Introduction to

Financial
Management
BY: ASSOCIATE PROF. RIA SANTOS FAJILAGO
DEPARTMENT OF BANKING AND FINANCE
COLLEGE OF ACCOUNTANCY AND FINANCE
Learning Outcomes
 Describe financial management in terms of
the three major decision areas that
confronts the financial manager
 Identify the goal of the firm and extrapolate
why shareholders’ wealth maximization is
preferred
 Explain the basic responsibilities of financial
managers
Nature of Financial Management
 Financial management also referred to as managerial
finance, corporate finance and business finance is a
decision-making process concerned with planning,
acquiring, and utilizing funds in a manner that achieves
the firm’s desired goals.
 It is also described as the process for and the analysis of
making financial decisions in the business context.
 Financial management is part of a larger discipline
called finance which is a body of facts, principles and
theories relating to raising and using money by
individuals, businesses, and governments.
FINANCIAL MANAGEMENT

UTILIZING DESIRED
PLANNING ACQUIRING
FUNDS GOALS
Meaning of Financial Management

Financial Management means planning,

organizing, directing and controlling the
financial activities such as procurement and
utilization of funds of the enterprise.
It means applying general management
principles to financial resources of the
enterprise.
FINANCIAL MANAGEMENT
PLANNING

ORGANIZING

DIRECTING

CONTROLLING FINANCIAL ACTIVITIES

Scope of Financial Management
 Procurement of short-term and long-term funds
from financial institutions
 Mobilizationof funds through financial instruments
such as equity shares, preference shares,
debentures, bonds, notes, and so forth.
 Compliance with legal and regulatory provisions
relating to funds procurement, use and
distribution as well as coordination of the finance
function with the accounting function.
THREE MAJOR SPHERES OF
FINANCIAL MANAGEMENT

PROCUREMENT OF FUNDS

ALLOCATION OF FUNDS

EFFICIENT AND EFFECTIVE MANAGEMENT OF CAPITAL

Financial Management Decisions
Investment decisions includes investment in fixed assets (called as
capital budgeting). Investment in current assets are also a part of
investment decisions called as working capital decisions.
Financial decisions - They relate to the raising of finance from various
resources which will depend upon decision on type of source, period
of financing, cost of financing and the returns thereby.
Dividend decisions - The finance manager has to take decision with
regards to the net profit distribution. Net profits are generally divided
into two:
 Dividend for shareholders- Dividend and the rate of it has to be decided.
 Retained profits- Amount of retained profits has to be finalized which will
depend upon expansion and diversification plans of the enterprise.
FINANCIAL MANAGEMENT
DECISIONS

INVESTMENT

FINANCIAL

DIVIDEND
Objectives of Financial
Management
The financial management is generally concerned with procurement, allocation and
control of financial resources of a concern.
Objectives:
1. To ensure regular and adequate supply of funds to the concern.
2. To ensure adequate returns to the shareholders which will depend upon the earning
capacity, market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be
utilized in maximum possible way at least cost.
4. To ensure safety on investment, i.e., funds should be invested in safe ventures so that
adequate rate of return can be achieved.
5. To plan a sound capital structure, there should be sound and fair composition of
capital so that a balance is maintained between debt and equity capital.
Functions of Financial Management
Estimation of capital requirements
A finance manager has to make estimation with regards to capital requirements of the
company. This will depend upon expected costs and profits and future programs and
policies of a concern. Estimations have to be made in an adequate manner which
increases earning capacity of enterprise.
Determination of capital composition
Once the estimation has been made, the capital structure has to be decided. This
involves short- term and long- term debt equity analysis. This will depend upon the
proportion of equity capital a company is possessing and additional funds which have
to be raised from outside parties.
Choice of sources of funds
For additional funds to be procured, a company has many choices:
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.
Choice of factor will depend on relative merits and demerits of each source and period of
financing.
Functions of Financial
Management cont.
Investment of funds
The finance manager has to decide to allocate funds into profitable ventures so that there is
safety on investment and regular returns is possible.

