Financial Management Unit 1 Class

7/31/2019 Financial Management Unit 1 Class

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Financial management


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Finance

To provide or raise the funds or capital for: ex :

financed a new car.

Provision of money at the time it is wanted

Procurement of fund and their effective

utilization


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Business finance

Activity concerned with

Planning

Raising Controlling

Administering of the funds used in business


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Financial management

Raising of funds and effective utilization of

funds in keeping in view ofall the overall

objectives of firm

it is an operational activity of a business that is

responsibility for obtaining and effectively

utilizing funds necessary for efficient

operations


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Scope of Financial Management

Financial Management involves

the application of general

management principles to

particular financial operation


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Financial Management Decisions

Fund requirement decision - Working capital

fixed capital

Financing decisionraising of funds - mix

Investment decision -capital assets and

current assets

Dividend decision -dividend payout ration Liquidity decision - current assetsidle

current assetsprofitability


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Finance function

1.Raising of fundsfinance decision

2.Investing them in assetsinvestment decision

3. Distributing profits to SH

dividend decisions4. Maintain cash inflow and outflowliquidity

decision


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The Financial Management Function

Managing daily cash inflows and outflows

Forecasting cash balances

Building long-term financial plans

Choosing the right mix of debt and equity


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Basic principles of finance decisions

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Risk return trade off

Maximization of wealth

Liquidity and profitablity

Raising of funds

Time value of money


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Objectives of Financial Management

Wealth maximiztion - Maximization ofshareholders wealth

Profit maximization


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Profit maximization

Success of any concern

Overall efficiency

Survival depends upon profit SH- investdividendhigh profit- high

dividend


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Profit maximisation

Performance of business unit is measured

Profit maximisedSH . Ees, prompt mayment

to creditors

Increase the confidence of management

Attracts the investors to invest their savings


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Profit against profit maximisation

1. Terms are vague

short run profitlong run

rate of profit

amt of profitaccounting profiteconomic profit

PAT/PBT

NP/GP


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Contd.

It ignores time :Rs received is more valuable

It does not take elements of risk

A huge profits invites problems from workers

True picture is not reflected

Industry leadershipincrease the profit

increase the cost

Consumers moralehe is exploited amway


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What Should Managers Maximize?

Profit maximization as goal:

Maximize shareholder wealth


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wealth maximisation

Gradual growth of financial assets

Wealth - attained by a company is reflected in

the market through the value of shares

Wealth of shareholders

Wealth maximisation is NPV

NPV = GPV of benefits receivedinvestmentsmade


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Maximize stock price, not profits

Accounts for risk

Takes time value of money

Postive NPVcreate wealth to the organistion

Negative NPVreduces the existing wealth ofshareholder

Ie total cash inflow should be more than outflow Excess of outflow is added to assets --- that is

wealth


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Example

A company has

50000 shares of rs 10 each

EPS = .40

Profit = 20000

Additional capital of rs 50000

Profit 30000

EPS = .30 Though the profit increases wealth of

shareholder decreased


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Advantages of wealth maximisation

Wealth maximisation is in clear term

PV of cash inflows are taken

Time value of money is considered Accepted by employees , creditors , bankers

etc

Risk factor is taken into accountbycalculating the NPV at discount factor

Li idit d fit bilit t


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Liquidity and profitabilitytwo

competing goals of a financial

manager Liquidity

The firm has adequate cash to pay it liabilities

The firm has adequate cash to large purchaseThe firm has cash reserve to meet emergencies


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Profitability

Requires funds to earn more profit / returns


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Liquidity vs profitability

Liquidity increases profitability decreases

Large amt of inventoryprofitability increases

and liquidty increases

Liberal credit policyincreses sales

increases profitliquidity decreases


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Risk return trade off

Higher riskhiher return

Hiher riskdecreases the liquidity

Higher returns

increases the profitabilty Level of operations Return and risk is

optimised

At this level - Market level of the company ismaximum


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Liquidity vs profitabilty

Debt equity ratioincrease

Fixed interest to be paiddecreases the

liquidity is reduced

Documents

Financial Management Unit 1 Class