Prof. Balakrishnachar.M.SAssistant Professor Department of MBAKoshys Institute of Management Studies, Bangalore

Topic :-Introduction to Financial Management

Subject :-Financial Management

Class :-III Semester MBA

FINANCIAL MANAGEMENT

Prof. Balakrishnachar.M.S

Assistant Professor

Department of MBA

Koshys Institute of Management Studies, Bangalore

Syllabus

1. Introduction to Financial Management

2. Time Value of Money

3. Long Term Financing Decisions

4. Long Term Investment Decisions

5. Short Term Financing and Investment Decisions

6. Dividend Decisions

Chapter 01

Introduction to Financial Management

?

• What is finance ?

• What is management ?

• Why we have to learn Financial management ?

• Where we have to applicable Financial management ?

• Is it theory ?

• Is it numerical ?

• What are the financial activities ?

• Do we have any assumptions?

• Is it only for company ? Or even for real life ?

• Is it advanced version of accounts ?

• Is it economics ?

• Do we get exact answer in main examinations ?

The Concept of Financial Management

• Financial management is that managerial activity

which is concerned with the planning and

controlling of the firm’s financial resources.

• Earlier it was a branch of Economics till 1890 and

as a separate discipline

• Its draws heavily on economics for its theoretical

concepts even now.

Finance• The study of how money is managed and the actual

process of acquiring needed funds.

• It includes Investment opportunities , Profitable

opportunities, Optimal Mix of Funds, System of

internal controls, Future decision making

• It simplified that, Personal Finance, Corporate

Finance and Public Finance

Personal Finance

• It is the application of the principles of finance

to the monetary decisions of an individual or

family unit. It addresses the ways in which

individuals or families obtain, budget, save

and spend monetary resources over time,

taking into account various financial risks and

future life events.

Corporate Finance

• The financial activities related to running a corporation. A

division or department that oversees the financial activities

of a company. Corporate finance is primarily concerned

with maximizing shareholder value through long term and

short term financial planning and the implementation of

various strategies. Everything from capital investment

decisions to investment banking falls under the domain of

corporate finance

Public Finance

• The public finance is the study of the income and

expenditure of the state . It deals only with the

finances of the government. Scope of public finance

consists in the study of the collections of funds and

their allocation between various branches of state

activities which are regarded as essential duties or

functions of the state.

• Financial Management means planning, organizing,directing and controlling the financial activities suchas procurement of funds in the most economicmanner and employment of those funds in the mostoptimum way.

• According to Weston and Brigham “ FinancialManagement is an area of financial decision making,harmonizing individual motives and enterprisegoals.”.

SCOPE OF FINANCIAL MANAGEMENT

The major scope of financial management are as follows

1. Investment Decision

2. Financial Decision

3. Dividend Decision

4. Working Capital Decision

5. Liquidity Decision

Investment Decision:

The investment decision involves the evaluation of risk, measurement of cost of capital and estimation of

expected benefits from a project. Capital budgeting and liquidity are the two major components of

investment decision. Capital budgeting is concerned with the allocation of capital and commitment of

funds in permanent assets which would yield earnings in future.

• Capital budgeting also involves decisions with respect to replacement and renovation of old assets. The

finance manager must maintain an appropriate balance between fixed and current assets in order to

maximise profitability and to maintain desired liquidity in the firm.

• Capital budgeting is a very important decision as it affects the long-term success and growth of a firm. At

the same time it is a very difficult decision because it involves the estimation of costs and benefits which

are uncertain and unknown.

• Financing Decision:

• While the investment decision involves decision with respect to composition or mix of assets,

financing decision is concerned with the financing mix or financial structure of the firm. The

raising of funds requires decisions regarding the methods and sources of finance, relative proportion

and choice between alternative sources, time of floatation of securities, etc. In order to meet its

investment needs, a firm can raise funds from various sources.

• Use of debt or financial leverage effects both the return and risk to the equity shareholders. The

market value per share is maximised when risk and return are properly matched. The finance

department has also to decide the appropriate time to raise the funds and the method of issuing

securities.

