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FINANCIAL MANAGEMENT

MEANING OF FINANCIAL
MANAGEMENT
 Financial management consist two word
q FINANCE MEAN
Ø Finance is the art &science of managing fund or money.
q MANAGEMENT :
 THE FIRST MANAGEMENT GURU:
Ø CHANAKYA
o THE MODERN MANAGEMENT FATHER:
Ø PETER.F.DRUCKER
q MANAGEMENT MEAN
Ø TIME.
Ø TALENT.
Ø TACTFULLY.
Ø TECHNIQUE.
MANAGEMENT MEAN

The mean of starting.


The excellence of man & material.
Deciding suitable place & time.
MEANING OF FINANCIAL
MANAGEMENT
It is the managerial activities which is concern with
planning & control of the firm’s financial resources.
F.M is done by financial manager.
F.M is concerned with the duties of financial
manager in business firm.
F.M is profit seeking & not for profit.
F.M has become more demanding & complex.
CONCEPT OF FINANCE
FUNCTION OF FINANCE MANAGER
Deciding capital structure.
Financial analysis & planning.
Selecting a source of finance.
Estimating financial requirements.
Proper use of surplus.
Implementing financial control.
Proper cash management.
Financial decision area
Investment decision analysis.
Working capital management.
Source & cost of fund.
Determination of capital structure.
Dividend policy.
Analysis of risk & return.
Scope of finance function or
responsibility of finance manager
Finance planning.
Raising of necessary fund.
Controlling the use of fund.
Disposition of profit.
5. Pay dividend.
6. Retain earning.
Objective of financial management
Maintain liquidity of the firm.
Maximize the profitability.
To maximize wealth the shareholder.
Scope of financial management
Classified two categories.
2. Traditional view.
3. Modern approach.
Traditional view
 Finance function evolved during 1920’s & 1930 &
dominate academic thinking during forties & through
the early fifties.
 Scope of financial management refer to its subject
matter.
 A separate branch of academic study.
 The term procurement used in a broad sense.
 The study & analysis of financial institution.
 The study & analysis of financial instrument share,
bond etc.
 Analysis of legal & accounting relationship b/w firm &
its source of fund.
Modern approach
Modern approach is called as financial decision
area.
There are three decision:
3. Investment decision.
4. Finance decision.
5. Dividend decision.
Investment decision
1. Capital budgeting :Capital Budgeting relate
selection of course of action whose benefit are
likely available in future over the life time of
project.
o There are three aspect:
III. First aspect- Choice of new asset out of
alternative available.
IV. Second aspect-Analysis of risk & return.
V. Finally aspect- Standard against which benefit
are to judge.
7. Working capital management decision
● Working capital management
decision
It is concern with the management of current
asset.
It is an important & integral part of F.M.
One aspect of W.C.M is trade off b/w profitability &
liquidity
Finance decision
Which source of fund are collect.
How many requirement of fund.
Which source will be use.
Financial decision we can also say financial mix
,capital structure ,leverage.
Source of fund
o Equity share.
o Debenture.
o Preference share.
o Borrowed goods(short term).
Dividend decision
Dividend refer to that portion of firm’s net earning
which are paid out to the shareholder.
Dividend is that part of company’s profit which is
distributed among its shareholder as reward of
investment.
Decision
§ Dividend distribute or not.
§ Retained earning or not.
MEANING OF TIME VALUE OF
MONEY
Means that value of unit of money is different in
different period of money.
T.V.M is also known as Time Preference of
money.
Time value of a sum of money receive today is
more than its value receive after some time.
Reason of T.V.M
§ Preference for consumption.
§ Investment opportunity.
MEANING OF TIME VALUE OF
MONEY
Means that value of unit of money is different in
different period of money.
T.V.M is also known as Time Preference of
money.
Time value of a sum of money receive today is
more than its value receive after some time.
Reason of T.V.M
§ Preference for consumption.
§ Investment opportunity.
TIME VALUE OF MONEEY
Future value.
Present value.
Technique of T.V.M
1. Compound future value.
2. Discounting technique.
Compound future value
Double period method.
Multiple compounding period.
Effective rate of interest in case of multiple period
compounding.
Future value of sense of payment.
Compound value of an annuity.
Discounting technique
Present value of series of payment.
Present value of series of an annuity.
Present value of series of infinite life annuity.
Present value of series of annuity growing at
constant rate.
FORMULA OF T.V.M
 COMPOUND INTEREST :

n
Vn=Vo(1+i)
o IN DOUBLY PERIOD :
o RULE OF 72 = 72/i
o RULE OF 69 =(0.35+69)/rule of interest
vMUL TI PLE CO MP OUN DI NG P ER IOD :
n*m
Vn=Vo(1+i/m)
vEFFECTIVE RATE OF INTEREST
n
=(1+i/m) -1
UNIT-III
FINANCING DECISION
SOURCE OF FINANCE
MEANING OF SHARE
The entire capital of the company is divided in to
small part .Each small part known as share.
It is to be noted if a company is bound up then
share holder will get maximum face value.
EQUITY SHARE
They represent owner’s capital.
The holder of share.
It is real owner of own capital.
Dividend paid after preference share to equity
share.
Equity share participate in decision.
Voting right.
MERIT OF EQUITY SHARE TO
COMPANY
Equity share not create any obligation to pay fixed
rate of dividend .
It is a permanent source of capital.
It provide flexibility in usage of fund.
It is permanent source of fund without repayment
liability.
Company not pay dividend at time of loss.
DEMERIT OF EQUITY SHARE TO
COMPANY
If only equity share issue the company cannot take
advantage trading on equity(debt).
As equity share cannot be redeemed.
Centralization of management & control.
Change in management policy.
PREFERENCE SHARE
P.S means share which has to preference.
First priority as to payment of dividend whenever
dividend will be pay.
Repayment of capital at the time when winding up
of company.
Cumulative.
Non Cumulative.
P.S is cannot issue for life time & more than 20
years.
It carries fixed rate of dividend.
It rank higher than equity.
Feature of PREFERENCE SHARE
Claim on income /asset.
Cumulative dividend.
Redeemability- preference share has a limited life.
Fixed dividend.
No voting right.
Control.
Maturity.
Merits of PREFERENCE
SHARE(company’s point of view)
There is no legal obligation to pay dividend on
preference share.
Preference share provide long-term capital to
company.
No carry voting right.
It enhance credit worthiness of a firm.
De-Merits of PREFERENCE
SHARE(company’s point of view)
Involve high capacity.
Tax.
Expensive source of finance.
Permanent burden.
No voting right.
MEANING OF RETAINED EARNING
Retained earning is technique of financial magt.
under which all profit of company are not
distributed amongst the shareholder as dividend
but a part of the profit is retained or re-invested in
the company. This process of retained profit year
after year their utilization in the business is also
known as retained earning.
Term loan
Term loan also known as term /project finance.
Primary source of such loan are financial
institutions.
Commercial bank also provide term finance in a
limited way which is generally payable more than
one year but less than ten year.
Feature OF Term loan
Maturity(6-10 years in comparison 3-5 years of
bank advances).
Negotiated –The term loan are negotiated b/w
borrower & the lenders.
Security – All term loan are secured.
Debenture/bonds/notes
Debenture represent creditorship security &
debenture –holder are long term creditors of
company.
Creditorship security is also known as debt capital.
A company raise long term finance by public
borrowing, the loan are raised by the issue of
debenture.