Financial mangement intro nsd

bybyMOHAMED MOHAMED NISHAD .TNISHAD .T

bybyMOHAMED MOHAMED NISHAD .TNISHAD .T

FINANCEFINANCEFINANCEFINANCEFinance is the life-blood of business.Finance is the life-blood of business.

Without finance neither any business Without finance neither any business can be started nor successfully run . can be started nor successfully run .

Finance is needed to promote or Finance is needed to promote or establish business, acquire fixed assets, establish business, acquire fixed assets, make necessary investigations, develop make necessary investigations, develop product keep man and machines at product keep man and machines at work ,encourage management to make work ,encourage management to make progress and create values. progress and create values.

Finance is the life-blood of business.Finance is the life-blood of business. Without finance neither any business Without finance neither any business

can be started nor successfully run . can be started nor successfully run . Finance is needed to promote or Finance is needed to promote or

establish business, acquire fixed assets, establish business, acquire fixed assets, make necessary investigations, develop make necessary investigations, develop product keep man and machines at product keep man and machines at work ,encourage management to make work ,encourage management to make progress and create values. progress and create values.

FINANCEFINANCEFINANCEFINANCE

Finance is defined as the provision of Finance is defined as the provision of money at the time when it is money at the time when it is required. It is the life-blood of the an required. It is the life-blood of the an enterprise. Without adequate enterprise. Without adequate finance, no enterprise can possibly finance, no enterprise can possibly accomplish its objectivesaccomplish its objectives

Finance is defined as the provision of Finance is defined as the provision of money at the time when it is money at the time when it is required. It is the life-blood of the an required. It is the life-blood of the an enterprise. Without adequate enterprise. Without adequate finance, no enterprise can possibly finance, no enterprise can possibly accomplish its objectivesaccomplish its objectives

FINANCEFINANCEFINANCEFINANCEFINANCE

PUBLIC FINANCE

Central GovernmentState GovernmentsLocal Self GovernmentsGovernment Institutions

PRIVATE FINANCE

Personal FinanceBusiness FinanceFinance of non-profit organisations

BUSINESS FINANCE

Sole-Proprietory

Finance

Partnership Firms

Finance

Company or

Corporate Finance

FINANCIAL MANAGEMENTFINANCIAL MANAGEMENTFINANCIAL MANAGEMENTFINANCIAL MANAGEMENT Traditionally known as ‘Business Traditionally known as ‘Business

Finance’ and ‘Corporation Finance’Finance’ and ‘Corporation Finance’ According to Guthmann & Dougall According to Guthmann & Dougall

“Business finance can be broadly “Business finance can be broadly defined as the activity concerned with defined as the activity concerned with planning, raising, controlling and planning, raising, controlling and administering the funds used in the administering the funds used in the business.”business.”

Traditionally known as ‘Business Traditionally known as ‘Business Finance’ and ‘Corporation Finance’Finance’ and ‘Corporation Finance’

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

FINANCIAL FINANCIAL MANAGEMENTMANAGEMENT

FINANCIAL FINANCIAL MANAGEMENTMANAGEMENT

Financial management is one the Financial management is one the functional area of management. It functional area of management. It refer to that part of the management refer to that part of the management activity which is concerned with the activity which is concerned with the planning and controlling of firms planning and controlling of firms financial resources.financial resources.

Financial management is one the Financial management is one the functional area of management. It functional area of management. It refer to that part of the management refer to that part of the management activity which is concerned with the activity which is concerned with the planning and controlling of firms planning and controlling of firms financial resources.financial resources.

DEFINITIONDEFINITIONDEFINITIONDEFINITION

““Financial management is the Financial management is the application of planning and control application of planning and control function of the finance function” function of the finance function”

Howard and UptonHoward and Upton

““Financial management is the Financial management is the application of planning and control application of planning and control function of the finance function” function of the finance function”

