Financial management entails planning for the future of a person or a business enterprise

to ensure a positive cash flow. It includes the administration and maintenance of financial
assets. Besides, financial management covers the process of identifying and managing risks.
The primary concern of financial management is the assessment rather than the techniques
of financial quantification. A financial manager looks at the available data to judge the
performance of enterprises. Managerial finance is an interdisciplinary approach that borrows
from both managerial accounting and corporate finance.
Some experts refer to financial management as the science of money management. The
primary usage of this term is in the world of financing business activities. However, financial
management is important at all levels of human existence because every entity needs to
look after its finances.
Evo

• Early 1900 : instrument, institution, and procedures of capital market and money
market
• Around 1920 : focus on security and banking sector, and investment in common
stock
• Around 1930 : focus on liquidity, debt, regulation, bankruptcy, reorganization
• Early 1940 and 1950 : internal analysis, planning and controlling cash flow
• End of 1950 : capital budgeting, valuation, and dividend policy
• Around 1960 : development of portfolio theory
• Around 1970 : CAPM model and APT model that can be used to value the financial
assets
• Around 1980 : focus on uncertainty, asymmetric information, financial signaling
• Around 1990 : multinational financial management, behavioral finance, enterprise
risk management, good corporate governance

Session 1: Evolution of Finance Management

Learning Objective
• Introducing financial management to the learners
• Outlining the role of finance staff in an enterprise
• Explain to the participants on the objectives of companies
Important Terms
• Finance management
Financial Management
Financial Management involves sourcing of funds, making appropriate investments and
promulgating the best mix of financial and dividends in relation to the value of the firm.
Evolution of Finance
Finance as a separate field from Accounting emerged from business combinations of 1900 in
steel industries. These enterprises became big with complex decisions to be made and
requirement for huge capital outlays. The combinations involved issuance of huge blocks of
fixed-income and equity securities. Growth in technological innovations and creation of new
industry resulted in further need of funds, prompting the study of finance to emphasise on
liquidity and financing of the firm.
The depressions of the 30’s meant firms had to concentrate on defensive aspect of survival
preservation of liquidity and reconstruction. Business lacked funding, those institutions
which were willing to lend required exorbitant interest rates. This time finance managers
had a responsibility of ensuring that the enterprise was having optimal usage of funds,
avoiding unnecessary expansion programmes and maintaining the loyalty of existing
customers. Discovery of computer brought better, disciplined and fruitful analysis of financial
performance. The 1990’s saw the introduction of numerous financial instruments replacing
hard cash as transfer of funds. The 2000’s have brought globalisation through merger of
firms, increase competition access to international markets and need for quality products.
Financial management is important in all types of businesses as well as government
operations like hospitals and school. Financial managers are involved in decisions like, what
product need expansion, where to obtain funding, make internally or sub contract.
A firm has a responsibility towards employees, shareholders, customers, creditors and
society. Each of the stakeholders sees the role of enterprise in a different way. Sound
financial management is necessary for the survival of an enterprise and its growth.
The type of questions that financial management seek to answer are as follows
1. What percentage of funds needed by the business should be obtained from
borrowing and what percentage should be sourced from the owners?
2. What percentage of the annual profits should be paid out to shareholders as
dividends?
3. Is it worth while for the enterprise to replace its manufacturing machine with a
computer-integrated system?
4. Should we allow more payable days to the customers?
5. How can the deteriorating gearing level of an enterprise be improved?
Areas of Financial Management
1. Investment decision
○ Allocation of capital to investment proposals
 ○ Managing existing investments efficiently
2. Financing
○ Determining the best mix of capital structure
○ Methods of obtaining long and short-term finance.
3. Dividend decisions
○ Percentage of earnings to stockholders
○ Stability of absolute dividend
○ Stock dividend and splits
The responsibility of financial staff includes:
• Forecasting and planning
Finance staff should be able to coordinate activities of various departments within the
business and be able to forecast both the short and long term requirements of these
departments. Finance staff should be open-minded to take into account factors which
may affect the future prospects of the business.
• Appraising investment activities
Business need to expand but unplanned expansion programme lead to over
capitalisation. Non current assets are underutilised and usually resulting in dormant
assets laying idle. Finance managers have the responsibility to assess the viability of
any capital investment undertaken by an enterprise. Only those projects which will
add value to the business should be undertaken. Financial managers should ensure
that the enterprise is not lacking behind in innovation. They are also supposed to
advice the management team on the business financing form for a capital project.
• Coordination and control
To satisfy the needs of various stake holders, finance management staff should
ensure efficient utilisation of resources. The activities of various departments should
be coordinate to avoid sub optimisation of various departments. Without coordination
there will be competition within the business on scarce resources. For example if the
purchasing department purchase from a cheaper source it will improve its budgetary
position but may be the quality may not be that good and will result in poor
performance for the manufacturing department.
• Decision on finance market
The financial staffs are required to source funds for the enterprise as they are
