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CHAPTER NO. 1 Nature & Scope of
Financial Management
INTRODUCTIONFinance Finance is defined as the provision of money at the
time when it is required. Every enterprise, whether big, medium , or small needs finance to carry on its operations and to achieve its targets. So, it is rightly said to be the lifeblood of an enterprise.
Classification of Finance Finance deals with the requirements, receipts and
disbursements of funds in the public institutions as well as in the private institutions. On the basis of these finance is classified in to following two parts.
1. Traditional classification2. Modern classification
Classification of Finance in Traditional way
BUSINESS FINANCE
PUBLIC FINANCE
1. GOVERNMENT INSTITUTIONS
2. STATE GOVERNMENTS
3. LOCAL SELF GOVERNMENTS
4. CENTRAL GOVERNMENTS
PRIVATE FINANCE
1. PERSONAL FINANCE2. BUSINESS FINANCE3. FINANCE OF NON
PROFIT ORGANISATIONS
Classification of Finance in Modern way
BUSINESS
FINANCE
PARTNERSHIP FINANCE
SOLE-PROPRITORY
FINANCE
COMPANY OR
CORPORATION FINANCE
APPROACHES TO BUSINESS FINANCEBusiness finance connotes finance of business
activities.It is composed of two words (I) business( state
of being busy related with all creative human activities) (ii) finance (provision of money when it is required) so, business finance concerned with the application of skills in the use and control of money.
Three main approaches to finance indicated in traditional and modern approaches.
(i) Providing of funds(ii) Finance to cash(iii) raising of funds and effective utilization.
Financial Management and Definition
Financial Management refers to :-1. Part of management activity2. Planning and controlling financial resources3. Finding out various sources for raising funds4. Suitable and economical sources5. Proper use of funds So, Financial management is an area of financial
decision making , harmonising individual motives & enterprise goals.
Definition“The area of the business management devoted to a
judicious use of capital and a careful selection of sources of capital in order to enable a spending unit to move in the direction of reaching its goals”
J. F. Bradley
EVOLUTION OF FINANCIAL MANAGEMENT
THREE STAGES
INITIAL
STAGE
(1930)
• EMERGENCE as distinct field & FORMATION of large sized business undertakings
• 1930 economic recession creates difficulties in raising finance & find out improved methods for sound financial structure
IN EARL
Y 1950
• EMPHASIZED on reorganization of industries & selection of sound financial structure
• SHIFTING to profitability to liquidity , techniques of analyzing capital investment & widened the scope of financial management
MODERN PHAS
E AFTE
R 1960
• DISCIPLINE of financial management become more analytical & development of theory , methods, models like CAPM, OPTION PRICING THEORY.
• NEW sources of finance like PCD’s, FCD’s, PD’S etc.
IMPORTANCE OF FINANCIAL MANAGEMENT
#
FOR FINANCIAL PLANNING & SUCCESSFUL PROMOTION
ACQUISITION OF FUNDS AT MINIMUM
COST
SOUND FINANCIAL DECISION
IMPROVING PROFITABILI
TY
PROPER USE AND ALLOCATION OF
FUNDS
INCREASING THE WEALTH OF INVESTORS
& NATION
AIMS OF FINANCE FUNCTION SCOPE OF FINANCE FUNCTION
1. Acquiring sufficient funds
2. Proper utilization of funds
3. Increasing profitability
4. Maximizing firm value
# Estimating financial requirements
# Deciding capital structure# Selecting a source of
finance# Selecting a pattern of
investment# proper cash management#Implementing financial
controls# proper use of surpluses
RELATIONSHIP OF FINANCE WITH OTHER BUSINESS FUNCTIONS
• DISTRIBUTION FUNCTION
• ACCOUNTIONG FUNCTION
• PRODUCTION FUNCTION
• PURCHASE FUNCTION
PRESONNEL FUNCTION
RESARCH AND
DEVELOPMENT
FUNCTION
OBJECTIVES OF FINANCIAL MANAGEMENT1. OBJECTIVE PROFIT MAXIMISATION
Arguments in favour # Profit maximization is
the obvious objectives when profit s the main aim.
