excel books financial management, dr. sudhindra bhatchapter-1financial management, dr. ratnesh...

Excel BooksExcel Books1 – 1 FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat Chapter-1Chapter-1FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI

1Chapter

INTRODUCTION TOFINANCIAL MANAGEMENT


Meaning of Business Finance:

Business Finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of business enterprises.

INTRODUCTION TOFINANCIAL

MANAGEMENT


What is Financial Management?

Financial Management is broadly concerned with

the acquisition and use of funds by a business firm.

Its scope may be defined in terms of the following

questions :How large should the firm be and how fast should it grow?

What should be the composition of the firm’s assets?

What should be the mix of the firm’s financing ?

How should the firm analyze, plan and control its financial

affairs?


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EVOLUTION OF FINANCIAL MANAGEMENT

Financial management has emerged as a distinct field of study only in the

early part of this century as a result of consolidation movement and

formation of large enterprises. Its evolution may be divided into three

phases viz.,

The Traditional phase,

The Transitional phase and

Modern phase


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Traditional Approach• The traditional approach, which was popular in the early stage, limited the role of

financial management to raising and administering of funds needed by the corporate enterprises to meet their financial needs. It deals with the following aspects :

– Arrangement of funds from financial institutions– Arrangement of funds through financial instruments like share, bonds etc/.

– Looking after the legal and accounting relationship between a corporation and its sources of funds.


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Main limitations of Traditional Approach

External Approach

Ignored routine problems

Ignored non-corporate enterprise.

Ignored working capital financing

No Emphasis on allocation of funds

Time value of money is not considered


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Modern Approach : • According to modern approach the term financial management

provides a conceptual and analytical framework for financial decision-making. That means, the finance function covers both acquisition of funds as well as their allocation.

• The new approach views the term financial management in a broader sense. It is viewed as an integral part of over-all management.



MANAGEMENT

Financial management, in the modern sense of the term, divided into four major decisions :

Financial Management

Investment Decision

Dividend Decision

Financing Decision

Funds Requirement

Decision


SCOPE AND FUNCTIONS OF FINANCIAL MANAGEMENT


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1. Liquidity: It is ascertained on the basis of three important considerations.

a) Forecasting cash flows i.e., matching the inflows against cash outflows

b) Raising funds i.e., financial manager will have to ascertain the sources from which funds may be

raised and the time when these funds are needed.

c) Managing the flow of internal funds.



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2. Profitability: While ascertaining profitability, the following factors are taken into account.

a) Cost control

b) Pricing

c) Forecasting future profits

d) Measuring cost of capital

3. Management: Asset management has assumed an important role in financial management. It includes : (a) the management of long term funds. (b) The management of short term funds.


Functional Areas of Modern Financial Management

Determining Financial need Determining Sources of Funds Financial analysis Optimal Capital Structure Cost Volume Profit Analysis Functional Areas Of Financial Management Profit Planning and Control


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Functional Areas of Modern Financial Management

• Fixed Assets Management• Project Planning and Evaluation• Capital Budgeting • Working Capital Management • Dividend Policies• Acquisition and Mergers• Corporate Taxation


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OBJECTIVE OF FINANCIAL MANAGEMENT :

Maximization of Profit : “Profit maximization” is a term which denotes

the maximum profit to be earned by an organization in a given time

period. The profit- maximization goal implies that the investment,

financing and dividend policy decision of the enterprise should be

oriented to profit maximization.


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Merits of the Profit – Maximization:

Best Criterion on Decision-Making: The goal of profit – maximization is regarded as the best criterion of the decision of making as it provides a yard-stick to judge the economic performance of the enterprises.

Efficient allocation of Resources: It leads to efficient allocation of scarce resources as they tend to be diverted to those uses which, in terms of profitability, are the most desirable.

Optimum Utilization: Optimum utilization of available resource is possible.

Maximum Social Welfare


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Drawbacks of Profit maximisation : Time Factor Ignored

it is Vague

The Term ‘Maximum’ is also Ambiguous

It Ignores Time Value

it Ignores the Risk Factor

In new business environment profit maximization is regarded as

Unrealistic

Difficult

Inappropriate

Immoral.


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Maximizing return or EPS

Ignores timing and risk of the expected benefit.

Market value is not a function of EPS. Hence maximizing EPS will not

result in highest price for company's shares.

Maximizing EPS implies that the firm should make no dividend

payment so long as funds can be invested at positive rate of return—

such a policy may not always work.


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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 objective—maximize the market value of the firm’s shares.


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Significance of Wealth- Maximization:

The company although it cares more for the economic welfare of

the shareholders, it cannot forget the others who directly or

indirectly work for the overall development of the company. Thus

Wealth- Maximization takes care of

Lenders or creditors

Workers or Employees

Public or Society

Management or Employer


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Significance of wealth - Maximization

Other objective – Ensuring fair return to shareholder,

Building up reserves for growth and expansion,

ensuring financial discipline in the management


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Method of Financial Management/tools

Cost of Capital

Capital budgeting appraisal

Ratio analysis

ABC analysis

Funds flow and Cash flow analysis

Working capital management

Trading on equity


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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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Functions of The Finance Controller/ Manager :

Accounting

Budgeting

Internal Audit

Finance Planning

Profit Planning

Investment Decisions

Economic appraisal.


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Financial management – Process :

Financial Analysis

Financial Decision

Financial Planning

Financial Control


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excel books financial management, dr. sudhindra bhatchapter-1financial management, dr. ratnesh...

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