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FINANCIAL

MANAGEMENT

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Introduction: Definition, Scope and Objective of Financial

Management. Basic Financial Concepts

Long Term Sources Of Finance

Capital Budgeting Principal Techniques Concept and Measurement of Cost of Capital

Cash Flows For Capital Budgeting

Financial Statement and Analysis

Leverage and Capital Structure Decision

Working Capital Decision

Dividend Policy

Syllabus

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Introduction: Definition, Scope and Objective of Financial

Management. Basic Financial Concepts

Long Term Sources Of Finance

Capital Budgeting Principal Techniques Concept and Measurement of Cost of Capital

Cash Flows For Capital Budgeting

Financial Statement and Analysis

Leverage and Capital Structure Decision

Working Capital Decision

Dividend Policy

Syllabus

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Despite of the variations between businesses the basicfinance issues they face are essentially the same.

The most important activities of a business firm are

Financial Management is concerned with the financesof an organization.

Introduction

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Financial Management performs facilitation, reconciliationand controls functions in an organization.

All the decision having monetary implications comes underthe purview of financial management.

Financial decision making involves procurement of fundsand their optimal utilization through investment, financingdividend and working capital decisions.

The key issue in finance are

Where to raise financial resources from

Where to invest the resources How to best manage the production distribution function

How much of profit to distribute and how much to retain

Finance function reconciles the conflicting interest of

the varied stakeholders.

Defining Finance

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Finance is analytical.

Finance is based on economic principles.

Finance uses accounting information as an input fordecision-making.

Finance is international in perspective.

Finance is constantly changing.

Finance is the study of how to invest and raise moneyproductively

Finance is the study of how people allocate scarceresources over time

- costs and benefits are distributed over time

- but the actual timing and size of future cash flowsare often known only probabilistically

Defining Finance

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1. Investment or Long Term Asset Mix Decision Function of investing raised funds in assets are known as

investment decision. Examples include Expansion, Modernization, Replacement of

Long Term Assets, R & D (having long term implications). The 2 important aspect of investment decision are

(a) Evaluation of the prospective profitability of newinvestments(b) The measurement of a cut-off rate; against that the

prospective return of new investments could becompared.

Decisions are taken in the light of their impact on the wealth ofshareholders.

The decision involve huge capital outlay, have long termimplications, and are usually irreversible.

Investment decision also referred as Capital Budgeting decisions.

Finance Functions

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3. Dividend or Profit Allocation Decision Distributing returns earned from assets to shareholders are known

as dividend decision. The financial manager must decided whether the firm should

distribute all profits, or retain them, or distribute a portion andretain the balance.

Such a decision depends on trade off between the future financing

needs of the firm and current consumption requirement ofshareholders.

The proportion of profits distributed as dividends is called thedividend payout ratio and the retained portion of profits is known

as retention ratio. Normally firms follow a policy of stable dividend, but firms withhigh growth rate generally offers a high retention and low payoutratio.

Dividends are generally paid in cash, but it can also be given in

form of bonus shares.

nance unct ons

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4. Working Capital Decision/ Liquidity Decision Working Capital decisions are related to the management of

current assets. The two key decision points in working capital management are

level of investment in current assets and financing of such assets.

Current asset management affect the firmsliquidity.

A firm attempts to balance cash inflows and outflows whileperforming these functions. These are called liquidity decisions.

A conflict exists between profitability and liquidity while

managing current assets. Hence, a proper trade-off must be

achieved between profitability and liquidity.

inance unctions