supposed to have a wider knowledge on financial market. The finance staffs will
advice the firm on both short and long term sources of finance. They are supposed to
consider both cost and the financial position of the business before embarking on any
financial market. With growing in international trade, finance managers need to
introduce the firm to both local and international source of finance. They are
supposed to compare the rates levels in different markets but also consider products
available on these international markets.
• Risk management
Finance staff needs to assess all the risk which the business face and make pre
arranged efforts to minimise or if possible eliminate these risk. The risk may include
political risk which can be minimised by investing in countries with stable
democracies, foreign currency risk by entering into forward rates with the banks,
natural or human induced disaster which can be reduced by obtaining an insurance
cover.
 • Performance measurement
Financial staffs should appraise the performance of the enterprise as a whole and
also its departments. The staff should compare the targets set for the enterprise and
the actual performance achieved. In broad terms, financial management staff should
construct a framework which one can be able to establish the meaningful
interrelationship on:
1. The financial goals of the company;
2. The valuation of the company;
3. The means of measuring the performance of the company – when its goals
have been identified and method of valuation chosen, the company
performance must be assessed and measured.
Objectives of the Firm
1. Maximising stock holders’ wealth
Objectives of organisations will be heavily influenced by the ‘coalition’ or stakeholder
groups that have the most power. The theory of company finance is based on the
assumption that the objective of management is to maximise the market value of the
company’s shares. A company is financed by the shareholders, loan stock holders
and other long term and short term creditors. Profit or cash flow generated by the
business need to be shared by these stakeholders. All surplus funds however belong
to the legal owner of the business, its ordinary shareholders. These are stakeholders
who are subordinate to all other classes of stakeholders as they will always be the
last in distribution of funds as dividend or sharing of liquidation proceeds. Any
retained profits are undistributed wealth of these shareholders and management is
directly answerable to them because they are the ones who appointed them and
have powers to remove them.
2. Other financial objectives
○ Achieving a target market share.
The enterprise will set objective to be the market leader or maintain its
market stand. The reason behind this objective is that performance of the
enterprise depends on being able to retain market share but also be able to
capture other new customers.
○ Survival
Where competition is stiff the firm may set as its objective to survive. The
firm may employ such tactics like maintaining a market niche, intensifying on
barriers to entry into the industry it is operating but also choosing non growth
strategy to ensure that they are able to stick to what they know.
○ Maximising the profits
This is a complementary objective to above primary objective, because
maximisation of shareholders requires the business to generate more profits.
Maximisation of profits will increase the market value of the business thereby
increasing the shareholders fund.
3. Non Financial Objectives
○ Provide welfare of employees
A company might try to provide good wages and salaries, comfortable and
safe working conditions, good training and career development, and good
pensions. If redundancies are necessary, many companies will provide
 generous redundancy payments or spend money trying to find alternative
employment for redundant staff.
○ Welfare of management
Managers will often take decisions to improve their own circumstances, even
though their decision will incur expenditure and so reduce the profits. High
salaries, company cars and other perks are all examples of managers
promoting their own interests.
○ Welfare of society as a whole
The management of some companies are aware of the role that their
company has to play in providing for the well-being of society. As an example,
oil companies are aware of their role as providers of energy for society, faced
with the problems of protecting the environment and preserving the earth’s
dwindling energy resources.
○ Provision of services
The major objectives of some companies will include the provision of a service
to the public. Entities like Shire bus lines much as they will be looking for
profitable bus routes they are supposed to provide services to certain sections
of the country regardless of the expected profit or loss expected from these
services.
○ Quality service to customers
Responsibilities towards customers include providing a product or service of
quality that customers expect, and dealing honestly and fairly with customers.

Definition

One who is skilled in the practice of accounting or who is in charge of public or private

accounts. An accountant is responsible for reporting financial results, whether for a

company or for an individual, in accordance with government and regulatory authority rules.

What Is Economics? How I Would Define It

If I were asked to provide an answer to the question of "What is Economics?" on a

test, I'd probably write the following explanation:

"Economics is the study of how individuals and groups make decisions with limited
resources as to best satisfy their wants, needs, and desires".
Most simply put, economics is the study of making choices.
We need economics because we as individuals and as a society experience
scarcity (of raw materials, of goods and services, of time, and so on) in
relationship to our ever-growing needs and wants. Economics examines how
we make choices: a new car or college tuition? more hospitals or more
highways? more free time or more income from work? It gives us a way of
understanding how to make best use of natural resources, machinery, and
people's work efforts.

Economics helps us examine trade-offs between various

goals and anticipate the outcomes of changes in governmental policies, company

practices, or composition of the population, and so on. Almost all issues of public

and private policy involve economics and so do your own individual choices.