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1. FM Introduction

Financial management involves obtaining and utilizing financial resources to achieve company goals, focusing on investment, financing, and dividend decisions. Key considerations include company objectives, the economic environment, and associated risks. The financial manager plays a crucial role in aligning financial strategies with corporate objectives to ensure the company's success.

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4 views15 pages

1. FM Introduction

Financial management involves obtaining and utilizing financial resources to achieve company goals, focusing on investment, financing, and dividend decisions. Key considerations include company objectives, the economic environment, and associated risks. The financial manager plays a crucial role in aligning financial strategies with corporate objectives to ensure the company's success.

Uploaded by

sarahzaik10
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We take content rights seriously. If you suspect this is your content, claim it here.
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FINANCIAL MANAGEMENT

CMA DEVIKA BS
Nature and Purpose of Financial
Management
Financial management focuses on effectively obtaining and using financial
resources, both for the short term and long term, to achieve the company's
goals.
There are three key decision areas in financial management:
 Investment – Deciding where to invest money, whether in long-term assets
like property or short-term needs like day-to-day operations.
 Financing – Choosing where to get the money from, such as loans, equity, or
other sources.
 Dividends – Deciding how much profit should be given to shareholders and
how this will impact the company's value.
The goal is to manage these areas efficiently to ensure the company's success.
When making these financial decisions, the financial
manager needs to consider:

The company's goals – What the business wants to achieve both


commercially and financially.
The economic environment – What the current state of the economy is
and how it affects the business.
Risks involved – What risks come with the decision and how those risks can
be managed.
INVESTMENT DECISION

The Investment Decision is about how a business uses its finance to achieve its
goals. The financial manager’s job is to make sure this money is used wisely and
efficiently. There are two key parts:
 Investment Appraisal: This involves looking at the company’s long-term plans
and choosing the right projects to invest in, usually requiring the purchase of
assets like equipment or buildings at the start.
 Working Capital Management: This focuses on the business’s day-to-day
survival. It ensures that:
• Debts are collected on time.
• Inventory levels are kept low but still support production.
• Cash is managed wisely.
• Bills are paid promptly.
FINANCIAL DECISION

The Financial Decision is about how a business gets the money it needs before
making any investments. One of the financial manager’s important tasks is to
figure out the best sources of funding, whether for the long term or the short
term.
When making this decision, the financial manager considers:
 Company needs - How much money the business requires and for how long.
 Investor expectations – What investors or lenders might want in return, such
as interest or shares.
 Availability of funds – How much money can realistically be raised from
different sources.

The goal is to choose the most suitable funding that meets the company’s
needs and satisfies the investors.
DIVIDEND DECISION

The dividend decision is about deciding what to do with the profits a business
makes. Once the business earns money, the financial manager has to choose
whether to:
 Pay dividends – Give some of the profits back to the owners (shareholders) as
cash.
 Retain profits – Keep the money in the business to reinvest and potentially
earn more in the future.
This decision is closely related to the financing decision because keeping more
money in the business means less need for external funding. The amount of
dividends paid can also impact the company’s value and its ability to raise more
funds later on.
Financial Roles

Financial management should be understood separately from other important


financial roles like management accounting and financial accounting:
 Management accounting – Focuses on providing information for daily tasks
such as controlling costs and making decisions. It deals with budgeting, cost
accounting, and short-term planning (usually within a year).
 Financial accounting – Deals with reporting past results and keeping track of
the overall financial position of a company. It’s mainly for shareholders and
others outside the company to see how the business is performing.
Financial Roles

Management accounting and financial management both focus on using resources


to achieve goals, but they differ in time focus:

• Financial Management is long-term, involving raising finance and allocating


resources to meet long-term objectives.
• Management Accounting focuses on short term tasks like budgeting, cost
control, and decision-making, typically within a 12-month period.

Meanwhile, financial accounting deals with reporting past financial results to


inform shareholders and other external parties, rather than guiding day-to-day
decisions.
Financial Roles
Management Financial Financial
Accounting Management Accounting
Review of overtime
✔
spending
Depreciation of non-
✔
current asset
Establishing dividend
✔
policy
Evaluating proposed
✔
expansion plans
Apportioning
overheads to cost ✔
units
Identifying accruals
✔
and prepayments
The relationship between corporate strategy
and corporate and financial objectives

The relationship between corporate strategy and corporate and financial


objectives revolves around what the business aims to achieve and how it plans to
do so.
Key points:
 Objectives/Targets: These define what the organization wants to accomplish,
like improving profits or increasing market share.
 Strategy: This explains how to reach those objectives. For example, a
strategy could be entering new markets or improving product quality.
Mission and Goals

Every business should identify its mission or main purpose. To fulfill this, the
company develops broad goals and then breaks them into smaller, detailed
commercial and financial objectives. These objectives should have clear,
measurable targets to track progress.
 Commercial objectives: These are based on market conditions, like customer
satisfaction.
 Financial objectives: These focus on monetary goals, such as increasing
revenue or reducing costs.
Aligning Objectives Throughout the
Organization:

Objectives are set at every level, from top management to individual


departments. For example, the credit control department’s goal of
reducing receivable days (speeding up cash collection) should align with
the company’s overall need for cash to fund projects that boost the
company’s stock price. This, in turn, satisfies shareholders by
increasing their wealth.
Levels of Strategy

 Corporate Strategy: Made by top management, these decisions involve


major areas like which markets to enter or exit. For example, the
company could decide to buy an existing firm or start a new one to
enter a market.
 Business Strategy: Focuses on individual units within the company, like
separate divisions or departments. They decide how to best compete,
whether by focusing on cost-efficiency or product quality.
 Operational Strategy: Focuses on how each department, such as
finance, will manage its daily operations to support the broader
corporate and business strategies. This includes decisions on managing
working capital, like ensuring there’s enough cash on hand.
Financial Manager’s Role
Almost every business strategy has financial implications, and the
financial manager plays a key role in ensuring these strategies succeed
by managing funds efficiently and making sure financial resources are
available when needed.
In summary, objectives define "what" the business wants to achieve,
while strategy defines "how" it will be done. Strategies are developed at
different levels and all must align to ensure the company's success. The
financial manager supports these strategies by making sure the
company’s financial health is strong enough to meet its goals.
THANK YOU

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