I. M. Pandey, Financial Management, I. M. Pandey, Financial Management, 9th ed., Vikas.9th ed., Vikas. 11

Apna Sapna Money-MoneyApna Sapna Money-Money

By-Rahul JainBy-Rahul Jain

Nature of Financial Nature of Financial ManagementManagement

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COURSE GUIDELINESCOURSE GUIDELINES

Introduction and Basics of Financial ManagementIntroduction and Basics of Financial Management

Sources of fundsSources of funds

Capital budgeting & structure Capital budgeting & structure

Marginal cost analysisMarginal cost analysis

Ratio analysisRatio analysis

Budgeting & Financial PlanningBudgeting & Financial Planning

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Aim of the ModuleAim of the Module

identify different sources of raising funds identify different sources of raising funds for an enterprise and methods of for an enterprise and methods of deploying themdeploying them

understand how capital structure is understand how capital structure is planned and executedplanned and executed

To Know about the viability of project.To Know about the viability of project.

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Our Strategy for achieving these Our Strategy for achieving these Objectives?Objectives?

Concepts, Cases and Class DiscussionConcepts, Cases and Class DiscussionPunctuality, Participation and PreparationPunctuality, Participation and Preparation

((Its compulsory to bring your own calculators, Its compulsory to bring your own calculators, Pen, Stationary, Registers, Prescribed Book, Pen, Stationary, Registers, Prescribed Book, Printouts of the Intranet documents- Otherwise Printouts of the Intranet documents- Otherwise necessary disciplinary action will be taken)necessary disciplinary action will be taken)

Judgment challengeJudgment challengeLearning to communicate ideas Learning to communicate ideas Learning from each other Learning from each other Learning through discoveryLearning through discovery

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What is “Good” What is “Good” Participation?Participation?

Quality, not quantity. Quality, not quantity.

Analyzing and discussing course Analyzing and discussing course material.material.

Questioning the analysis of others. Questioning the analysis of others.

Seeking clarification.Seeking clarification.

Summarizing / synthesizing.Summarizing / synthesizing.

Adherence to guidelines for Adherence to guidelines for

professionalprofessional conduct.conduct.

Some Important rulesSome Important rules

Switch off your MobilesSwitch off your Mobiles

Attendance rules will be strictly appliedAttendance rules will be strictly applied

Non completion of Assignment will lead to strict Non completion of Assignment will lead to strict disciplinary measuresdisciplinary measures

Students can gather additional bonus points by being a Students can gather additional bonus points by being a “Star Performer” in the whole course.“Star Performer” in the whole course.

Students falling in the “Improvement category” would be Students falling in the “Improvement category” would be penalized.penalized.

If Attendance less than 75% then one grade will be If Attendance less than 75% then one grade will be reduced in respective Viva/Exam/Log Process.reduced in respective Viva/Exam/Log Process.

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Learning objectives:Learning objectives:

What is financial management?What is financial management?

Difference between financial management Difference between financial management and financial accountingand financial accounting

The goals of financial management !The goals of financial management !

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Business ActivitiesBusiness Activities

Production Production

MarketingMarketing

FinanceFinance

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MeaningMeaning

Financial managementFinancial management is a systematic is a systematic process that provides the necessary process that provides the necessary financial information to help a business financial information to help a business produce and distribute goods and services produce and distribute goods and services in a way that will maximize wealth.in a way that will maximize wealth.

It also provides feedback about how well It also provides feedback about how well the organization is doing. the organization is doing.

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Overview of Financial ManagementOverview of Financial Management

Dev: A Finance Manager has many responsibilities. He has to manage Dev: A Finance Manager has many responsibilities. He has to manage all the incomes and expenses related to the company. He has to all the incomes and expenses related to the company. He has to see that resources are not wasted anywhere. He has to negotiate see that resources are not wasted anywhere. He has to negotiate with the suppliers. And see that all departments get the money to with the suppliers. And see that all departments get the money to meet their expenses.meet their expenses.

Ajay:Ajay: Please tell me more… Please tell me more…

Dev:Dev: Just as the Purchase Manager needs money to buy the raw Just as the Purchase Manager needs money to buy the raw materials, the Production Manager also has to maintain his materials, the Production Manager also has to maintain his machinery so that the production goes on smoothly. This machinery so that the production goes on smoothly. This maintenance also requires money. If Ranjeet does not give the maintenance also requires money. If Ranjeet does not give the required funds to either of them, the production will stop. What will required funds to either of them, the production will stop. What will ABC sell, if no textile is manufactured? Financial management ABC sell, if no textile is manufactured? Financial management involves several functions, especially in bigger companies. involves several functions, especially in bigger companies.

