FINANCIAL MANAGEMENT
Module 1
1
Module 1: Introduction
Introduction to FM
1 and 2
Learning Outcomes:
Students will be able to Understand the basics and scope of
financial management in business.
Module 1: Introduction
Scope & Goals
3 and 4
Learning Outcomes:
Students will be able to Understand the basics and scope of
financial management in business.
2
Financial Management
Financial Management involves raising of funds and
their effective utilization with the objective of
maximizing shareholders wealth
Functions of Financial Management
Anticipating financial needs
Acquiring financial resources
Allocating the funds in the business
Increase the profitability
Maximising Firm’s value
Goals/Objectives of Financial Management
Profit maximisation
Shareholder’s Wealth Maximisation
Profit Maximisation
Maximising the Rupee Income of Firm
Resources are efficiently utilized
Appropriate measure of firm performance
Serves interest of society also
Objections to Profit Maximisation
It is vague
It ignores the timing of returns
It ignores quality of benefits
Effect of dividend policy on the market
Limitations of price of the share
Profit In new business environment profit
Maximisation
maximization is regarded as:
• Unrealistic
• Difficult
• Inappropriate and Immoral
Shareholders’ Wealth Maximisation
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
MONEY%2520MANAGEMENT
Shareholders’ Wealth Maximisation
CIF1 CIF2 CIF3 CIFn
W = ----------- + ----------- + ----------- + - - - - + -------- - ICo
(1+r)1 (1+r)2 (1+r)3 (1+r)n
where W = Net present worth
CIF1, CIF2, CIF3 …. CIFn represent the stream of cash inflows
(benefits)
IC0 = Initial cash outflow to buy the asset.
r = Expected rate of return or appropriate rate of discount.
Decisions of Finance
Financing
decision
Investment Decisions of Dividend
decision Finance decision
Working Capital
decisions
Key Issues in Financial Decision-making
Investment • What business to be in?
Decisions • What growth rate is appropriate?
• What assets to acquire?
Financing • What mix of debt and equity to be used?
Decisions • Can value of the firm change with the change in capital mix?
• Is there an optimal debt–equity mix?
Dividend • How much of the profit should be distributed as dividends?
Decisions • Can value of the firm change with the change in the dividend?
• What should be the mode of dividend payment?
Working • What level of inventory is ideal?
Capital • What level of credit should be given to the customers?
Decisions
• What level of cash should be maintained?
• How can the blockage of funds in the current assets be minimised
without compromising with profits?
Scope of Financial Management
Traditional
Approach
Emphasis on raising the funds only
Concentrates mainly on financial administration of the
joint stock companies
Represents the sporadic view of the finance function
Emphasis on long term financial requirements
Scope of Financial Management
Modern
Approach
Financial management – broad sense
Acquisition of funds and their allocations
What is the total volume of funds an enterprise
should commit?
What specific assets should an enterprise
acquire?
How should the funds required be financed?