Howard and UptonHoward and Upton

Importance of FMImportance of FMImportance of FMImportance of FM No business, whether big, medium, or No business, whether big, medium, or

small can be started without an adequate small can be started without an adequate amount of finance. Right from the very amount of finance. Right from the very beginning, i.e., conceiving an idea to beginning, i.e., conceiving an idea to business, finance is needed to promote business, finance is needed to promote or establish the business, acquire fixed or establish the business, acquire fixed assets, make investigation such as assets, make investigation such as market survey etc, develop product, keep market survey etc, develop product, keep men & machine at work, encourage men & machine at work, encourage management to make progress and management to make progress and create valuescreate values

No business, whether big, medium, or No business, whether big, medium, or small can be started without an adequate small can be started without an adequate amount of finance. Right from the very amount of finance. Right from the very beginning, i.e., conceiving an idea to beginning, i.e., conceiving an idea to business, finance is needed to promote business, finance is needed to promote or establish the business, acquire fixed or establish the business, acquire fixed assets, make investigation such as assets, make investigation such as market survey etc, develop product, keep market survey etc, develop product, keep men & machine at work, encourage men & machine at work, encourage management to make progress and management to make progress and create valuescreate values

Importance of FMImportance of FMImportance of FMImportance of FM The importance of corporation finance The importance of corporation finance

has arisen because of the fact that has arisen because of the fact that present day business activities are present day business activities are predominantly carried on company or predominantly carried on company or corporate from of the organisation. corporate from of the organisation. Following factors further increased the Following factors further increased the importance of FMimportance of FM

1.1. The increase in size and influence of the The increase in size and influence of the business enterprisebusiness enterprise

2.2. Wide distribution of corporate ownershipWide distribution of corporate ownership

3.3. Separation of ownership & managementSeparation of ownership & management

The importance of corporation finance The importance of corporation finance has arisen because of the fact that has arisen because of the fact that present day business activities are present day business activities are predominantly carried on company or predominantly carried on company or corporate from of the organisation. corporate from of the organisation. Following factors further increased the Following factors further increased the importance of FMimportance of FM

1.1. The increase in size and influence of the The increase in size and influence of the business enterprisebusiness enterprise

2.2. Wide distribution of corporate ownershipWide distribution of corporate ownership

3.3. Separation of ownership & managementSeparation of ownership & management

Importance of FMImportance of FMImportance of FMImportance of FM FM is indispensible to any orgn as it helpsFM is indispensible to any orgn as it helps

1.1. Financial planning & successful promotion of an Financial planning & successful promotion of an enterpriseenterprise

2.2. Acquisition of funds as & when required at Acquisition of funds as & when required at minimum possible costminimum possible cost

3.3. Proper use & allocation of fundsProper use & allocation of funds

4.4. Taking sound financial decisionTaking sound financial decision

5.5. Improving the profitability through financial Improving the profitability through financial controlscontrols

6.6. Increasing the wealth of investors and nations, &Increasing the wealth of investors and nations, &

7.7. Promoting & mobilising individual & corporate Promoting & mobilising individual & corporate savingssavings

FM is indispensible to any orgn as it helpsFM is indispensible to any orgn as it helps

1.1. Financial planning & successful promotion of an Financial planning & successful promotion of an enterpriseenterprise

2.2. Acquisition of funds as & when required at Acquisition of funds as & when required at minimum possible costminimum possible cost

3.3. Proper use & allocation of fundsProper use & allocation of funds

4.4. Taking sound financial decisionTaking sound financial decision

5.5. Improving the profitability through financial Improving the profitability through financial controlscontrols

6.6. Increasing the wealth of investors and nations, &Increasing the wealth of investors and nations, &

7.7. Promoting & mobilising individual & corporate Promoting & mobilising individual & corporate savingssavings

Finance functionFinance functionFinance functionFinance function Finance function is the most important Finance function is the most important

of all functions. It remains a focus of of all functions. It remains a focus of all activities. It is not possible to all activities. It is not possible to substitute or eliminate this function substitute or eliminate this function bcoz the business will close down in bcoz the business will close down in the absence of finance. The need for the absence of finance. The need for money is continuous. It start with money is continuous. It start with setting up of an enterprise & remains setting up of an enterprise & remains at all times. The development & at all times. The development & expansion of business rather needs expansion of business rather needs more commitment of funds.more commitment of funds.

