FINANCIAL

MANAGEMENT
MODULE-01
DEFINITIONS
 Financial management involves organizing, planning, monitoring, and also controlling a company’s,
or an organization’s.
 It is important that the finance it procures is invested in a manner that the returns from the
investment are higher than the cost of finance. In a nutshell, financial management –
 Endeavors to reduce the cost of finance
Ensures sufficient availability of funds
Deals with the planning, organizing, and controlling of financial activities like the
procurement and utilization of funds
 According to Guthman and Dougal: “Financial management is the activity concerned with
planning, raising, controlling and administering of funds used in the business.”
 “Financial management is the operational activity of a business that is responsible for obtaining and
effectively utilizing the funds necessary for efficient operations.”- Massie
 In views of Howard and Upton, “Financial management should be considered as an application of
general managerial principles to the area of financial decision-making.”
 SCOPE OF FINANCIAL MANAGEMENT

Financial
Financial Planning decisions Decision
which relate (LongCapital
to estimating term Structure
and Short termwhich
decisions ) involve
the sources and application of funds. It means pre- identifying sources of funds. They also involve
estimating financial needs of an organization to ensure decisions with respect to choosing external sources
the availability of adequate finance. like issuing shares, bonds, borrowing from banks.

InvestmentShort-term
Decisioninvestment decisions means committing
Long-term investment decisions or Capital Budgeting
funds for a short period of time like current assets.
mean committing funds for a long period of time like
These involve decisions pertaining to the investment of
fixed assets.
funds in the inventory, bank deposits and investments.

Dividend Decisions
These involve decisions related to the portion of profits that will be distributed as dividend. Shareholders always
demand a higher dividend, while the management would want to retain profits for business needs. Hence, this is a
complex managerial decision.
 FUNCTIONS OF FINANCIAL MANAGEMENT
 Evaluating capital requirements: The finance manager evaluates capital requirements to optimize a

company’s revenue. The such evaluation considers needs-based finances, determined by anticipated expenses
plus earnings and the company’s plan.

 Evaluating capital constitution: The capital constitution can be determined after gauging capital requirements.

It includes long-term and short-term debt-equity analyses based on the company’s equity capital ratio and any
funds to be sourced from outside.

 Taking investment decisions: Financial managers will decide on relevant projects and investment opportunities

for the company to provide safe and lucrative returns.

 Managing liquidity: A finance manager balances liquidity and reflowing funds in the business.

 Financial control: Monitoring and controlling financing activities is vital to financial management. It is possible

to accomplish financial control using cost and profit control, ratio analysis, and financial forecasting methods.
IMPORTANCE OF FINANCIAL MANAGEMENT

It helps a business to organize its finances and acquire the necessary capital.
It is crucial for efficient and effective use of borrowed money.
Businesses need financial management to make financial decisions.
It is essential for executing plans in light of up-to-date financial reports and data
on relevant Key Performance Indicators (KPIs).
It ensures that the company is adhering to all the legal requirements on financial
aspects.
It ensures that each department operates within budget and in alignment with
strategy.
NATURE OF FINANCIAL MANAGEMENT
 Financial management is mainly concerned with the proper management of
funds.
 The financial manager must see that the funds are procured in a manner that
there is risk, cost and control considerations are properly balanced in a given
situation and there is optimum utilization of funds.
FINANCIAL GOALS