• Dividend Decision:

• In order to achieve the wealth maximisation objective, an appropriate dividend

policy must be developed. One aspect of dividend policy is to decide whether to

distribute all the profits in the form of dividends or to distribute a part of the profits

and retain the balance. While deciding the optimum dividend payout ratio

(proportion of net profits to be paid out to shareholders).

• The finance manager should consider the investment opportunities available to the

firm, plans for expansion and growth, etc. Decisions must also be made with respect

to dividend stability, form of dividends, i.e., cash dividends or stock dividends, etc.

• Working Capital Decision:

• Working capital decision is related to the investment in current assets and

current liabilities. Current assets include cash, receivables, inventory, short-

term securities, etc. Current liabilities consist of creditors, bills payable,

outstanding expenses, bank overdraft, etc. Current assets are those assets

which are convertible into a cash within a year. Similarly, current liabilities

are those liabilities, which are likely to mature for payment within an

accounting year.

• Liquidity Decision

• It is very important to maintain a liquidity position of a firm to avoid insolvency. Firm’s

profitability, liquidity and risk all are associated with the investment in current assets. In order

to maintain a trade-off between profitability and liquidity it is important to invest sufficient

funds in current assets. But since current assets do not earn anything for business therefore a

proper calculation must be done before investing in current assets.

• Current assets should properly be valued and disposed of from time to time once they become

non profitable. Currents assets must be used in times of liquidity problems and times of

insolvency.

Functions of Financial Management1. Estimation of capital requirements: A finance manager has to make estimation with regards to capital

requirements of the company. This will depend upon expected costs and profits and future programmes

and policies of a concern. Estimations have to be made in an adequate manner which increases earning

capacity of enterprise.

2. Determination of capital composition: Once the estimation have been made, the capital structure

have to be decided. This involves short- term and long- term debt equity analysis. This will depend

upon the proportion of equity capital a company is possessing and additional funds which have to be

raised from outside parties.

3. Choice of sources of funds: For additional funds to be procured,

1. Issue of shares and debentures

2. Loans to be taken from banks and financial institutions

3. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source and period of financing.

4. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so

that there is safety on investment and regular returns is possible.

5. Disposal of surplus: The net profits decision have to be made by the finance

manager. This can be done in two ways:

1. Dividend declaration - It includes identifying the rate of dividends & other benefits like

bonus.

2. Retained profits - The volume has to be decided which will depend upon expansion,

innovation, diversification plans of the company.

6. Management of cash: Finance manager has to make decisions with regards to cash

management. Cash is required for many purposes like payment of wages and salaries,

payment of electricity and water bills, payment to creditors, meeting current

liabilities, maintenance of enough stock, purchase of raw materials, etc.

7. Financial controls: The finance manager has not only to plan, procure and utilize

the funds but he also has to exercise control over finances. This can be done through

many techniques like ratio analysis, financial forecasting, cost and profit control, etc.

Financial goals of a firm

• 1. Wealth Maximization : The one of the most important objective of financial

managers is to maximize the value of shares of their shareholders.

• 2. Profit Maximization

• 3. Focus on stakeholders: Stakeholders are those entities who have invested in

shares and the interest of those people that a firm can’t ignore.

• 4. Estimation of capital requirement

• 5. Arranging of required funds

• 6. Optimum utilization of funds

• 7. Management of cash position or balance

• 8. Coordination with other functions or department

Agency Problem

• The agency problem is a conflict of interest inherent in any relationship where one party is

expected to act in another's best interests. 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 even though it is in the

manager’s best interest to maximize his own wealth.

• The agency theory is a supposition that explains the relationship between principals and

agents in business. Agency theory is concerned with resolving problems that can exist in

agency relationships due to unaligned goals or different aversion levels to risk. The most

common agency relationship in finance occurs between shareholders (principal) and

company executives (agents).

Role of Finance manager in India

• Estimation of the financial management• Selection of the right sources of funds• Allocation of funds• Analysis and interpretation of financial

performance• Analysis of Cost Volume Profits• Capital budgeting• Working capital management• Profit planning and control• Fair returns to the investors• Maintaining liquidity and wealth maximisation