Introduction to Financial Management

Definitions  :

F.W.Paish  –“In a modern money using  economy finance may defined  as the provision of money at the time it is wanted .”—- Procurement  View .

John J Hampton—“The term finance can be defined as the management of the flows of money through an organization, whether it will be a corporation , school, bank or a govt. agency.”—Custodian  Function.

Howard  and Upton —“Finance may be defined as that administrative area or set of administrative functions in an organization which relate with the arrangement of cash and credit so that the organization may have the means to carry out its objectives as satisfactorily as possible.”

Functions  of Finance  — three  major  decisions

1)      Investment  Decision—Capital  Budgeting.

2)      Financing Decision—Procuring  Owned & Borrowed  Capital

3)      Dividend  Decision— Profits-> Dividends  and  Retained  Earnings

Scope of FM

1)      Estimating requirements of funds

2)      Decision regarding capital structure

3)      Investment Decision

4)      Dividend  Decision

5)      Cash  Mgt.

6)      Evaluation of Financial  Performance

7)      Negotiation for additional funds

Objectives/Goals of FM

Fundamental  objective  is WEALTH  MAXIMISATION.

Objectives which lead to Wealth Maximisation

a)      Proper Utilisation of Funds

b)     Maximisation of ROI

c)      Survival

d)     Achieving BEP

e)      Managing Cash Flows

f)       Minimum Profits—Peter  Drucker—“Profit is a condition of survival.”

g)      Coordination amongst different  depts.-Prodcn., Sales, Finanace etc

h)     Good  Image of Orgn. in market & Public

Two  Approaches  for  attaining  Objectives/Goals of FM

A)    Profit  Maximisation Approach

B)    Wealth Maximisation Approach

Changing  Role  of  Finance  Managers

Traditional  role  of  Finance  Managers was  concerned only  with  raising  funds  for  the  organization.  In  the  Modern  times  role of FM  includes

a) Determining  the  requirement  of  funds  for  the orgn.

b) Determining  Capital  Structure –Owned Funds and Borrowed  funds

c) Raising Funds at minimum cost   and  restrictive conditions.

d) Optimum utilization of  funds

e) Financial solvency to be ensured at  all cost.

f)  Allocating the funds to different  departments

g) Allocating  funds between Fixed  assets  and  Working  Capital

Types of Risks  (FM has to deal with)

1)      Credit /Default risk- possibility that debtor will default

2)      Interest Rate risk- change in bank deposit/loan rates

3)      Business risk- failure of business due to controllable/uncontrollable factors

4)      Inflation risk- Decrase in purchasing   of money

5)      Industry risk- failure of the related industry

6)      Liquidity risk- inability to convert investment into cash

7)      Systematic/undiversifiable risk-  arising from external uncontrollable factors like political,economic etc.

8)      Unsystematic/diversifiable risk-  arising from internal controllable factors like plant breakdown/labour strike etc.