•Financial ManagementFinancial Management

By Dr. B. Krishna ReddyBy Dr. B. Krishna ReddyProfessor and Head_SKIM Professor and Head_SKIM

FINANCEFINANCE

1.1. Finance is the life-blood of business. Without finance Finance is the life-blood of business. Without finance neither any business can be started nor successfully run . neither any business can be started nor successfully run .

2.2. Finance is needed to promote or establish business, Finance is needed to promote or establish business, acquire fixed assets, make necessary investigations, acquire fixed assets, make necessary investigations, develop product keep man and machines at develop product keep man and machines at work ,encourage management to make progress and work ,encourage management to make progress and create values. create values.

3.3. Finance is the managerial activity which is concerned Finance is the managerial activity which is concerned with planning and controlling of the firms Financial with planning and controlling of the firms Financial ResourcesResources. .

What is Financial What is Financial Management?Management?

Concerns the Concerns the acquisitionacquisition, , financingfinancing, and , and managementmanagement of of assets with some assets with some overall goaloverall goal in mind.in mind.

DefinitionDefinition Financial management is the ways and Financial management is the ways and

means of managing money. i.e. the means of managing money. i.e. the determination, acquisition, allocation and determination, acquisition, allocation and utilization of financial sources usually with utilization of financial sources usually with the aim of achieving some particular goals the aim of achieving some particular goals or objectives.or objectives.

““Financial management is the application of Financial management is the application of planning and control function of the finance planning and control function of the finance function”- Howard and Uptonfunction”- Howard and Upton

NATURE AND SCOPE OF NATURE AND SCOPE OF FINANCIAL MANAGEMENTFINANCIAL MANAGEMENT

The nature of financial decisions would be The nature of financial decisions would be clear when we try to understand the clear when we try to understand the operation of a firm. At the very outset, the operation of a firm. At the very outset, the promoters makes an appraisal of various promoters makes an appraisal of various investment proposals and selects one or investment proposals and selects one or more of them ,depending upon the net more of them ,depending upon the net benefits derived from each as well as on the benefits derived from each as well as on the availability of funds. availability of funds.

FINANCIAL DECISION PROCESSFINANCIAL DECISION PROCESS

1. Selection of investment proposals ,known as the 1. Selection of investment proposals ,known as the investment decision. investment decision.

2. Determination of working capital 2. Determination of working capital requirements, known as the working capital requirements, known as the working capital decision.decision.

3. Raising of funds to finance the assets, 3. Raising of funds to finance the assets, known known as the financing decision. as the financing decision.

4. Allocation of profit for dividend 4. Allocation of profit for dividend payment, payment, known as the dividend decision.known as the dividend decision.

What is Finance?What is Finance?What is this course all about?What is this course all about?

• Accounting is the language of business.Accounting is the language of business.

• Finance uses accounting information together Finance uses accounting information together with other information to make decisions that with other information to make decisions that affect the market value of the firm.affect the market value of the firm.

• There are There are threethree primary decision areas that primary decision areas that are of concern.are of concern.

Investment DecisionsInvestment Decisions

What is the optimal firm size?What is the optimal firm size? What specific assets should be acquired?What specific assets should be acquired? What assets (if any) should be reduced or What assets (if any) should be reduced or

eliminated?eliminated?

Most important of the three decisions.Most important of the three decisions.

•: Investment decisions : Investment decisions What assets should the company hold? This What assets should the company hold? This determines the left-hand side of the balance sheet. determines the left-hand side of the balance sheet. these decision are concerned with the effective these decision are concerned with the effective utilization of funds in one activity or the other. The utilization of funds in one activity or the other. The investment decision can be classified under two investment decision can be classified under two groups-groups-

(i) Long term investment decision(i) Long term investment decision (ii) Short term investment decision(ii) Short term investment decision

The former are referred to as the The former are referred to as the capital budgeting capital budgeting and the latter as working capital management. and the latter as working capital management.

Financing DecisionsFinancing Decisions

What is the best type of financing? What is the best type of financing? What is the best financing mix?What is the best financing mix? What is the best dividend policy (e.g., What is the best dividend policy (e.g.,

dividend-payout ratio)?dividend-payout ratio)? How will the funds be physically acquired?How will the funds be physically acquired?

Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet).

Financing decisionFinancing decisionHow should the company pay for the investments How should the company pay for the investments it makes? This determines the right-hand side of it makes? This determines the right-hand side of the balance sheet. it is also known as the balance sheet. it is also known as capital capital structure decisionstructure decision. It involves the choosing the . It involves the choosing the best source of raising funds and deciding optimal best source of raising funds and deciding optimal mix of various source of finance.mix of various source of finance.