Disposal of surplus
The net profits decision has to be made by the finance manager. This can be done in two ways:
 Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.
 Retained profits - The volume has to be decided which will depend upon expansion, innovational,
diversification plans of the company.

Management of cash
Finance manager has to make decisions with regards to cash management. Cash is required for
many purposes like payment of wages and salaries, payment of electricity and water bills,
payment to creditors, meeting current liabilities, maintenance of enough stock, purchase of raw
materials, etc.

Financial controls
The finance manager has not only to plan, procure and utilize the funds but he also has to
exercise control over finances. This can be done through many techniques like ratio analysis,
financial forecasting, cost and profit control, etc.
Significance of Financial
Management
Broad applicability
Financial management is equally applicable to all forms of business like sole
proprietorships, partnerships and corporations. It is also applicable to non-profit
organizations like trust, societies, government organizations, public sectors and so forth.
Reduction of chances of failure
The strength of business lies in its financial discipline. Finance function is treated as
primordial which enables the other functions like production, marketing, purchase, and
personnel to be effective in the achievement of organizational goals and objectives.
Measurement of return on investment
Financial management studies the risk-return perception of the owners and the time
value of money. It considers the amount of cash flows expected to be generated for
the benefit of the owners, the timing of these cash flows and the risk attached to these
cash flows.
Role of a Financial Manager
Financial management—the art and science of managing a firm’s
money so that it can meet its goals—is not just the responsibility of
the finance department. All business decisions have financial
consequences. Managers in all departments must work closely with
financial personnel. If you are a sales representative, for example,
the company’s credit and collection policies will affect your ability to
make sales. The head of the IT department will need to justify any
requests for new computer systems or employee laptops.
Revenues from sales of the firm’s products should be the chief
source of funding. But money from sales doesn’t always come in
when it is needed to pay the bills. Financial managers must track
how money is flowing into and out of the firm. They work with the
firm’s other department managers to determine how available funds
will be used and how much money is needed. Then they choose the
best sources to obtain the required funding.
Role of a Financial manager cont.
A financial manager will track day-to-day operational data such as
cash collections and disbursements to ensure that the company has
enough cash to meet its obligations. Over a longer time horizon, the
manager will thoroughly study whether and when the company
should open a new manufacturing facility. The manager will also
suggest the most appropriate way to finance the project, raise the
funds, and then monitor the project’s implementation and operation.
Financial management is closely related to accounting. In most
firms, both areas are the responsibility of the vice president of
finance or Chie Financial Officer. But the accountant’s main function
is to collect and present financial data. Financial managers use
financial statements and other information prepared by accountants
to make financial decisions. Financial managers focus on cash flows,
the inflows and outflows of cash. They plan and monitor the firm’s
cash flows to ensure that cash is available when needed.
Finance manager is expected to
analyze the business firm and
determine the following:

