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FINANCIAL MANAGEMENT
AN INTRODUCTION
FINANCIAL MANAGEMENT DEFINED
• This is the business management function that
is concerned with managing a business’
finances.
• It refers to the application of financial
management tools and techniques to
coordinate all the financial functions in the
business.
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Financial Management
Management + Finances
Is all about managing financial resources
optimally in order to achieve desired objective,
which is preset.
FM
Financial department
Responsibility of
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Objectives of Finance
Maximization of market share.
Maximization of ROI.
Maximization of profits.
Achieving a specific service level.
Satisfying all stakeholders to maximum possible
extent.
Maximization of shareholder’s wealth.
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Functions of a Financial Manager
Spearheading the process of capital budgeting
Managing the liquidity of the firm.
Sourcing and utilization of funds
Financial analysis and planning.
Taking custody of company’s valuable documents
Paying suppliers
Monitoring the banking operations
Budgeting and forecasting
Proper earnings management
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Organization of Financial Department
CFO
Supervises
Treasurer
Controller
Main functions are
Obtain finances
Manages cash
Administer credit
Capital budgeting
Financial accounting
Internal audit
Management
accounting
Taxation
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Main functions of the department




Facilitation of finances.
Allocation of finances.
Utilization of finances.
Control of finances.
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Maximum use
of resources
Importance of Proper Financial Management
FINANCIAL
MANAGEMENT
Evaluate new
business
opportunities
Measure
business
performance
Make sound
business
decisions
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Importance of FM Contd…
• Maximize use of financial resources
FM allows you to identify and plan for the use of
your financial resources.
It provides information for financial decision
making.
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Importance of FM Contd…
• Evaluate new business opportunities
FM provides the key information and answer
questions of whether to exploit
such
opportunities or not.
That is, entrepreneurs can effectively analyze a
business opportunity and determine whether it is
worthwhile or not.
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Importance of FM Contd…
• Measuring business performance
FM helps the investor to monitor the progress
of their business towards achieving business
goals and to take corrective action where
necessary.
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Importance of FM Contd…
• Making sound business decisions
The financial information systems provides a
wide range of information that can be used to
make better decisions.
This is done using financial ratios, break even
analysis etc.
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Financial Decisions
 Investment decisions
Financing decisions
 Dividend Decisions
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1.
Investment Decision
This is also known as the Capital budgeting, and it
refers to the decision to invest in long term assets.
The assets are expected to be used over a long
period of time e.g. when a firm acquires plant and
equipment or replaces an old equipment or when
you invest in research and development.
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Importance of Capital Budgeting
• It determines the asset mix and hence the
business risk.
• It involves heavy initial outlays of the
business resources.
• Benefits accrue in future which future is
associated with risk and uncertainty.
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Practical Financial Management Problem.
• Investment appraisal using NPV, IRR, Pay
back period.
• Cost of capital
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Working capital decision
This is the decision concerned with the short term
assets/resources an organization uses to meet its
day to day obligations.
Such assets include:
•Cash reserves of the organization
•Funds collected from debtors of the organization.
•Inventories
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2.
Financing Decision
• This is the decision concerned with the sourcing of
funds that are utilized under the investment
decision.
• Much management time and effort is devoted to
trying to ensure the adequacy of the company's
profit flow.
• However, it is just as important that a company has
an adequate flow of funds if it is to remain in
business and very much less management time and
effort is devoted to this need.
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Financing decision Contd…
• As companies expand, they require growing
amounts of cash to finance acquisitions of fixed
assets. They also require growing amounts of cash
to finance their growing working capital (net
current
assets)
requirements.
Some of this funding requirement will come from
INTERNAL sources, whilst some will need to
come from EXTERNAL sources.
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3. Dividend Decision
The Financial Manager has to decide on what
to do with the earnings once they have been
realised. There are three options,
• To declare and pay all dividends to
shareholders
• To retain all the earnings and hence declare
and pay no dividends
• To decide on what proportion to be paid and
what to be retained.
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Considerations in dividends payment
• Internal restrictions that do not favour dividend
payment
• Legal considerations.
• Level of the firm’s leverage position.
• Ease of raising additional capital.
• Will payment of dividends disadvantage the
shareholders or investors?
• The preferences of the majority shareholders.
• Existence of profitable investment portfolio.
• The levels of control desired by the
shareholders
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THANKS FOR YOUR PATIENCE
Dr. Rakesh Kumar
ASST. PROF.BUSINESS ADMINISTRATION
PGGC-11 ,CHANDIGARH
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