FINANCIAL MANAGEMENT

Soumya v

FINANCE

PUBLIC FINANCE PRIVATE FINANCE

PERSONAL FINANCE

BUSINESS FINANCE

FINANCE OF NON-PROFITORGANISATIONS

CENTRAL GOVT

STATE GOVT

LOCAL AUTHORITIES

BUSINESS FINANCEDEFINITION: “ That business activity which is

concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall objectives of business enterprise.” (Wheeler)

According to Guthamann & Dougall, “ Business finance can be broadly defined as the activity concerned with the planning, raising, controlling and administering the funds used in the business”

Meaning: Business finance is the process of raising, providing and administering of all money/funds to be used in a business enterprise

FINANCIAL MANAGEMENT

Financial management refers to that part of management activity which is concerned with the planning and controlling of the firm’s financial resources. IT deals with finding out various sources of raising funds for the firm and also using such funds in the most appropriate manner

Importance of Financial Management

FM helps in Financial planning & successful promotion of an

enterprise Acquisition of funds at minimum cost Proper use & allocation of funds Taking sound financial decisions Improving profitability through financial control Increasing the wealth of investors and the

nation Promoting and mobilising individual and

corporate savings

SCOPE OF FINANCIAL MANAGEMENT

Estimating financial requirements (short term & long term)

Deciding capital structure Selecting a source of finance Selecting a pattern of investment Proper cash management Implementing financial controls Proper use of surpluses

FINANCE FUNCTION

Long-term asset mix or investment decision

Capital-mix or financing decision Profit allocation or dividend decision Short-term asset mix or liquidity

decision

INVESTMENT DECISIONAlso referred to as Capital Budgeting Decision,

involves the decision of allocation of capital to long term assets that would yield benefits in the future.

Important aspects- a) Evaluation of prospective profitability andb) Measurement of cut-off rate or required

rate of return

Evaluation should be made in terms of both risk and return

Capital budgeting also involves replacement decisions

FINANCING DECISIONDeciding- when, where from and how to acquire

funds to meet the investment needs.

Central issue- determining the optimum capital structure (mix of debt & equity). Capital structure will be optimum when the market value of shares is maximised

Proper balance has to be struck between risk & return

Also considers factors such as control, flexibility, loan agreements, legal aspects etc

DIVIDEND DECISIONDecide whether the firm should distribute all

profits, or retain them, or distribute a portion and retain the balance.

The proportion of profits distributed – dividend-payout ratio

The proportion of profits retained – retention ratio

Optimum dividend policy – maximises the market value of shares

Dividend can be paid either in cash or in shares. [Bonus shares]

LIQUIDITY DECISIONInvestment in current assets or current asset

management or working capital management

Short term survival is a pre requisite for long term success

Lack of liquidity – insolvency ( in extreme situations)

Profitability-liquidity trade-off

2 basic ingredients- a) overview of working capital management as a

whole b) Efficient management of individual current

assets

FACTORS INFLUENCING FINANCIAL DECISIONS

External Factors: a) State of economy b) Structure of capital & money

markets c) Requirements of investors d) Government policy e) Taxation policy f) Lending policy of financial

institutions

Internal Factors:

• Nature and size of business• Expected return, cost and risk• Composition of assets• Structure of ownership• Trend of earnings• Age of the firm• Liquidity Position• Working capital requirements• Conditions of debt agreements

Functional Areas of FM

Determining Financial needs Choosing the sources of funds Financial Analysis & Interpretation Cost-Volume Profit Analysis Capital Budgeting Working Capital Management Profit Planning and Control Dividend Policy

ROLE OF A FINANCIAL MANAGER

Financial Forecasting & Planning Acquisition of funds Funds allocation Helping in valuation decisions Maintain proper liquidity Profit planning- operating decisions in

the areas of pricing, costs, volume of output and the firm’s selection of product lines.

Understanding capital markets