A company can not depend upon only one source A company can not depend upon only one source of finance ,hence a varied financial structure is of finance ,hence a varied financial structure is developed. but before using any particular source developed. but before using any particular source of capital ,its relative cost of capital ,degree of risk of capital ,its relative cost of capital ,degree of risk and control etc should be thoroughly examined by and control etc should be thoroughly examined by the financial manager. the major source of long-the financial manager. the major source of long-term capital as term capital as sharesshares and and debenturesdebentures. .

DIVIDEND DECISION DIVIDEND DECISION

Dividend decisions - What should be done Dividend decisions - What should be done with the profits of the business? The with the profits of the business? The dividend decision is concerned with dividend decision is concerned with determining how much part of the earning determining how much part of the earning should be should be distributeddistributed among the share among the share holders by way of dividend and how much holders by way of dividend and how much should be should be retainedretained in the business for in the business for meeting the future needs of funds internally.meeting the future needs of funds internally.

Asset Management Asset Management DecisionsDecisions

How do we manage existing assets How do we manage existing assets efficientlyefficiently??

Financial Manager has varying degrees of Financial Manager has varying degrees of operating responsibility over assets.operating responsibility over assets.

Greater emphasis on Greater emphasis on Current Asset Current Asset Management (Working Capital Management)Management (Working Capital Management) than than fixed asset managementfixed asset management..

Importance of Finance inImportance of Finance in Modern World Modern World

Financial ProblemsFinancial Problems Wealth Maximization Goal Wealth Maximization Goal Allocation of FundsAllocation of Funds Maximizing EarningsMaximizing Earnings Cost of Present & Future FundsCost of Present & Future Funds Allocation of EarningsAllocation of Earnings

Conflicting Goal of ManagementConflicting Goal of Management Structural ChangesStructural Changes

-Mergers, Reorganization, Consolidation, -Mergers, Reorganization, Consolidation, Liquidation, Collaboration & Internal Liquidation, Collaboration & Internal Restructuring.Restructuring.

Factors influencing financial Factors influencing financial decision decision

These factors are divided into two parts-These factors are divided into two parts-1.Micro economic factor1.Micro economic factor2.Macro economic factor2.Macro economic factor

Micro economic factor- micro economic factor is Micro economic factor- micro economic factor is related to the internal condition of the firm-related to the internal condition of the firm-

(a) Nature and size of the firm(a) Nature and size of the firm (b) Level of risk and stability in earnings(b) Level of risk and stability in earnings (c) Liquidity position (c) Liquidity position (d) Asset structure and pattern of ownership(d) Asset structure and pattern of ownership (e) Attitude of the management(e) Attitude of the management

Macro economic factor Macro economic factor

These are the Environmental factor-These are the Environmental factor-

1. The state of the economy 1. The state of the economy

2. Governmental policy 2. Governmental policy

What is the Goal of What is the Goal of the Firm?the Firm?

Maximization of Maximization of Shareholder Wealth!Shareholder Wealth!

Value creation occurs when we Value creation occurs when we maximize the share price for current maximize the share price for current

shareholders.shareholders.

Objectives of financial managementObjectives of financial management

The objective of financial management The objective of financial management are considered usually at two levels –at are considered usually at two levels –at macro level and micro level. three primary macro level and micro level. three primary objectives are commonly explained as the objectives are commonly explained as the Objective of financial management-Objective of financial management-

1.1. Maximization of profitsMaximization of profits

2.2. Maximization of returnMaximization of return

3.3. Maximization of wealth Maximization of wealth

Maximization of profitsMaximization of profits

Profit earning is the main aim of every Profit earning is the main aim of every economic activity. Profit maximization economic activity. Profit maximization simply means maximizing the income of simply means maximizing the income of the firm . Economist are of the view that the firm . Economist are of the view that profits can be maximized when the profits can be maximized when the difference of total revenue over total cost is difference of total revenue over total cost is maximum, or in other words total revenue maximum, or in other words total revenue is greater than the total cost. is greater than the total cost.

Maximization of returnMaximization of return

Some authorities on financial management Some authorities on financial management conclude that maximization of return conclude that maximization of return provide a basic guideline by which financial provide a basic guideline by which financial decision should be evaluated . decision should be evaluated .

Maximization of wealthMaximization of wealth

According to prof. Solomon Ezra of stand ford According to prof. Solomon Ezra of stand ford university , the ultimate goal of financial university , the ultimate goal of financial management should be the maximization of the management should be the maximization of the owners wealth. The value of corporate wealth may owners wealth. The value of corporate wealth may be interpreted in terms of the value of the be interpreted in terms of the value of the company’s total assets. The finance should company’s total assets. The finance should attempt to maximize the value of the enterprise to attempt to maximize the value of the enterprise to its shareholders. Value is represented by the its shareholders. Value is represented by the market price of the company’s common stock.market price of the company’s common stock.