Finance function is the most important Finance function is the most important of all functions. It remains a focus of of all functions. It remains a focus of all activities. It is not possible to all activities. It is not possible to substitute or eliminate this function substitute or eliminate this function bcoz the business will close down in bcoz the business will close down in the absence of finance. The need for the absence of finance. The need for money is continuous. It start with money is continuous. It start with setting up of an enterprise & remains setting up of an enterprise & remains at all times. The development & at all times. The development & expansion of business rather needs expansion of business rather needs more commitment of funds.more commitment of funds.

Finance functionFinance functionFinance functionFinance function The fund will have to be raised from The fund will have to be raised from

various sources. The receiving money is various sources. The receiving money is not enough, its utilisation is more not enough, its utilisation is more important. The money once received will important. The money once received will have be returned also. If its use is proper have be returned also. If its use is proper then its return will be easy otherwise it then its return will be easy otherwise it will create difficulties for repayment. The will create difficulties for repayment. The management should have an idea of management should have an idea of using the money profitably. It may be using the money profitably. It may be easy to raise funds but it may be difficult easy to raise funds but it may be difficult to repay them.to repay them.

The fund will have to be raised from The fund will have to be raised from various sources. The receiving money is various sources. The receiving money is not enough, its utilisation is more not enough, its utilisation is more important. The money once received will important. The money once received will have be returned also. If its use is proper have be returned also. If its use is proper then its return will be easy otherwise it then its return will be easy otherwise it will create difficulties for repayment. The will create difficulties for repayment. The management should have an idea of management should have an idea of using the money profitably. It may be using the money profitably. It may be easy to raise funds but it may be difficult easy to raise funds but it may be difficult to repay them.to repay them.

Approaches to finance Approaches to finance functionfunction

Approaches to finance Approaches to finance functionfunction

The Traditional approachThe Traditional approach

It relates to the initial stage of its evolution It relates to the initial stage of its evolution during 1920s & 1930s when the term during 1920s & 1930s when the term ‘corporate finance’ was used to describe what ‘corporate finance’ was used to describe what is known as financial management today. is known as financial management today. According to this approach, the scope of According to this approach, the scope of finance function was confined to only finance function was confined to only procurement of funds needed by a firm on most procurement of funds needed by a firm on most suitable terms. The utilisation of funds was suitable terms. The utilisation of funds was considered beyond the purview of finance considered beyond the purview of finance function. It was felt that decisions regarding function. It was felt that decisions regarding the application of funds are taken somewhere the application of funds are taken somewhere else in the organisation else in the organisation

The Traditional approachThe Traditional approach

It relates to the initial stage of its evolution It relates to the initial stage of its evolution during 1920s & 1930s when the term during 1920s & 1930s when the term ‘corporate finance’ was used to describe what ‘corporate finance’ was used to describe what is known as financial management today. is known as financial management today. According to this approach, the scope of According to this approach, the scope of finance function was confined to only finance function was confined to only procurement of funds needed by a firm on most procurement of funds needed by a firm on most suitable terms. The utilisation of funds was suitable terms. The utilisation of funds was considered beyond the purview of finance considered beyond the purview of finance function. It was felt that decisions regarding function. It was felt that decisions regarding the application of funds are taken somewhere the application of funds are taken somewhere else in the organisation else in the organisation

The Modern approachThe Modern approachThe Modern approachThe Modern approach It includes both raising of funds as well as It includes both raising of funds as well as

their effective utilisation. their effective utilisation. The cost of raising funds and the returns The cost of raising funds and the returns

from their use should be compared. from their use should be compared. The funds raised should be able to give The funds raised should be able to give

more returns than the cost involved in more returns than the cost involved in procuring them.procuring them.

This approach considers the three decisionsThis approach considers the three decisions

Investment decision, Financing decisions & Investment decision, Financing decisions & Dividend decisionDividend decision

It includes both raising of funds as well as It includes both raising of funds as well as their effective utilisation. their effective utilisation.

The cost of raising funds and the returns The cost of raising funds and the returns from their use should be compared. from their use should be compared.

The funds raised should be able to give The funds raised should be able to give more returns than the cost involved in more returns than the cost involved in procuring them.procuring them.