The total funds requirements of the firm

The assets or resources to be acquired
The best pattern of financing the assets
The Financial Manager’s
Responsibilities and Activities
Financial managers have a complex and challenging job.
1. They analyze financial data prepared by accountants, monitor the firm’s
financial status, and prepare and implement financial plans.
2. One day they may be developing a better way to automate cash collections,
and the next they may be analyzing a proposed acquisition. The key activities
of the financial manager are:
Financial planning: Preparing the financial plan, which projects revenues,
expenditures, and financing needs over a given period.
Investment (spending money): Investing the firm’s funds in projects and securities
that provide high returns in relation to their risks.
Financing (raising money): Obtaining funding for the firm’s operations and
investments and seeking the best balance between debt (borrowed funds) and
equity (funds raised through the sale of ownership in the business).
The Goal of the Financial Manager
How can financial managers make wise planning, investment, and financing
decisions?
1. The main goal of the financial manager is to maximize the value of the firm to
its owners. The value of a publicly owned corporation is measured by the share
price of its stock. A private company’s value is the price at which it could be
sold.
2. To maximize the firm’s value, the financial manager has to consider both short-
and long-term consequences of the firm’s actions. Maximizing profits is one
approach, but it should not be the only one. Such an approach favors making
short-term gains over achieving long-term goals. What if a firm in a highly
technical and competitive industry did no research and development? In the
short run, profits would be high because research and development is very
expensive. But in the long run, the firm might lose its ability to compete
because of its lack of new products.
Finance Department Functions
 The activities expected from a finance department cover a wide range from basic
bookkeeping to providing information to assisting managers in making strategic
decisions. What to expect from your finance department will depend largely on
factors such as how much involvement the owner/manager has in the organization.
 At the base level, your bookkeeper will be responsible for all the day-to-day
transactional accounting for the business. This will include the tracking of all
transactions and the management of any government reporting. In very small
owner-managed businesses, this role is often filled by a family member with
accounting experience. An outside accounting firm is usually used for annual
financial statements and returns. In larger organizations this role will extend right
through to preparing the financial statements with an external auditor engaged for
assurance purposes.
 The finance department is also responsible for management of the organization’s
cash flow and ensuring there are enough funds available to meet the day-to-day
payments. This area also encompasses the credit and collections policies for the
company’s customers, to ensure the organization is paid on time, and that there is a
payment policy for the company’s suppliers. In most organizations there will be
some form of forecast prepared on a regular basis to systematically calculate the
ongoing cash needs.
Finance department functions cont.
 Where there are cash needs beyond the day to day working capital, the finance
department is responsible for advising and sourcing longer term
financing. Financing may be obtained through bank or private lender debt or, in
applicable firms, share issues to private investors. If the organization is ready to
target angel investors or venture capitalists the finance department will be key in
preparing the documents required for these presentations and may work with
outside consultants on a company valuation. In larger firms considering public share
offerings the finance department will assist with the preparation of the offering
documents but will likely also use outside consultants to advise on this complicated
process.
 With the must-do’s taken care of, the finance department can now start to
contribute to the management and improvement of the operations by measuring
and reporting regularly on key numbers crucial to the success of the
organization. Management accounting information is information that managers
can use to monitor the operations and decide where further attention may be
required. It will likely include some non-financial information and should be
communicated to managers in a way that is easy to understand. In smaller owner-
managed businesses this resource, though extremely important, is often overlooked
or ignored.
Finance department functions cont.

 Looking forward, the finance department will work with managers to prepare the
organization’s budgets and forecasts, and to report back on the progress against these
throughout the year. This information can be used to plan staffing levels, asset purchases
and expansions and cash needs, before they become necessary. Some organizations
often ‘plan’ by the seat of their pants, while organizations know it is important to have
some idea of where you want to go before you start going there.
 Finally, the finance department should be called upon to provide information to assist
managers in making key strategic decisions, such as which markets or projects to pursue
or the payback periods for large capital purchases. The finance department can often
contribute an objective perspective based on special financial assessment techniques.
 In summary, some organizations know the finance department should be considered a
resource to assist managers in the running of the business. With the growing popularity of
outsourced finance departments, it is possible for even small businesses to have access
to all of the benefits of a full finance department, through part time professionals, at a
fraction of the cost of employing a full time finance department.
References

1. https://www.managementstudyguide.com/financial-management.htm
2. https://opentextbc.ca/businessopenstax/chapter/the-role-of-finance-and-the-
financial-manager/
3. https://www.google.com/search?q=organizational+structure+of+the+finance
+department&tbm=isch&source=univ&sa=X&ved=2ahUKEwjIx9q8lIniAhUBE4gK
HccBBGYQsAR6BAgJEAE&biw=1366&bih=631#imgrc=S8tCnc6DocJnFM:
4. https://www.smythecpa.com/news-insights/roles-and-responsibilites-of-a-
finance-department/