Monday, September

22, 2014
Sarvajanik College of
Engineering & Technology
INTRODUCTION TO
FINANCIAL MANAGEMENT
Prepared by:

Reena Mishra
SCET
Gujarat
FINANCE:
Finance is an art and science of
managing money. All
individuals and organizations
raise and spend or invest
money.
Finance is all about making
decisions like: when to buy,
what to buy, when to sell
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FINANCIAL MANAGEMENT
This is the business management function that
is concerned with managing a business
finances.
It deals with procurement of the funds and
their effective utilization in the business.

SCOPE OF FINANCIAL MANAGEMENT
Two main aspects of financial management:
1) Procurement of funds:
Funds can be procured from multiple sources.
Funds obtained from different sources have
different characteristics in terms of risk, cost
and control. Funds issued by issue of equity
shares are the best from risk point of view(As
there is no need of repayment of equity capital
when the company is liquidated).

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From the cost point of view, equity
capital is most expensive source of
funds as dividend expectations of
shareholders are normally higher
than that of prevailing interest rates.
The cost of funds should be
minimum for a proper balancing of
risk and control.
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2)Utilization of funds:
Effective utilization of funds is an
important aspect of financial
management. It avoids the
situations where funds are either
kept idle or proper uses are not
being made. If funds are not used
properly, then running business will
be too difficult. Many firms have
been liquidated because of
mismanagement of financial affairs..
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ORGANIZATION OF
FINANCE FUNCTION
There is no standard pattern for the
organization of finance function. It
varies from enterprise to enterprise.
In smaller companies, generally
there is no separate executive to
look after the finance function.
In bigger companies, there is
executive of finance function like
Treasurer, Finance Controller,
9Finance Management, Vice
president(Finance).
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Generally organization of
finance function is centralized.
Board of directors makes the
main financial decisions. He
may delegate the powers to the
executive committee. Routine
financial matters may be
delegated to lower level
officers..
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Reason of centralised financial
function is that Financial decisions
are most crucial ones on which
survival and failure of organization
depends.
Role of Finance Controller:
*Accounting and costing
Annual Reporting
Budgeting
Record keeping

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Roles of Treasurer:
Taxes and insurance
Banking relations
Dividend distribution
Receivable management.
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FINANCE FUNCTION IN
RELATION WITH OTHER
FUNCTIONS:
1)Relation to Economics:
It is closely related to economics.
Fiancial managers must be alert to
consequeces of varying level of
economic activity for supply and
demand analysis.
Primary economic principle used in
managerial finance is marginal cost benefit
analysis, the principle that financial
decisions should be made and action taken
when added benefit exceeds the added
cost.

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2) Relationship to Accounting:
They are closely related and
generally overlap. Finance
function is related to cash
flows and other to decision
making.
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3)Relation with other
functions like marketing,
production and personnel
All these functions are closely
related because to execute these
functions ,funds are needed.
Production Function: To produce
high quality goods, infrastructural
facilities like building, machineries
are needed, Raw materials are also
needed. All these activities need the
investment to be made in terms of
fixed or working capital.
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Marketing Function: Good
distribution system requires
investment to be made in terms
of fixed or working capital.
Personnel Function: It includes
investment of funds in hiring,
training and giving salary to
employees.
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ROLE OF FINANACE
MANAGER
* Risk Management: Finance manager finds
new ways to control risk of company.
Sourcing and utilization of funds
Financial analysis and planning.
Taking custody of companys valuable
documents
Paying suppliers
Monitoring the banking operations
Budgeting and forecasting
Financial Management decisions
are of three types:
1)Capital Budgeting: It is long
term investment decisions
which is irreversible. Finance
manager has to select the best
investment proposal after
analyzing the risk and benefit
of each investment proposal.
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2) Capital Structure:
The means by which company
is financed. It means
combination of sources of
finance.
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3) Working Capital
Management:
The process of managing day to
day operating needs of the
company through its current
assets and current liabilities.

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Objectives of Finance
Function
For optimum financial
decisions, the objectives of
financial management shall be
clearly defined. They should be
so laid down that they
contribute directly towards the
achievement of overall
business objectives.
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In order to survive ups and
downs in the business, the
business must earn sufficient
profits and it should also
maintain proper relations with
shareholders, customers,
suppliers and other social
groups.
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The financial management of
an organisation must seek to
achieve the following
objectives:
To ensure adequate and
regular supply of funds.
To provide a fair rate of return
to the suppliers

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To ensure effective utilization
of funds by maintaining proper
balance between profitability,
liquidity and safety.
to generate and build up
sufficient surplus for
expansion and growth.

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To coordinate the activities of
the finance department with
the activities of other
departments in the
organisation.

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OBJECTIVE OF FINANCE
MANAGER:
Profit Maximization: it is not
clear what profit maximation
means. For instance to
maximize profit, should a
manager increase this years
profit at the expense of futures
years profit by avoiding
routine manintenace. Or,
should a manager reduce
inventories?
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But the primary objective of
finance manager is to increase
the wealth of owners of
company.
Wealth maximisation.: to
maximize stock price.
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Importance of Proper Financial
Management
FINANCIAL
MANAGEMENT
Make sound
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decisions
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Evaluate new
business
opportunities
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Importance of FM Contd
Maximize use of financial
resources
FM allows you to identify and
plan for the use of your financial
resources.
It provides information for
financial decision making.
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Importance of FM Contd
Evaluate new business opportunities
FM provides the key information and
answer questions of whether to exploit such
opportunities or not.