This approach considers the three decisionsThis approach considers the three decisions

Investment decision, Financing decisions & Investment decision, Financing decisions & Dividend decisionDividend decision

Aims of Finance functionAims of Finance functionAims of Finance functionAims of Finance function

Acquiring Sufficient FundsAcquiring Sufficient Funds Proper Utilisation FundsProper Utilisation Funds Increasing profitabilityIncreasing profitability Maximising firm’s ValueMaximising firm’s Value

Acquiring Sufficient FundsAcquiring Sufficient Funds Proper Utilisation FundsProper Utilisation Funds Increasing profitabilityIncreasing profitability Maximising firm’s ValueMaximising firm’s Value

Scope / Content of FMScope / Content of FMScope / Content of FMScope / Content of FM Estimating Financial RequirementEstimating Financial Requirement Deciding Capital StructureDeciding Capital Structure Selecting a Source of FinanceSelecting a Source of Finance Selecting a Patten of InvestmentSelecting a Patten of Investment Proper Cash ManagementProper Cash Management Implementing Financial ControlImplementing Financial Control Proper use of surplusProper use of surplus

Estimating Financial RequirementEstimating Financial Requirement Deciding Capital StructureDeciding Capital Structure Selecting a Source of FinanceSelecting a Source of Finance Selecting a Patten of InvestmentSelecting a Patten of Investment Proper Cash ManagementProper Cash Management Implementing Financial ControlImplementing Financial Control Proper use of surplusProper use of surplus

Objective of FMObjective of FMObjective of FMObjective of FM

FM is concerned with procurement &use FM is concerned with procurement &use of funds. Its main aim is to use business of funds. Its main aim is to use business fund in such a way that the firm’s value fund in such a way that the firm’s value or earnings are maximised. This or earnings are maximised. This objective can be achieved byobjective can be achieved by

Profit maximisationProfit maximisation Wealth maximisation Wealth maximisation

FM is concerned with procurement &use FM is concerned with procurement &use of funds. Its main aim is to use business of funds. Its main aim is to use business fund in such a way that the firm’s value fund in such a way that the firm’s value or earnings are maximised. This or earnings are maximised. This objective can be achieved byobjective can be achieved by

Profit maximisationProfit maximisation Wealth maximisation Wealth maximisation

PROFIT MAXIMISATIONPROFIT MAXIMISATIONPROFIT MAXIMISATIONPROFIT MAXIMISATION Arguments are in favour of profit maximisation:Arguments are in favour of profit maximisation:

1.1. When profit earning is the aim of business then When profit earning is the aim of business then profit maximisation should be the obvious objective.profit maximisation should be the obvious objective.

2.2. Profitability is the barometer for measuring Profitability is the barometer for measuring efficiency.efficiency.

3.3. A business will be able to survive under A business will be able to survive under unfavourable situation, only if it has some past unfavourable situation, only if it has some past earningsearnings

4.4. Profit are the main sources of finance for growth of a Profit are the main sources of finance for growth of a business.business.

5.5. Profitability is essential for fulfilling social goals alsoProfitability is essential for fulfilling social goals also

Arguments are in favour of profit maximisation:Arguments are in favour of profit maximisation:

1.1. When profit earning is the aim of business then When profit earning is the aim of business then profit maximisation should be the obvious objective.profit maximisation should be the obvious objective.

2.2. Profitability is the barometer for measuring Profitability is the barometer for measuring efficiency.efficiency.

3.3. A business will be able to survive under A business will be able to survive under unfavourable situation, only if it has some past unfavourable situation, only if it has some past earningsearnings

4.4. Profit are the main sources of finance for growth of a Profit are the main sources of finance for growth of a business.business.

