe timingtiming andand riskrisk ofofthethe expectedexpected benefitsbenefits..

BenefitsBenefits areare measuredmeasured inin termsterms ofofcashcash flowsflows..

FundamentalFundamental objectiveobjectivemaximizemaximizethethe marketmarket valuevalue of of thethe firmsfirmssharesshares..


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Agency CostAgency Cost

(Managers Vs. Shareholders Goals)(Managers Vs. Shareholders Goals)The decision taking authority in largeThe decision taking authority in large

companies lie in the hands ofcompanies lie in the hands ofmanagers.managers.

Shareholders as owners of theShareholders as owners of thecompany are the principals andcompany are the principals andmanagers are their agents.managers are their agents.

In theory, managers should act in theIn theory, managers should act in thebest interest of shareholders; that isbest interest of shareholders; that istheir actions and decisions should leadtheir actions and decisions should lead

to Shareholder's wealth Maximization.to Shareholder's wealth Maximization.


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In practice, managers may not necessarilyIn practice, managers may not necessarilyact in the best interest of shareholders, andact in the best interest of shareholders, and

they may pursue their own personal goals atthey may pursue their own personal goals atthe cost of shareholders.the cost of shareholders.

Further, a company is a complex organizationFurther, a company is a complex organizationconsisting of multiple stakeholders such asconsisting of multiple stakeholders such as

employees, debt holders, consumers,employees, debt holders, consumers,suppliers, government and society.suppliers, government and society.

Managers in practice may, thus , perceiveManagers in practice may, thus , perceivetheir role as reconciling conflicting objectivestheir role as reconciling conflicting objectivesof stakeholders.of stakeholders.

This stakeholders' view of managers role mayThis stakeholders' view of managers role maycompromise with the objective of SWM.compromise with the objective of SWM.


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Overview of FinancialOverview of Financial

ManagementManagement

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INTERFACE (RELATION) BETWEENINTERFACE (RELATION) BETWEEN

FINANCE

AND

OTHE

R FUNCTIONFINANCE

AND

OTHE

R FUNCTION MARKETINGMARKETING-- FINANCE INTERFACEFINANCE INTERFACE

PRODUCTIONPRODUCTION-- FINANCE INTERFACEFINANCE INTERFACE

PERSONNELPERSONNEL FINANCE INTERFACEFINANCE INTERFACE

TOP MANAGEMENTTOP MANAGEMENT-- FINANCE INTERFACEFINANCE INTERFACE


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ThanksThanks

Introduction to FM

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