MC9030

Marketing and Financial

Management

INTRODUCTORY CLASS

Mr.A.Ajanthan, Lecturer
Dept. of Accounting,
Faculty of Mgt. Studies and Commerce
University of Jaffna, Sri Lanka
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 Lesson Plan

 Introduction – (Me and You)- 30 minutes

 Subject Overview – 20 minutes

 Important Instructions – 10 minutes

 Discussion on Topic 1 – Introduction to

Financial Management.

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 Introduction
 Me
– Personal
– Education
– Professional

 Now You
– Background (Name, Home location)
– Life goals
– What do you want from this subject?

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 My Background- Work
 Lecturer, UoJ, Sri Lanka – (February, 2018 - current)
 Probationary Lecturer, UoJ, Sri Lanka (2016 - January, 2018)
 Production (Board) Planner, OMEGA Line Plc (Apparel
Industry), Sri Lanka – (November, 2014 – August, 2015)
 Assistant Lecturer , UoJ, Sri Lanka - (April, 2013 – August,
2014)
 Management Trainee (MT) - Cargill’s Plc, Sri Lanka (January,
2013 – March, 2013)
 Accounting Assistant: Sri Lanka Business Development
Centre (SLBDC), Sri Lanka – (June, 2012 – November, 2012)
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 Introduction

 Now Your turn

– Background (Name, Home location)

– Life goals

– What do you want from this subject?

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 Subject Overview - Objectives
 To familiarize the students with the concept of
finance and financial management.
 Recognize the different principles of financial
management.
 Describe the functions and objectives of financial
management.
 Understand the concept of the time value of money
and its role in financial decision making.
 Understand the nature and importance of capital
budgeting decision in a firm.
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 Subject Overview-Learning Methods

 Lectures (interactive).
 Tutorials (class exercise).

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 Subject Overview - Assessment

 Mid Semester Exam (30%)

 Final Exam (60%)
 Other (10%)
– 2 Quizzes (for FM)
– Presentation (for MM)
(Individual / Group)
Total = 100%

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 Subject Overview – Course Materials
Learning resources:
 Recommended textbook (any edition can be used).
• Atrill, P. & McLaney, E. (2017). Accounting and Finance for Non-
Specialists, Pearson Education Limited, 10th edition.
• Atrill, P. (2014). Financial Management for Decision Makers,
Pearson Education Limited, 7th edition.
• Brigham, E.F. & Ehrhardt, M.C. (2011). Financial Management:
Theory & Practice 13th edition.
• Pandey, I.M. (2015). Financial Management, Vikas Publishing
House Pvt Ltd, 11th edition.
 Other References;

(Journals, Reports, Websites, E. Library…etc.)

 Lecture slides

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 Chapter - 01

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 Introduction
Introduction to
to
Financial
Financial Management
Management

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 Chapter Objectives
 What is finance and financial management?
 Functions of financial management.
 Form of business organizations and financial
management.
 Financial management system: role of a finance
manager.
 Principles of financial management.
 The goal of the firm.
 Understand the agency problems.
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 Introduction
 In our daily lives, we need to match our expenditure
with income, arrange a loan where there is a temporary
shortfall in funds, and invest our savings (the difference
between income and expenditure) to make our future
more secure.
 Any rational individual who systematically performs
these activities practically follows the principles of
financial management.
 Similarly, money plays an important role in the
management of organizations.
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 Cont’d
 For example, an organization without money cannot
hire people, buy materials and equipment it needs to
earn profit.
 Commercial organizations exist primarily to earn profit
or make money within, of course, a regulated
environment.
 Finance1 (money used in a broader sense) is,
therefore, the lifeblood of any organization. It needs to
be managed appropriately for the success of a firm.

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 Real Situation
 In conversation, when we say, “I’m passing
through financial crisis”, we obviously mean
“crisis of fund or money”. So, in ordinary
parlance, finance may be used in the sense of
money.
 But in literature, finance consists of three
interrelated areas: (a) money and capital
markets, (b) investments, and (c) financial
management.
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 Types of Finance
 Finance is one of the important and integral
part of business concerns, hence, it plays a
major role in every part of the business
activities. It is used in all the area of the
activities under the different names.
 Finance can be classified into two major
parts:

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 Cont’d

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 Definition of Business
Finance/Corporate Finance
According to the Guthumann and
Dougall,
“Business finance can broadly be
defined as the activity concerned with
planning, raising, controlling,
administering of the funds used in the
business”.
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 Definition of Financial Management

 Financial Management means planning,

organizing, directing and controlling the
financial activities of the organization.
 It refers the efficient and effective
management of money (funds) in such a
manner as to achieve the goals of the
organization.

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 Definition of Financial
Management
S.C. Kuchal :
“Financial Management deals with procurement of funds
and their effective utilization in the business”.
Howard and Upton:
Financial management “as an application of general managerial
principles to the area of financial decision-making”.
Weston and Brigham:
Financial management “is an area of financial decision-making,
harmonizing individual motives and enterprise goals”.

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 Functions of Financial Management

Financial management is used to help make three

major decisions:
1) Which assets should we invest in?
2) How will we pay for these assets?
3) What should we do with the earnings generated
by the assets?
These are called the investment, financing, and
dividend decisions.
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 Investment decisions
 Investment decisions involve identifying the assets
(tangible and long-lived assets) or projects in which the
firm’s limited resources (money) should be invested.
 Decision making related to long-lived assets is referred
to as capital expenditure decision or capital budgeting
or investment appraisal.
 Since capital expenditure decision normally deal with a
longer period of time and comparatively large amount
of money, the risk element is high.