5.5. Profitability is essential for fulfilling social goals alsoProfitability is essential for fulfilling social goals also

PROFIT MAXIMISATIONPROFIT MAXIMISATIONPROFIT MAXIMISATIONPROFIT MAXIMISATION

Arguments against profit Arguments against profit maximisationmaximisation

1.1. AmbiguityAmbiguity

2.2. Ignores Time Value of MoneyIgnores Time Value of Money

3.3. Ignores Risk FactorIgnores Risk Factor

4.4. Dividend PolicyDividend Policy

Arguments against profit Arguments against profit maximisationmaximisation

1.1. AmbiguityAmbiguity

2.2. Ignores Time Value of MoneyIgnores Time Value of Money

3.3. Ignores Risk FactorIgnores Risk Factor

4.4. Dividend PolicyDividend Policy

WEALTH MAXIMISATIONWEALTH MAXIMISATIONWEALTH MAXIMISATIONWEALTH MAXIMISATION Arguments in favour of wealth maximisationArguments in favour of wealth maximisation

1.1. It serves the interest of owners & other stake It serves the interest of owners & other stake holdersholders

2.2. It is consistent with the objective of owners welfareIt is consistent with the objective of owners welfare

3.3. It implies long-run survival & growth of the firmIt implies long-run survival & growth of the firm

4.4. It takes into consideration the risk factor & time It takes into consideration the risk factor & time value of moneyvalue of money

5.5. The effect of dividend policy on market price of The effect of dividend policy on market price of shares also consideredshares also considered

6.6. This leads towards maximising shareholders utility This leads towards maximising shareholders utility or value maxmisation of equity share holdersor value maxmisation of equity share holders

Arguments in favour of wealth maximisationArguments in favour of wealth maximisation

1.1. It serves the interest of owners & other stake It serves the interest of owners & other stake holdersholders

2.2. It is consistent with the objective of owners welfareIt is consistent with the objective of owners welfare

3.3. It implies long-run survival & growth of the firmIt implies long-run survival & growth of the firm

4.4. It takes into consideration the risk factor & time It takes into consideration the risk factor & time value of moneyvalue of money

5.5. The effect of dividend policy on market price of The effect of dividend policy on market price of shares also consideredshares also considered

6.6. This leads towards maximising shareholders utility This leads towards maximising shareholders utility or value maxmisation of equity share holdersor value maxmisation of equity share holders

WEALTH MAXIMISATIONWEALTH MAXIMISATIONWEALTH MAXIMISATIONWEALTH MAXIMISATION Arguments against wealth maximisationArguments against wealth maximisation

1.1. It is a prescriptive ideaIt is a prescriptive idea

2.2. This objective not necessarily socially This objective not necessarily socially desirable.desirable.

3.3. There is some controversy as to whether There is some controversy as to whether objective is to maximise the objective is to maximise the shareholder’s wealth or wealth of the shareholder’s wealth or wealth of the firmfirm

4.4. This objective may also face difficulties This objective may also face difficulties when ownership & management are when ownership & management are separatedseparated

Arguments against wealth maximisationArguments against wealth maximisation

1.1. It is a prescriptive ideaIt is a prescriptive idea

2.2. This objective not necessarily socially This objective not necessarily socially desirable.desirable.

3.3. There is some controversy as to whether There is some controversy as to whether objective is to maximise the objective is to maximise the shareholder’s wealth or wealth of the shareholder’s wealth or wealth of the firmfirm

4.4. This objective may also face difficulties This objective may also face difficulties when ownership & management are when ownership & management are separatedseparated

FINANCIAL DECISIONFINANCIAL DECISIONFINANCIAL DECISIONFINANCIAL DECISION

Investment DecisionInvestment Decision Long-term investment decisionLong-term investment decision Short-term investment decisionShort-term investment decision

Financing DecisionFinancing Decision Dividend DecisionDividend Decision

Investment DecisionInvestment Decision Long-term investment decisionLong-term investment decision Short-term investment decisionShort-term investment decision

Financing DecisionFinancing Decision Dividend DecisionDividend Decision

Functional areas of FMFunctional areas of FMFunctional areas of FMFunctional areas of FM Determining Financial NeedsDetermining Financial Needs Selecting the Source of FundsSelecting the Source of Funds Financial Analysis & interpretationFinancial Analysis & interpretation Cost-Volume –Profit AnalysisCost-Volume –Profit Analysis Capital BudgetingCapital Budgeting Working capital ManagementWorking capital Management Profit planning & controlProfit planning & control Dividend policy Dividend policy