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Overview of Financial ManagementOverview of Financial Management

Dev:Dev: Matching the income and expenditure is not Matching the income and expenditure is not the only job. Ranjeet has to allocate the cash, but the only job. Ranjeet has to allocate the cash, but at the same time, he has to see that equipment, at the same time, he has to see that equipment, workers, supplies, etc. are also being used workers, supplies, etc. are also being used properly. Wastage of any of these resources will properly. Wastage of any of these resources will affect the cash balances of ABC.affect the cash balances of ABC.

Using resources efficiently will help ABC to reduce Using resources efficiently will help ABC to reduce the costs of operations. At the same time, if the costs of operations. At the same time, if resources are used efficiently, it will generate resources are used efficiently, it will generate additional resources for the company. Ranjeet also additional resources for the company. Ranjeet also has to analyze ABC’s financial performance. If the has to analyze ABC’s financial performance. If the company is not able to make profits, he has to find company is not able to make profits, he has to find out the reasons for it.out the reasons for it.

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Finance FunctionsFinance Functions

Investment or Long Term Asset Mix Investment or Long Term Asset Mix DecisionDecision

Financing or Capital Mix DecisionFinancing or Capital Mix Decision

Dividend or Profit Allocation DecisionDividend or Profit Allocation Decision

Liquidity or Short Term Asset Mix Liquidity or Short Term Asset Mix DecisionDecision

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Financial accounting and Financial Financial accounting and Financial ManagementManagement

Financial accounting gives the financial Financial accounting gives the financial status of the company to people outside status of the company to people outside the company. It is recording and reporting the company. It is recording and reporting the activities and events that lead to cash the activities and events that lead to cash inflow and outflow.inflow and outflow.

Financial management means efficiently Financial management means efficiently managing the various resources of the managing the various resources of the company.company.

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Financial accounting and Financial Financial accounting and Financial ManagementManagement

Financial accounting aims at maintaining a clear Financial accounting aims at maintaining a clear record of the financial condition of the firm. record of the financial condition of the firm. Accounting measures the performance of the Accounting measures the performance of the firm so that the situation of the company can be firm so that the situation of the company can be measured in financial terms.measured in financial terms.

Financial management is concerned with value Financial management is concerned with value maximization. Management’s efforts are for maximization. Management’s efforts are for increasing the value of the company for the increasing the value of the company for the shareholders. This requires investing in projects shareholders. This requires investing in projects that are likely to provide positive returns to the that are likely to provide positive returns to the companycompany. .

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Financial accounting and Financial Financial accounting and Financial ManagementManagement

CertaintyCertainty Accounting is maintenance of financial Accounting is maintenance of financial records. So, it deals with what has already records. So, it deals with what has already occurred. This makes it more certain. occurred. This makes it more certain. A finance manager is concerned with what is going to A finance manager is concerned with what is going to happen in the future. He takes critical decisions that will happen in the future. He takes critical decisions that will affect the future of the company. These are based on affect the future of the company. These are based on various calculations and assessments. This is not easy various calculations and assessments. This is not easy because there are many uncertainties in financial because there are many uncertainties in financial management. management.

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Finance Manager’s RoleFinance Manager’s Role

Raising of FundsRaising of Funds

Allocation of FundsAllocation of Funds

Profit PlanningProfit Planning

Understanding Capital MarketsUnderstanding Capital Markets

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Financial GoalsFinancial Goals

Profit maximization (profit after tax)Profit maximization (profit after tax)

Shareholder’s Wealth MaximizationShareholder’s Wealth Maximization

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Profit MaximizationProfit Maximization

Maximizing the Rupee Income of Firm Maximizing the Rupee Income of Firm – Resources are efficiently utilizedResources are efficiently utilized

– Appropriate measure of firm performanceAppropriate measure of firm performance

– Serves interest of society alsoServes interest of society also

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Objections to Profit Objections to Profit MaximizationMaximization

It is VagueIt is VagueIt Ignores the Timing of ReturnsIt Ignores the Timing of ReturnsIt Ignores RiskIt Ignores RiskIn new business environment profit In new business environment profit maximization is regarded as maximization is regarded as – Inappropriate and Immoral.Inappropriate and Immoral.

