1 Financial Management INTRO Final

8/6/2019 1 Financial Management INTRO Final

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Hologram of Financial Management :

An Integral View of WealthMaximization



Objectives of thePresentation

� To drive home the differences betweenFinancial management and Accounting.

� To explain the objectives of financialmanagement.

� To point out the unifying concept of financialmanagement i.e. wealth maximization.



Finance and Accounting

Finance Accounting

Cash Flows Collection of Data



Financeand

Accounting

Finance Accounting

Cash FlowsAccrual based

Information



USEFULNESS OFACCOUNTING DATA

FOR FINANCIAL MANAGER

Profitability Solvency Liquidity



Financial mgt VsAccounting

Finance Accounting

Decision making Collection of Data



Financial mgt:Areas of decision-

making

Financialanalysis

or Dividenddecision

InvestmentDecision

FinancingDecision



Investment Decision

Capital budgeting Working capitalManagement

Management of Fixed Assets

Management of Current assets andCurrent liabilities



Capital budgeting

Decisions

Approval of Investmentproposal

Risk ±Return

Analysis

Criterion

for theevaluationof the worth of

Benefits



Working capital

Magt. Decision

Trade- off

BetweenProfitability and

Liquidity

Efficient

managementof individual

Current Assets



Financing

Decisions

CapitalstructureTheory

Capitalstructuredecision

Capitalstructure



Dividend Policy

Decisions

Distribution of profits

Retention of profits



Capital A/csLiabilityA/cs

Income A/cs

Asset A/csExpenseA/cs

BALANCE SHEET



Capital A/csLiabilityA/cs

Income A/cs

Asset A/csa) ExpenseA/cs(capital exp)

BALANCE SHEET

Financialdecision

FinancialAnalysis

InvestmentDecision

b) ExpenseA/cs(loss)

FinancialAnalysis

Sources of Funds

Uses of Funds



Goal of theFinancial

Manager

Wealthmaximization

Profit Maximization



Wealth maximizationVs

Profit Maximization

Wealth maximization Profit Maximization

Increase in shareprices

Increase in Profits

Meaning



FINANCE MANAGER

MAXIMIZATION OF SHARE VALUE

FINANCIAL DECISION

FUNDS REQUIREMENTDECISION

INVESTMENTDECISION

DIVIDENDDECISION

FINANCING DECISION

RETURN RISK

TRADE- OFF



MEANING OF BUSINESS FINANCE

� ³ Business finance is that businessactivity which is concerned with theacquisition and conservation of capital funds in meeting financialneeds and overall objectives of abusiness enterprise´



OBJECTIVES OF FINANCIAL

MANAGEMENT

� Basic objectives� Other objectives



BASIC

OBJECTIVES

Maintenanceof

Liquid Assets

Profitmaximizatio

n

Maximizationof

Wealth



� It is Vague� It ignores Timing

� It overlooks quality aspect of future activities

Profit maximization



Maximization

of Wealth

BASIC OBJECTIVES



� Avoid High Level of Risks� Pay Dividends

� MaintainG

rowth inS

ales� Maintain Price of Equity Shares� Social Responsibility

� Government Constraints

Steps in Maximization of Wealth



OTHER OBJECTIVES



OTHER OBJECTIVES

� Ensuring a fair return to share holders� Building up reserves for growth and

expansion

�E

nsuring maximum operationalefficiency efficient and effectiveutilization of finances

� Ensuring financial discipline in theorganization



SCOP

EOF FI

NAN

CIAL

MANAGEMENT



SCOPE OF FINANCIAL MANAGEMENT

� Traditional Approach

� Modern Approach



Traditional Approach

� Arrangement of funds from thefinancial institutions

� Arrangement of funds from financialinstruments, i.e., share, bonds, etc

� Looking after the legal andaccounting relationship between a

corporation and its sources of funds.



CRITICISMS

� Outsider- looking-in approach� Ignored routine problems� Ignored non-corporate enterprise� Ignored working capital financing� No emphasis on allocation of funds



MODERN APPROACH

� Funds requirementdecision

� Financing Decision� Investment Decision

� Dividend Decision



LIQUDITY

VsPROFITABILITY



Liquidity means that:

� The firm has adequate cash topay its bills

�T

he firm has sufficient cash tomake unexpected largepurchases.

� The firm has cash reserve to meetemergencies, at all time



FINANCEMANAGER

MAXIMIZAT

ION

OF SHARE VALUE

FINANCIAL DECISION

FUNDS REQUIREMENTDECISION

INVESTMENTDECISION

DIVIDENDDECISION

FINANCING DECISION

RETURN RISK

TRADE- OFF



METHODS OF FINANCIAL MANAGEMENT

� Measuring the Effectiveness of

Firm¶s Actions and Decisions� Measuring the Validity of theDecision Regarding Accepting or

Rejecting Future Projects



FINANCIAL TOOLS

1.Cost of Capital2.Financial Leverage

3.Capital Budgeting Appraisal Method4.ABC Analysis5.Ratio Analysis

6.Fund Flow and Cash Flow Analysis



RELATIONSHIP BETWEEN

FINANCIAL MANAGEMENT AND OTHER AREAS OF

MANAGEMENT



Financial Management

andCost Accounting




andMarketing




andAssets Management




andPersonnel Management




andFinancial Accounting

1 Financial Management INTRO Final

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