Chapter 1 Finanicial Management

Chapter 1Chapter 1

AN OVERVIEW OF AN OVERVIEW OF FINANCIAL FINANCIAL

MANAGEMENTMANAGEMENT

Himalaya Publishing House

Financial Management: Principles and

Practice By G. Sudarsana Reddy

Chapter 1An Overview of Financial

Management

LEARNING OBJECTIVESLEARNING OBJECTIVES

• List out 7 Ms of management. • Give the meaning and definition of financial

management.• Trace the evolution of financial management.• Explain the scope of financial management.• Give the interface of financial management with other

disciplines.• Explain the different financial decisions.• Extract the inter-relationship among financial

decisions.• Bring out Aims of Finance Function.• Elucidate the objectives of financial management.• Debate on organisation of finance function.





Management

Seven Ms of ManagementSeven Ms of Management

• Men

• Money

• Machines

• Materials

• Methods

• Minutes and

• Management





Management

Financial ManagementFinancial Management

• Financial Management is concerned with the acquisition, financing and management of assets to achieve organizational goal





Management

Evolution of Financial Evolution of Financial ManagementManagement

• The Traditional phase,

• The Transitional phase and

• Modern phase





Management

Scope of Financial ManagementScope of Financial Management

I. Traditional approach Criticism - Ignore day-to-day problems

- Outsider-looking-in approach - Ignores working capital financing - Ignores allocation of capital

II. Modern approach





Management

Interface of Financial Management with other Disciplines:

• Economics

• Accounting

• HR

• Production

• Marketing





ManagementFinancial DecisionsFinancial Decisions1. Investment Decision:

Decision which is related to the selection of assets

2. Financing Decision:

Determination of proportion of debt and equity in capital structure

3. Dividend Decision:

It involves determination of portion of EPS to be declared as dividend per share.

Financial

Decisions

Investment Decision

Dividend Decision

Financing Decision





Management

Inter-relation among Financial Decisions

• Investment and Financing decision

• Financing and Dividend decision

• Dividend and Investment decision





Management

Aim of Finance Function

• Anticipation of funds needed

• Acquisition of funds estimated

• Allocation of funds raised

• Increase profitability

• Maximising Firm’s value





Management

Goals of Financial Management

1. Profit Maximisation Limitations: (a) Vague (b) Ignores time value of money (c) Ignores quality of benefits

2. Wealth Maximisation





Management

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) expected to occur from a course of action that is adopted.

IC0 = Initial cash outflow to buy the asset. r = Expected rate of return or appropriate rate of

discount.

Goals of FM Conted….





Management

3. Alternative goals

Maximisation of ROE

Maximisation of EPS

Management of reserves for growth and expansion

Goals of FM Conted….





Management

Organisation of Organisation of Finance Finance FunctionFunction

Credit Management

Board of Directors

Vice-President Operations

Vice-President Finance

Vice-President Sales

Treasurer Controller

Capital Budgeting

Cash Management

Commercial Banking and Investment

Banking

Portfolio Manager

Fund raising Manager

Inventory Manager

Internal Audit

Financial Accounting

Manager

Cost Accounting

Manager

Data Processing Manager

Tax Manager

Financial Statements Preparation

Managing Director

Preparing Budgets

Chapter 1 Finanicial Management

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