 Profit maximization:
 Maximizing the rupee income of firm/Company.
 Resources are efficiently utilized
 Appropriate measure firm performance
 Serves interest of society
 Wealth maximization:
 Maximizes the net present value
 Fundamental objective- maximize the market value of the firms share
FINANCIAL PLANNING AND FORECASTING
Financial planning indicate a firm’s growth, performance, investments and
requirements of funds during a given period of time.
 Financial planning covers the whole of a business's financial concerns and
operations. Some of the concepts involved in financial planning include
budgeting, accounting methods, the creation of sales goals, and financial
performance analysis.
 Financial planning help a firm’s financial manager to regulate flows of funds
which is his primary concern.
Forecasting is an important segment of financial planning. Using historical
data and market analysis, forecasting helps a business set reasonable goals for
revenue and costs.
FINANCIAL PLANNING
Financial planning process involves the following facts-
 Evaluating the current financial condition of the firm’s.
 Analyzing the future growth prospects and options.
 Projecting the investment options to achieve the stated growth objective.
 Estimating funds requirement and considering alternative financing options.
 Comparing and choosing from alternative growth plans.
 Measuring actual performance with the planned performance.
FINANCIAL FORECASTING
Financial forecasting is a planning process with respect to firm’s position, the
firm’s future activities relative to the expected economic, technical,
competitive and social environment.
A financial planning model establishes the relationship between financial
variables and targets, and facilitate the financial planning.
Financial forecasting is evaluating a company’s past performance and the
market’s current trends to predict its future financial performance. It’s a critical
tool for businesses of all sizes, as it can help them make informed decisions.
They gauge where to allocate resources and how to best position the firm for
growth.
 COMPONENTS OF FINANCIAL FORECASTING
1. Profit and Loss Statement
The profit and loss statement, commonly known as the income statement, is an
essential component of forecasting.
It demonstrates how an organization generates profit or loss over a period.
The profit and loss statement projection can foresee impending expenses and
income. Budgets are a large part of this statement’s projection.
Items that can be forecasted in a P&L statement include revenue, COGS, operating
expenses, depreciation, amortization, interest income, and interest expense.
2. Cash Flow Statement
Every company relies on cash to run. The cash flow statement displays the total
amount of money coming in, going out, and remaining at the end of the month.
The company’s income statement may predict loss but not cash on hand. Thus,
we project cash flow statements to determine how the company can operate
while making timely adjustments to create profit cycles.
A forecast of cash can help management plan on cash outflow for wages, debt
payments, tax, etc. They can also use it to plan future investment strategies.
Items that can be forecasted in a Cash Flow statement include cash flow from
operating activities, cash flow from financing activities, cash flow from
investing activities, and finally cash in hand.
3. Balance Sheet
The balance sheet provides a summary of the company’s financial position. It
consists of assets like cash on hand, money in the bank, etc.
It also includes shares, investor stocks, and shareholders’ equity.
Within liabilities, it contains unpaid bills, loan fees, credit card balances, and
other obligations.
It uses various financial inputs like profit, investment, and financial plans along
with cash and capital expenditure budgets.
Items that can be forecasted in a Balance Sheet include long-term debt, retained
earnings, Net PP&E, other liabilities, and much more.
4. Working Capital
We project the additional funds using the projected Balance Sheet, Income
Statement, and Initial Balance Sheet. These funds used during the planning
period are known as working capital.
Firms use this projection to evaluate operating expenses like tax and dividend
payments.
Items that can be forecasted in a Working Capital Schedule include accounts
receivable, accounts payable, prepaid expense, other current liabilities, etc.
 FINANCIAL FORECASTING METHODS
Quantitative Research
1. Percent of Sales
This method calculates the percentage of sales using the line-of-sale items
from the primary financial statements. They later apply these percentages to
estimate those sales items’ future value.
The companies need to analyze their history to establish the percent of sales
values. For instance, the selling price of a product is proportional to its
production cost. Thus, we can apply a similar growth rate to future metrics.
2. Straight-Line Method
The easiest and most popular method businesses use is the straight-line
method. It involves assuming that the company’s growth rate stays constant
over the years. Thus, applying the growth rate to the current financials can
present future values.
However, this method does not consider fluctuations in the market and
economic conditions. It also needs increasing experts and individuals to
conduct financial calculations and economic operations with security.
Here, we first calculate the growth rate using the company’s history. Then, we
multiply the growth rate with the current data value and calculate the result.
3. Simple Linear Regression
Regression analysis enables us to determine which elements
have the most significant influence on a particular business
area. These elements are called variables, and they are
dependent and independent variables.
It is the most popular method for modeling a relationship
between two sets of variables. Analysts produce an equation to
forecast and estimate data.
In this model, X-axis carries the independent variable, while
the Y graphs the dependent variable. The observations of the Y
variable at each level of X represent their relationship as a
straight line.
The simple linear regression equation is y=Bx-A, where y and
x are the dependent and independent variables, respectively. B
is the slope, and A is the intercept (the predicted value of y
when the x is 0).
4. Moving Average
 Moving averages is an effective visual tool that is easy to use and comprehend. It provides essential
insights into company trends. It averages the company’s historical data and creates a future forecast.
 Moving averages’ most typical use is to determine the trend’s direction. For instance, sales for a
particular product from the previous quarter can help predict the current quarter’s sales.
 The most widely applied moving averages are Simple Moving Averages (SMA) and Exponential
Moving Averages (EMA). Calculating the moving average is dividing the total variable value for a
period by the number of periods.
5. Multiple Linear Regression
 Multiple linear regression is a statistical method that examines situations where more than one
variable is present. There can be several independent variables but only one dependent
variable.
 Using this technique, one can check causes and approximately predict the values of the
response (dependent) variables.
 A business is not just affected by a single situation but by many factors. Thus, this method is
more dynamic and valuable, as it uses several variables.
QUALITATIVE RESEARCH
1. Market Research
 Businesses use market research to gather data to understand the consumer
better systematically. The study helps in making better business decisions.
 It assists in understanding the needs of the market. The company can create
effective planning of human and material resources to align with market
trends.
 Surveys can help gain knowledge about the company’s target audience. They
use it to understand the customer’s needs regarding their goods or services.
 For startups, determining the economic degree of success or failure when it
enters the market is necessary. Even when existing businesses launch a new
product or service, they must gauge its success rates. Market analysis methods
can help with both of these scenarios.
2. Delphi Method
The most popular qualitative sales or demand
forecasting technique is probably the Delphi
Method. This approach involves a multi-
stage, iterative process with a team of
experts.
This method uses professionals who have
been in the market for a while. They must
possess plenty of experience and knowledge
of the industry’s demands.
The analysts first analyze the business model
and prepare a forecast. The report is
circulated among the experts one by one,
where they add their opinion on the forecast.
 FINANCIAL FORECASTING VS FINANCIAL PLANNING
 Financial forecasting focuses on predictions, while financial planning concerns long-term goals.

 Financial forecasting uses factors such as a company’s current cash position or industry trends to

determine future happenings. However, most of what happens during a financial plan are future
speculation based on present-day actions.

 The act of forecasting involves making estimates using data from the company’s historical and past

events. Financial planning considers savings and investments to plot a future financial outcome.

 Financial forecasting is a component of strategic planning, but it does not include implementation

approaches. It generally facilitates statistics to guide planning. Financial planners use present
information to create an actionable plan for their clients.

 In financial planning, you’re looking at how to sustain your company for years to come. Plans are

usually less detailed than forecasts and span from one year to five years.