Chapter1 Introduction to Financial Mangement

8/9/2019 Chapter1 Introduction to Financial Mangement

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Financial Management

An Overview


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What is Finance?What is Financial Management?

Evolution of Financial management?

Scope of Financial Management?

Goals or Objectives of Financial Management?

Financial Decisions in firm

Emerging Role of Financial Manger in India.


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The term Finance" in our simpleunderstanding - it is perceived as equivalentto Money

Finance refers to sources of funding anactivity.

Finance is also referred to as Funds orCapital.

Finance as a subject for generating its profileand attributes, we distinguish betweenpersonal finance and corporate finance.


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Financial management refers to that part ofmanagement activity which is concerned withthe planning and controlling of firms financialresources.

Defined as the management of flow of funds inthe firm and it deals with the financialdecision making of the firm


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Financial management emerged as adistinct field of study at the turn of the

20th century.

Its evolution may be divided into threebroad phases

the traditional phase

the transitional phase and

the modern phase

Evolution of Financial Management


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In The Traditional phase:

The financial manager was concerned with record

keeping, preparing different report, and managing

cash.

Finance function was concerned with procuring offunds to finance the expansion or diversification

activities and thus the occurrence of finance

function was episodic in nature.


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Transitional phase:

The scope of finance widened and the day-

to-day problems of finance were also

incorporated.

Fund analysis and control on regular basis.

This phase is in fact was an extension of

traditional phase.


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The Modern Phase:

The modern phase began in mid-1950s and has

been marked by infusion of ideas from economic

theory and application of quantitative methods.

The distinctive features of the modern phase are:

Central concern : Shareholder wealth maximization

Approach

: Analytical and quantitative


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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.


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FINANCE THEORY RESTS ON THE PREMISE

THAT MANAGERS SHOULD MANAGE THEIR

FIRMs RESOURCES WITH THE OBJECTIVE OF

ENHANCING THE FIRMs MARKET VALUE.

Adam Smiths invisible hand is at work when

investors private gain is a public value


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Wealth Maximization or ShareholdersWealth maximization (SWM):

SWM means maximizing the net presentvalue or wealth of a course of action toshareholders.

The net present value (NPV) of a course of

action is the difference between thepresent value of its benefits and thepresent value of its cost.


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Financial theory asserts that wealth maximization issingle substitute for a stockholders utility.

When the firm maximizes the stockholders wealth, the

individual stockholder can use this wealth to maximize

his individual utility.

It means that by maximizing stockholders the firm is

operating consistently toward maximizing stockholders

utility.

Symbolically,

SWM = NPo (number of shares owned X current stockprice per share)


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In the wake of liberalization,globalization, and institutionalization ofthe capital market, there is a greaterincentive to focus on creating value forshareholders. The following observations

are clear indications.Dhirubai Ambani : In everything that wedo, we have only one supreme goal, thatis to maximize your wealth as India'slargest investor family.

Anand Mahindra : All of us are beginningto look at companies as owned byshareholders. The key is to raiseshareholder returns


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Profit maximization means maximizing the rupee incomeof firm.

This goal is not as inclusive a goal as maximization ofshareholders wealth.

Its limitations are:

Profit in absolute terms is not a proper guide to decision

making. It should be expressed either on a per sharebasis or in relation to investment.

It leaves considerations of timing and durationundefined.

It glosses over the factor of risk


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Example BHELs mission and objectives

BHEL defines its vision, mission and objectives asfollows:

Vision To become a world class , innovative,competitive and profitable engineering enterpriseproviding total business solutions

Business Mission To be the leading Indian engineering

enterprise, providing quality products, systems andservices in the field of energy, transportation,infrastructure and other potential areas.

Objectives Growth

Profitability

Customer Focus

People orientation

Technology

Image to fulfill the expectations which shareholders likegovernment, as a owner, employees, customers and thecountry at large have from BHEL.


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As of Financial Management

Anticipating Financial Needs.

Acquiring Financial Resources.

Allocating Funds in Business.

Administrating the allocation of funds.

Analyzing the performance of finance

Accounting and Reporting to Management


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Finance Functions

Fi c Functi ns r cisi n include:

Invest ent r l ng-ter sset- ix

decisi n.

Financing r capital- ix decisi n. ividend r pr fit all cati ndecisi n.

Li uidity r sh rt-ter asset- ix

decisi n.


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Capital Budgeting

Decisions

Capital StructureDecisions

Dividend

Decisions

Working Capital

Decisions

Return

Risk

Market Value of

the Firm


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The job of the financial manager in India hasbecome more important, complex anddemanding due to the following factors:

1. Liberalization

2. Globalization3. Technological developments

4. Volatile financial prices

5. Economic uncertainty

6. Tax law changes7. Ethical concerns over financial dealings

8. Shareholder activism


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The key challenges for the financialmanager appear to be in the followingareas:

Investment planning and resourceallocation

Financial structureMergers, acquisitions, and restructuringWorking capital managementPerformance managementRisk managementCorporate governance Investor relations


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There are three broad areas of financial decision

making, viz., capital budgeting, capital

structure, and working capital management.

Finance theory, in general, rests on the premise

that the goal of financial management should be

to maximise the wealth of shareholders.


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A confluence of forces appears now to beprodding Indian companies to accord greater

importance to the goal of shareholder

wealth Maximization.

In general, when you take a financialdecision, you have to answer the following

questions :

What is the expected return ?

What is the risk exposure ?

Given the risk-return characteristics of the

decision how would it influence value ?


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Thank you

Documents

Chapter1 Introduction to Financial Mangement