Determining Financial NeedsDetermining Financial Needs Selecting the Source of FundsSelecting the Source of Funds Financial Analysis & interpretationFinancial Analysis & interpretation Cost-Volume –Profit AnalysisCost-Volume –Profit Analysis Capital BudgetingCapital Budgeting Working capital ManagementWorking capital Management Profit planning & controlProfit planning & control Dividend policy Dividend policy

Functions of Financial Functions of Financial ManagerManager

Functions of Financial Functions of Financial ManagerManager

Financial Forecasting & PlanningFinancial Forecasting & Planning Acquisition of FundsAcquisition of Funds Investment of FundsInvestment of Funds Helping in valuation decisionHelping in valuation decision Maintain proper liquidityMaintain proper liquidity

Financial Forecasting & PlanningFinancial Forecasting & Planning Acquisition of FundsAcquisition of Funds Investment of FundsInvestment of Funds Helping in valuation decisionHelping in valuation decision Maintain proper liquidityMaintain proper liquidity

The financial decision involvesThe financial decision involvesThe financial decision involvesThe financial decision involves

Investment, Financial & Dividend Investment, Financial & Dividend decisiondecision

Investment, Capital budgeting& Investment, Capital budgeting& Dividend decisionDividend decision

Investment, financing &Dividend Investment, financing &Dividend decision decision

Investment, Financial & Dividend Investment, Financial & Dividend decisiondecision

Investment, Capital budgeting& Investment, Capital budgeting& Dividend decisionDividend decision

Investment, financing &Dividend Investment, financing &Dividend decision decision

Value or wealth maximisation Value or wealth maximisation objectives stands for objectives stands for Value or wealth maximisation Value or wealth maximisation objectives stands for objectives stands for

Maximisation of earnings per Maximisation of earnings per shareshare

Maximisation of value of debt Maximisation of value of debt instumentinstument

Maximising the value of equity Maximising the value of equity None of theseNone of these

Maximisation of earnings per Maximisation of earnings per shareshare

Maximisation of value of debt Maximisation of value of debt instumentinstument

Maximising the value of equity Maximising the value of equity None of theseNone of these

F M is concerned with F M is concerned with thethe

F M is concerned with F M is concerned with thethe

Raising of fund from the marketRaising of fund from the market Investing the funds in most Investing the funds in most

appropriate asstsappropriate assts Procurement of funds & their Procurement of funds & their

effective utlisationeffective utlisation Management of working fund onlyManagement of working fund only

Raising of fund from the marketRaising of fund from the market Investing the funds in most Investing the funds in most

appropriate asstsappropriate assts Procurement of funds & their Procurement of funds & their

effective utlisationeffective utlisation Management of working fund onlyManagement of working fund only

Objective of the firm in FM Objective of the firm in FM isis

Objective of the firm in FM Objective of the firm in FM isis

Profit MaximisationProfit Maximisation Profitability maximisationProfitability maximisation Wealth maximisationWealth maximisation Cash maximisationCash maximisation

Profit MaximisationProfit Maximisation Profitability maximisationProfitability maximisation Wealth maximisationWealth maximisation Cash maximisationCash maximisation

Profit maximisation lacksProfit maximisation lacksProfit maximisation lacksProfit maximisation lacks

Time value of moneyTime value of money Risk & uncertaintyRisk & uncertainty Vague & ambiguousVague & ambiguous All of the above All of the above

Time value of moneyTime value of money Risk & uncertaintyRisk & uncertainty Vague & ambiguousVague & ambiguous All of the above All of the above

Intrinsic value of a share is equal Intrinsic value of a share is equal to itsto its

Intrinsic value of a share is equal Intrinsic value of a share is equal to itsto its

Book valueBook value Market valueMarket value True value justified by earning True value justified by earning

capacitycapacity Par valuePar value

Book valueBook value Market valueMarket value True value justified by earning True value justified by earning

capacitycapacity Par valuePar value

Decision regarding long-term Decision regarding long-term investment is called investment is called Decision regarding long-term Decision regarding long-term investment is called investment is called

Solvency decisionSolvency decision Capital budgetingCapital budgeting Capital structuringCapital structuring Long-term investment decisionLong-term investment decision

Solvency decisionSolvency decision Capital budgetingCapital budgeting Capital structuringCapital structuring Long-term investment decisionLong-term investment decision