Financial Management Meaning and Need of financial Management

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Objectives of the sessionIntroduction to financial management as a subject,

understanding its scope and utilization for decision making process to increase shareholders wealth.

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Introduction FM is that managerial activity which is concerned with planning and controlling of the firms financial resources.FM is an area of financial decision making, harmonizing individual motives and enterprise goals

Aim of financial managementAcquiring sufficient funds

Long gestation period- owners capitalReduction of tax- debtRequirements of funds for a project- debenturesProper utilization of funds

returns> costNo ideal funds Increasing profitabilityMaximizing firms value

Objective of financial management contWealth maximization

PositivesLong term survival of the businessIncrease in EPSConsiders risk factor and time value of moneyNegativesNot descriptiveSocial acceptability is questionedShareholders wealth vs. wealth of firm

Scope of financial managementEstimating financial requirementsDeciding capital structureSelecting a source of financeSelecting a pattern of investment (FA & WC)Proper cash management (cash budget/report)Implementing financial controls(cost, return, BEP, audit)Proper use of surplus(expansion, dividends, reinvesting)

Functional areas of financial managementDetermining financial needsSelecting the sources of fundsFinancial analysis and interpretationCost- volume profit analysisCapital budgetingWorking capital managementProfit planning and controlDividend policy

Financial decisionsThree types:

Investment decisions or long term asset-mixCapital budgeting decision- profitability of new investment, expected risk and returnFinancing decisions or capital-mixCapital structure- control, flexibility, legal aspects, loan covenantsDividend decisions or profit allocationOptimum dividend policyLiquidity decisions or short term asset-mixProfitability- liquidity trade-off

Factors affecting financial decisionsInternal

Nature and size of businessExpected return , cost and riskComposition of assetsConditions of debt agreementWorking capital requirementLiquidity positionAge of the firmTrend of margin

Factors affecting financial decisions cont..External

State of economyStructure of capital and money marketsRequirement of investorsGovernment policyTaxation policyLending policy of financial institutions

Financial management processFinancial planning and controlFinancial decisionsInvestment decisionsfinancing decisionsDividend decisions

feedbackRisk and return characteristics of the firmMarket price of shareShareholder wealth

Functions of financial managerNot limited to preparing reports, raising funds and maintaining recordsFunds raisingFunds allocation

Decide about the expenditures and determine the demand for capital for these expendituresHow large should be an enterprise and how fast it should grow?In what form should it hold its assets?How should the funds required to be raised?

Functions of financial manager cont.Profit planning

Decisions in the areas of cost, pricing volume of output and firms selection of product linesCost structure to develop actions plans for the futureUnderstanding capital market

Operations of capital marketEvaluation by investors

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