That is, entrepreneurs can effectively
analyze a business opportunity and
determine whether it is worthwhile or not.

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Importance of FM Contd
Measuring business performance
FM helps the investor to monitor
the progress of their business
towards achieving business goals
and to take corrective action
where necessary.

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Importance of FM Contd
Making sound business decisions
The financial information systems
provides a wide range of
information that can be used to
make better decisions.
This is done using financial ratios,
break even analysis etc.

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MAJOR FINANCIAL
MANAGEMNET FUNCTIONS
Investment decision
Working capital decision
Financing decision
Earnings management decision
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1. Investment decision


This is also known as the Capital budgeting,
and it refers to the decision to invest in
long term assets.
The assets are expected to be used over a
long period of time e.g. when a firm
acquires plant and equipment or replaces
an old equipment or when you invest in
research and development.
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2. Working capital decision
This is the decision concerned with the short
term assets/resources an organization uses to
meet its day to day obligations.
Such assets include:
Cash reserves of the organisation
Funds collected from debtors of the
organization.
Inventories

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3. Financing decision
This is the decision concerned with the
sourcing of funds that are utilized under
the investment decision.
Much management time and effort is
devoted to trying to ensure the adequacy of
the company's profit flow.
However, it is just as important that a
company has an adequate flow of funds if it
is to remain in business and very much less
management time and effort is devoted to
this need.
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Financing decision Contd
As companies expand, they require
growing amounts of cash to finance
acquisitions of fixed assets. They also
require growing amounts of cash to finance
their growing working capital (net current
assets) requirements.
Some of this funding requirement will come
from INTERNAL sources, whilst some will
need to come from EXTERNAL sources.
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4. Earnings management
decision
The Financial Manager has to decide on
what to do with the earnings once they
have been realised. There are three options,
To declare and pay all dividends to
shareholders
To retain all the earnings and hence declare
and pay no dividends
To decide on what proportion to be paid
and what to be retained.
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Considerations in dividends
payment
Internal restrictions that do not favour
dividend payment
Legal considerations.
Level of the firms leverage position.
Ease of raising additional capital.
Will payment of dividends disadvantage the
shareholders or investors?
The preferences of the majority shareholders.
Existence of profitable investment portfolio.
The levels of control desired by the
shareholders
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Objectives of financial management
Profit maximization

Wealth maximization
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INDIAN FINANCIAL
SYSTEM AND
REGULATORY BODIES:
Financial system plays a vital role in
economic growth of a country.
Financial system is a complex , well
integrate set of subsystems of
financial institution, market,
instrument and services which
facilitates the transfer and allocation
of funds, efficiently and effectively.
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Indian financial system can be
classified into formal financial
system and informal system.
Formal financial system comes
under the purview of Ministry
of Finance(MoF), the Reserve
Bank of India(RBI), the
Securities and Exchange Board
of India(SEBI) etc.
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The informal financial system
consists of :
Individual moneylenders such
as neighbours, relatives,
landlords etc.
Groups of persons operating as
Funds or Associations.


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Formal Financial System consists
of four segments:
Financial Institution.
Financial Markets
Financial Instruments
Financial services.
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Financial institutions: they are
intermediaries that mobilize
savings and facilitate the
allocation of funds in an
efficient manner. They are of
two types: Banking institution
and non banking institution.
Banking institution are creators
of credit and non banking are
of purveyors of credit.
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Financial Markets: it is a mechanism
enabling participants to deal in
financial claims. Main organized
financial market are money market
and capital market.
Money market is a market for short
term securities and while capital
market is for long term securities.
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Financial instrument: It is a
claim against a person or an
institution for payment, at a
future date, of a sum of money
in the form of interest or
dividend.
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Financial services: are those
that help with borrowing and
funding, lending and
investing, managing risk.

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Regulatory bodies:
Financial market is regulated
by many regulatory like
SEBI(securities and exchange
board of india), RBI etc.

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SEBI
Protective Functions: These
functions are performed by SEBI to
protect the interest of investor and
provide safety of investment.
SEBI prohibits fraudulent and
Unfair Trade Practices: SEBI does
not allow the companies to make
misleading statements which are
likely to induce the sale or purchase
of securities by any other person.


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SEBI has framed rules and
regulations and a code of conduct to
regulate the intermediaries such as
merchant bankers,
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RBI
RBI Act gives authority to the RBI
to issue currency notes. The RBI also
takes action to control circulation of
fake currency.
The RBI is responsible for
controlling the overall operations of
all banks in India. These banks may
be: Public sector banks, Private
sector banks, Foreign banks, Co-
operative banks,
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RBI has been given powers to grant
licenses to commence new banking
operations. The RBI also grants
licenses to open new branches for
existing banks.
Risk Management: The RBI provides
guidelines to banks for taking the
steps that are necessary to mitigate
risk.
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The RBI has power to control the
appointment of the chairman and
directors of banks in India. The RBI
has powers to appoint additional
directors in bank s as well.
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