# Profitability is a barometer for measuring efficiency & prosperity of a business
# To survive In unfavorable situation
# For the expansion and diversification
# For fulfilling social goals
Arguments in against$ Ambiguity$ Ignores time value of
money$ Ignores risk factors $ Dividend policy
2.OBJECTIVE WEALTH MAXIMISATIONArguments in favour @ It serves the interest of
all shareholders@ Owners economic
welfare@ Long run survival and
growth@ Consider risk factors and
the time value of money@Increase the market
value of the shares@Value maximization of
equity shareholders by increasing price per share
Arguments in against* Objective is not
descriptive* Not socially desirable* Controversial point
that it increases firm’s value or shareholder wealth
* Wealth maximization is difficult when ownership and management are separated
MEASURING SHAREHOLDERS VALUE CREATIONEconomic value added EVA is a measure of performance evaluation
employed by Stewart & Co. It is now used to measure the surplus value created by an investment or a portfolio of investments.
EVA = Net profit after tax – Cost of capital x Capital invested
Market value added MVA is the sum total of all the present values of
future economic value added. It can also defined as
MVA = Current market value of the firm – Book value of capital employed
FINANCIAL DECISIONS & INTER RELATION OF FINANCIAL DECISIONS
FINANCIAL DECISIONS
1. Investment decision2. Financing decision3. Dividend decision
INTER RELATION OF FINANCIAL DECISION----
INVESTMENT
DECISION
DIVIDEND DECISION
FINANCING DECISION
FINANCIAL MANAGEMENT CONCERNED WITH
1. FINANCING DECISION
2. INVESTMENT DECISION 3. DIVIDEND
DECISION
ANALYSISRISK
RETURN RELATIONSHI
P
TO ACHIEVE THE GOALS OF WEALTH MAXIMISATION
FACTORS INFLUENCING FINANCIAL DECISION
INTERNAL FACTORS EXTERNAL FACTORS
A. State of economyB. Structure of capital and
money marketsC. Requirements of
investorsD. Government policyE. Taxation policyF. Lending policy of
financial institutions
• Nature and size of business
• Expected return, cost, risk• Composition of assets• Structure of ownership• Trend of earnings• Age of the firm• Liquidity position• Working capital
requirements• Conditions of debt
agreements
RISK RETURN TRADE OFF
INVESTMENT DECISION1. CAPITAL
BUDGETING2. WORKING CAPITAL
MANAGEMENT
RISK
FINANCING DECISION# CAPITAL STRUCTURE
MARKET VALUE OF THE FIRM
DIVIDEND DECISION
* DIVIDEND POLICY
RETURN
FUNCTIONAL AREAS OF FM
FUNCTIONS OF A FINANCE MANAGER
∞ Determining financial needs
∞ Selecting the sources of funds
∞Financial analysis and interpretation
∞Cost-Volume-Profit analysis
∞Capital budgeting∞Working capital
management∞Profit planning and
control∞Dividend policy
1. Financial forecasting and Planning
2. Acquisition of funds3. Investment of funds4. Helping in valuation
decisions5. Maintain proper
liquidity
FINANCIAL ENGINEERINGDesigning and developing new financial
instruments # Formulating new processes $ Formulating
creative solutions to financial problems.
ORGANISATION OF THE FINANCE FUNCTIONBoard of Directors
Managing Director
Vice President Production
Vice President Finance
Financial Controller
Planning & Control
Annual Reports
Budgeting
Additional Funds
Cash Manageme
ntAudit
Protect Funds &
Securities
Relation with Banks & Financial
Institutions
Profit Analysis
Accounting Payroll
Treasures
Vice President Sales
The Financial Controller Vs. Treasurer
Treasurer Controller
1 Provision of capital 1 Accounting
2 Relation with banks and other financial institutions
2 Preparation of financial reports
3 Cash management 3 Reporting and interpreting
4 Receivables management 4 Planning and control
5 Protect funds and securities 5 Internal audit
6 Investors relations 6 Tax administration
7 audit 7 Reporting to government
THANKS