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Financial Management: by Barkha Makheja

This document provides an overview of financial management. It discusses what finance is, key issues in finance like where to raise resources and invest them. It then defines financial management as the acquisition of funds at optimal cost and utilization with minimum risk. The document outlines why finance is studied and its relationship to disciplines like economics, banking, accounting, marketing, production and quantitative methods. It also covers the scope of financial management including investment, financing, dividend and working capital decisions. Objectives of financial management like profit and wealth maximization are defined. The emerging role of finance managers in India and financial decision making are summarized.

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Barkkha Makhija
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50 views16 pages

Financial Management: by Barkha Makheja

This document provides an overview of financial management. It discusses what finance is, key issues in finance like where to raise resources and invest them. It then defines financial management as the acquisition of funds at optimal cost and utilization with minimum risk. The document outlines why finance is studied and its relationship to disciplines like economics, banking, accounting, marketing, production and quantitative methods. It also covers the scope of financial management including investment, financing, dividend and working capital decisions. Objectives of financial management like profit and wealth maximization are defined. The emerging role of finance managers in India and financial decision making are summarized.

Uploaded by

Barkkha Makhija
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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FINANCIAL

MANAGEMENT
By Barkha Makheja
What is Finance?​

■ The art and science of managing money,  or management of money.​


■ It is the study of value.​
■ It is the study of how to make good  decision that involve money.​
■ What assets to buy?​
■ How to pay for the assets you buy?​
Key issues in Finance​

■ Where to raise financial resources from?​
■ Wherein to invest the resources?​
■ How best to manage the production-  distribution function?​
■ How much of profit to distribute and how  much to retain?​
1. Financial Management​

■ Acquisition of fund at optimum cost  and its utilization with minimum  financial risk.​


■ It is concerned with management of  fund.​
■ Financial Management means planning, organizing, directing and controlling the
financial activities such as procurement and utilization of funds of the enterprise. It
means applying general management principles to financial resources of the enterprise.
Why Study Finance?​

■ Marketing​
Budgets, marketing research, marketing  financial products​
■ Accounting​
Dual accounting and finance function,  preparation of financial statements​
■ Management​
Strategic thinking, job performance,  profitability​
■ Personal finance​
Budgeting, retirement planning, day-to-  day cash flow issues​
1.1 Finance and related discipline

■ Finance and Economics


The relationship in between these two disciplines are studied in two different headings viz
Micro and Macro economics
The major part of the financial management is to raise the financial resource to the
requirements. While raising the financial resources, the availability is subject to the macro
economic influences.
■ Banking system
■ Money and capital markets
■ Financial intermediaries
■ Monetary and credit policies
■ Finance and Accounting
The two are embedded with different disciplines. The finance is the discipline which is mainly based on the
cash basis of operations but the accounting is totally governed by the accrual system.
Accounting is mainly vested with the collection and presentation of data, but the finance is closely
connected with the decision making of the organization.
Till this moment, the differences are discussed only to know the role of finance over the accounting of any
organization. The following is the major relationship which lies in between the finance and accounting as
follows "Finance begins where accounting ends"
■ Finance and Marketing: 
These two are disciplines are interrelated to plan for introduction of new product. The major reason is that
the introduction of new product normally warrants huge sum of money for research and development; which
needs immense planning and execution to succeed over the other competitors
■ Finance and Production: 
The changes in the production policy of the organization will impact the capital expenditures. The fixed
assets of the organization should be effectively utilized which neither over capitalization nor under
capitalization
■ Finance and Quantitative methods: 
These are inter related to solve complex problems in order to take decisions.
1.2 scope of financial management

■ 1. Investment Decision:
The investment decision involves the evaluation of risk, measurement of cost of capital and
estimation of expected benefits from a project.
Capital budgeting and liquidity are the two major components of investment decision. Capital
budgeting is concerned with the allocation of capital and commitment of funds in permanent
assets which would yield earnings in future.
■ 2. Financing Decision:
While the investment decision involves decision with respect to composition or mix of assets,
financing decision is concerned with the financing mix or financial structure of the firm.
The raising of funds requires decisions regarding the methods and sources of finance, relative
proportion and choice between alternative sources, time of floatation of securities, etc. In
order to meet its investment needs, a firm can raise funds from various sources.
■ 3. Dividend Decision:
■ In order to achieve the wealth maximisation objective, an appropriate dividend policy
must be developed. One aspect of dividend policy is to decide whether to distribute all
the profits in the form of dividends or to distribute a part of the profits and retain the
balance.
■ 4. Working Capital Decision:
■ Working capital decision is related to the investment in current assets and current
liabilities. Current assets include cash, receivables, inventory, short-term securities, etc.
Current liabilities consist of creditors, bills payable, outstanding expenses, bank
overdraft, etc. Current assets are those assets which are convertible into a cash within a
year. Similarly, current liabilities are those liabilities, which are likely to mature for
payment within an accounting year.
■ 5. Risk management:
■ If the firm wants to maximise its value, it should’ increase its profits and revenues. For
this purpose increase of sales volume or other activities can be taken up. It is the general
feature of any firm to increase profits by proper utilisation of all opportunities and plans.
1.3 Objectives of financial management
■ Profit maximization (profit after tax)​

■ Maximizing Earnings Per Share​

■ Shareholder’s Wealth Maximization​


Profit Maximisation​

■ Main aim is earning profit.​
■ Profit is the parameter of the business  operation.​
■ Profit reduces risk of the business ​concern.​
■ Profit is the main source of finance.​
■ Profitability meets the social needs also.​
Wealth Maximisation​

■ This concept is to improve the value or wealth of the shareholders.​

■ It considers both time and risk of the business concern.​

■ It provides efficient allocation of resources.​

■ It ensures the economic interest of the society.​


1.4 Emerging role of finance manager in india

■ Investment Planning-
■ Financial Structure-
■ Treasury Operations-
■ Investor Communication-
■ Management Control-
■ Disposal of Profits or Surplus:
■ .Management of Cash
1.5 Financial decision making

■ Capital budgeting​
What long-term investments or projects  should the business take on?​
■ Capital structure​
How should we pay for our assets?​
Should we use debt or equity?​
■ Working capital management​
How do we manage the day-to-day finances of  the firm?​
Investment Decisio •What business to be in?​
n​ •What growth rate is appropriate?​
•What assets to acquire?​
​ •What mix of debt and equity to be used?​
Financing  Decision​ •Can we change value of the firm by changing
the capital  mix?​
•Is there an optimal debt–equity mix?​
​ •How much of the profit should be distributed as di
Dividend  Decision​ vidends  and how much should be ploughed back​
•Can we change value of the firm by changing the
amount  of dividend?​
•What should be the mode of dividend payment​

​ •What level of inventory is ideal?​
Working  Capital  D •What level of credit should be given to
ecision​ the customers?​
•What level of cash should be maintained?​
•How can the blockage of funds in the current
assets be  minimized
without compromising with profits?​
THANK YOU
Any questions?

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