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Shareholders’ Wealth Shareholders’ Wealth MaximizationMaximization

Maximizes the cash flow.Maximizes the cash flow.

Accounts for the timing and risk of the Accounts for the timing and risk of the expected benefits.expected benefits.

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

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Risk-return Trade-offRisk-return Trade-off

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

Financial decisions of the firm are guided by Financial decisions of the firm are guided by the the risk-return trade-offrisk-return trade-off..

The return and risk relationship: The return and risk relationship: Return = Risk-free Return = Risk-free rate + Risk premiumrate + Risk premium

Risk-free rate is a compensation for time and Risk-free rate is a compensation for time and risk premium for risk. risk premium for risk.

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Managers Versus Managers Versus Shareholders’ GoalsShareholders’ Goals

A company has stakeholders such as employees, debt-A company has stakeholders such as employees, debt-holders, consumers, suppliers, government and society. holders, consumers, suppliers, government and society. Managers may perceive their role as reconciling conflicting Managers may perceive their role as reconciling conflicting objectives of stakeholders. This stakeholders’ view of objectives of stakeholders. This stakeholders’ view of managers’ role may compromise with the objective of SWM. managers’ role may compromise with the objective of SWM. Managers may pursue their own personal goals at the cost of Managers may pursue their own personal goals at the cost of shareholders, or may play safe and create satisfactory wealth shareholders, or may play safe and create satisfactory wealth for shareholders than the maximum. for shareholders than the maximum. Managers may avoid taking high investment and financing Managers may avoid taking high investment and financing risks that may otherwise be needed to maximize risks that may otherwise be needed to maximize shareholders’ wealth. Such “satisfying” behaviour of shareholders’ wealth. Such “satisfying” behaviour of managers will frustrate the objective of SWM as a managers will frustrate the objective of SWM as a normative normative guide.guide.

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Financial Goals and Firm’s Financial Goals and Firm’s Mission and ObjectivesMission and Objectives

Firms’ primary objective is maximizing the welfare of Firms’ primary objective is maximizing the welfare of owners, but, in operational terms, they focus on the owners, but, in operational terms, they focus on the satisfaction of its customers through the production of satisfaction of its customers through the production of goods and services needed by themgoods and services needed by them

Firms state their vision, mission and values in broad Firms state their vision, mission and values in broad termsterms

Wealth maximization is more appropriately a Wealth maximization is more appropriately a decision decision criterioncriterion, rather than an , rather than an objectiveobjective or a or a goalgoal. .

Goals or objectives are missions or basic purposes of a Goals or objectives are missions or basic purposes of a firm’s existencefirm’s existence

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Financial Goals and Firm’s Financial Goals and Firm’s Mission and ObjectivesMission and Objectives

The shareholders’ wealth maximization is The shareholders’ wealth maximization is the second-level criterion ensuring that the second-level criterion ensuring that the decision meets the minimum the decision meets the minimum standard of the economic performance. standard of the economic performance.

In the final decision-making, the In the final decision-making, the judgement of management plays the judgement of management plays the crucial role. The wealth maximization crucial role. The wealth maximization criterion would simply indicate whether criterion would simply indicate whether an action is economically viable or not.an action is economically viable or not.

Interview ExerciseInterview Exercise

Meet Owner/Manager of an Organization:Meet Owner/Manager of an Organization:

Find following:Find following:

1)1)About the Organization and its USP. About the Organization and its USP.

2)2) Important financial decisions that his Important financial decisions that his organization is taking. organization is taking.

3)3)Challenges faced.Challenges faced.

4)4)Sources of Revenues and Top three costs.Sources of Revenues and Top three costs.

5)5)Future Plans of Expansion. Future Plans of Expansion. 2727

Learning ToolsLearning Tools

WebsiteWebsitewww.learningfinancialmanagement.pbworks.com

Phone: 9811228852Phone: 9811228852

Email: rahulkjain16@yahoo.co.inEmail: rahulkjain16@yahoo.co.in

Text Book:Text Book:

Financial Management , I.M. Pandey, Vikas Financial Management , I.M. Pandey, Vikas PublicationsPublications

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AssignmentAssignment

Prepare an individual file having :Prepare an individual file having :

a) Key learnings of Class-1a) Key learnings of Class-1

b) Summary of any Fashion Business Newsb) Summary of any Fashion Business News

Read Chapter 1 of the Book. (I.M. Pandey)Read Chapter 1 of the Book. (I.M. Pandey)

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