Nature of Fm

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Chapter- 1

Nature of

Financial

Management


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FINANCIAL MANAGEMENT FUNDAMENTALS

A. Introduction To Financial Management

B. Business activitiesC. Finance function

D. Finance managers roleE. Financial goalsF. Risk return trade- off

G. Managers vs. Shareholders goalsH. Financial Goals And Firms Mission And ObjectivesI. Organisation of the finance functions

J.Status and duties of finance executives

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INTRODUCTION TO FM

Financial management deals with procurementof funds and their effective utilization in thebusiness.

Financial management comprises theforecasting, planning, organizing, directing,coordinating and controlling of all activitiesrelating to acquisition and application of the

financial resources of an undertaking in keepingwith its financial objective.

by Raymond Chambers organization

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Business Activities

Production

Marketing

Finance

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Finance Functions

Investment or Long Term Asset Mix

Decision (Capital Budgeting)

Financing or Capital Mix Decision

(Source of finance and cost of Capital)

Dividend or Profit Allocation Decision

(Capital Structure)Liquidity or Short Term Asset Mix Decision

(Working capital decision)

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Finance Managers Role

Determination of size of the enterprise and

determination of rate of growth

Raising of Funds

Allocation of Funds

Profit Planning

Understanding Capital Markets

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Financial Goals

Profit maximization (profit after tax)

Maximizing Earnings per Share

Shareholders Wealth Maximization (SWM)

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Profit Maximization

Maximizing the Rupee Income of Firm

Resources are efficiently utilized

Appropriate measure of firm performance

Serves interest of society also

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Objections to Profit Maximization

It is Vague

It Ignores the Timing of Returns

It Ignores Risk

Assumes Perfect CompetitionIn new business environment profit

maximization is regarded as

Unrealistic Difficult

Inappropriate

Immoral

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Maximizing EPS

Ignores timing and risk of the expectedbenefit

Market value is not a function of EPS. Hencemaximizing EPS will not result in highestprice for company's shares

Maximizing EPS implies that the firm should

make no dividend payment so long as fundscan be invested at positive rate of returnsuch a policy may not always work

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Shareholders Wealth Maximization

Maximizes the net present value of a

course of action to shareholders.

Accounts for the timing and risk of the

expected benefits.

Benefits are measured in terms of cash

flows.

Fundamental objectivemaximize the

market value of the firms shares.

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Comparison of profit maximisation and wealth

maximisation

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Comparison of profit maximisation and wealth

maximisation

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Functions & Objectives of FM

Financial Management

Maximization of share value

Financial Decision

Investment

Decision

Liquidity

Management

Financing

Decisions

Dividend

Decisions

Return RiskTrade off


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Risk-return Trade-off

Risk and expected return move in tandem;the greater the risk, the greater theexpected return.

Financial decisions of the firm are guidedby the risk-return trade-off.

The return and risk relationship:

Return = Risk-free rate + Risk premiumRisk-free rate is a compensation for time

and risk premium for risk.

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Risk Return Trade-off

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Risk and expected return move in tandem; the greater the risk, the greaterthe expected return.


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Agency Problems: Managers Versus Shareholders Goals

The manager, acting as the agent for theshare holders, is supposed to make decisionsthat will maximize shareholders wealth.However, manager may prioritize his personalobjective (Liberty, prestige and wealth)

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Agency Problems: Managers Versus Shareholders Goals

This conflict is known as Agency problem.

This may be minimised by providing incentivesin the form of stock options, cash bonus and

other long term benefits

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Financial Goals and Firms Mission and

Objectives

Goals or objectives are missions or basic

purposes of a firms existence

Wealth maximization is more appropriately a

decision criterion, rather than an objective or

a goal.

The wealth maximization criterion would

simply indicate whether an action is

economically viable or not

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Vision

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Vision:describes a desirable state that a company or individual wishes to attainat some time in the future


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Mission

The mission statement reflects every facet ofyour business: the range and nature of theproducts you offer, pricing, quality, service,

marketplace position, growth potential, use oftechnology, and relationships with yourcustomers, employees, suppliers, competitorsand the community.

Therefore a mission statement is somethingwhich tells you what to do in the present inorder to achieve the future..

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VISION

MISSION

MISSION

MISSION

MISSION

MISSION

(ULTIMATE GOAL)

SHORT TERM GOALSAND TARGETS


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Summary of mission & vision

Vision:

what organization wants to become in future.

Mission :what is the purpose of the existence of

the organization.

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VISION- The

best premium

ice-cream player

Mission: we exist to thrill

customers, define and lead

multi branding, enrich

stakeholders and build

powerful brands


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Organisation of the Finance Functions

Reason for placing the finance functions in

the hands of top management

Financial decisions are crucial for the survival

of the firm.

The financial actions determine solvency of the

firm

Centralisation of the finance functions can

result in a number of economies to the firm.

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Status and Duties of Finance Executives

The exact organisation structure for

financial management will differ across

firms.

The financial officer may be known as the

financial manager in some organisations,

while in others as the vice-president of

finance or the director of finance or thefinancial controller.

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Role of Treasurer and Controller

Two more officersthe treasurer and the

controllermay be appointed under the

direct supervision of CFO to assist him or

her.

The treasurers function is to raise and

manage company funds while the

controller oversees whether funds arecorrectly applied.

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Organization Of Finance Function

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Changing Scenario

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Assignment

Question : What do you mean by financialmanagement ?

Question : Explain the scope of financialmanagement ?

Question : What are the functions of aFinance Manager ?

Question : What are the various methods and toolsused for financial management ?

Hint: Financial leverage or trading on equity

capital budgeting techniques as payback, internal rate of return, net present value, profitability index, average rate ofreturn

cash management may be centralised or de-centralised

ratio analysis

Funds flow and cash flow statements and projected financial statements

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Assignment

Question : Discuss the role of a finance

manager ?

Question : Draw a typical organisation chart

highlighting the finance function of a

company ?

Question : Discuss some of the instances

indicating the changing scenario of financial

management in India ?

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Assignment

Collect the latestannual reports of L &T and

BHEL. Read directors report and chairmans

statement and comment on both firms

objective and financial goals. What differencedo you notice. What could be the reasons for

the difference

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Documents

Nature of Fm