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 Financing decisions
The second important area of decision –making is
financing decisions. There will be many questions to
consider in this context.
How is this investment to be financed?
What is the best way to finance it?
What source or sources can be used?
What will be the implications of financing from a
particular source?

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 Dividend decisions
 Once profit is generated, its distribution becomes
another complex but important function.
 Many questions need to be answered.
 How much to pay to the shareholders as dividend?
 How much to be retained in the firm to make
provision for meeting future financing of projects.
 Does the available cash position permit payment of
a cash dividend?
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 Interrelationship among important
functions of financial management

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 Cont’d
 All the three financial decisions (investment,
financing and dividend) should go hand in
hand to fulfill the goal or objective of the
firm.
 In fact, they are not only interrelated but
also complementary to each other.

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 Financial Management:
Public sector Vs. Private sector
“The difference between financial management in
the public and private sectors is that,
 In public organizations you get a bag full of money
at the beginning of the year and are told to spend
it.
 In private enterprise you get an empty money bag
at the beginning of the year and are told to fill it!”

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 Form of Business Organizations
and Financial Management
A business may be organized in different forms. Three
major forms in Sri Lanka are as follows;
1) Sole proprietorship/trader: A business owned by a
single individual.
2) Partnership: Business owned by two or more individuals
or entities.
3) Corporation: A business created as a distinct legal
entity owned by one or more individuals or entities, and
having many of the rights, duties and privileges of an
actual person.
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 Sole proprietorship

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 Partnership

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 Cont’d
 A partnership entity is very similar to a sole trader entity
except that there must be at least two owners of the
business.
 Partnerships often grow out of a sole trader entity,
perhaps because more money needs to be put into the
business or because the sole trader needs some help.
 But it is also quite common for a new business to begin
as a partnership, e.g. when some friends get together to
start a home-decorating service or to form a car-repair
business.
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 Partnership

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 Corporation / Public
Companies

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 Financial Management System:
Role of a Finance Manager
 The vital importance of the financial decisions to a firm
makes it imperative to set up a sound and efficient
organization for the finance functions.
 The top management is responsible for the finance
management of a company. Thus, a department to
manage financial activities may be established under
the direct control of the board of directors (BODs).
 The board may constitute a finance committee. The
executive heading the finance department is the firm’s
Chief Finance Officer (CFO).
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 Cont’d
 The finance committee or CFO will decide on the
major financial policy matters, while the routine
activities would be delegated to lower levels.
 The exact organizational structure for financial
management will differ across firms.
 It will depend on factors such as the size of the firm,
nature of the business, financing operations,
capabilities of the firm’s financial officers and most
importantly, on the financial philosophy of the firm.
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 Cont’d
 The name/designation of the CFO would also differ within
firms. In some firms, the financial officer may be known as
the financial manager, while in others as the vice
president of finance or the director of finance or the
financial controller.
 Two more officers— treasurer and controller —may be
appointed under the direct supervision of CFO to assist
him or her. In larger companies, with modern
management, there may be vice-president or director of
finance, usually with both controller and treasurer
reporting to him.
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 Financial Management System:
Organization for Finance Function

Chairman / CEO

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38
 Organization Structure of Mobitel

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 Interrelationship of the decisions
made by a Financial Manager

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 Principles of Financial
Management
“It is necessary to understand these
principles in order to understand
finance.”

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 Principle 1:
The Risk-Return Trade-off
 We won’t take on additional risk unless we
expect to be compensated with additional
return.
 Investment choices have different amounts of
risk and expected returns.
 The more risk an investment has, the higher
its expected return will be.

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 Principle 2:
The Time Value of Money
 A rupee received today is worth more
than a rupee received in the future.
 Because we can earn interest on
money received today, it is better to
receive money earlier rather than
later.

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 Principle 3:
Cash - Not Profits - Is King
 Cash Flow, not accounting profit, is
used as our measurement tool.
 Cash flows, not profits, are actually
can be reinvested.

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 Principle 4:
Incremental Cash Flows
 The incremental cash flow is the
difference between the projected
cash flows if the project is selected,
versus what they will be, if the
project is not selected.

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 Principle 5:
The Curse of Competitive Markets
 It is hard to find exceptionally profitable projects.
 If an industry is generating large profits, new
entrants are usually attracted.
 The additional competition and added capacity
can result in profits being driven down to the
required rate of return.
 Product differentiation, service and quality can
separate products from competition.
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 Principle 6:
Efficient Capital Markets
 The markets are quick and the
prices are right.
 The values of all assets and
securities at any instant in time fully
reflect all available information.

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 Principle 7:
The Agency Problem ( P-A Theory)
 Managers won’t work for the owners unless it
is in their best interest.
 A agency problem resulting from conflicts of
interest between the manager/agent and the
stockholder/owners.
Managers may make decisions that are not in line
with the goal of maximization of shareholder
wealth.

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 Principle 8:
All Risk is Not Equal
 Some risk can be diversified away, and
some cannot.
 The process of diversification can
reduce risk, and as a result, measuring
a project’s or an asset’s risk is very
difficult.

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 Principle 9:
Ethical Behavior is Doing the Right Thing,
and Ethical Dilemmas Are Everywhere in
Finance

 Each person has his or her own

set of values, which forms the
basis for personal judgments about
what is the right thing.

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 What are the Goals (objectives) of the
Firm? (General Goals)

 Survival
 Avoid financial distress and bankruptcy/insolvency
 Beat the competition
 Maximize sales or market share
 Minimize costs / maximize profits
 Maintain steady earnings growth

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 Shortcoming/ problem of
these General Goals

 These goals are either associated with

increasing profitability or reducing risk.
 So it is necessary to find a goal that
can encompass both profitability and
risk.

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 The Real Goal of the
Firm
Maximization of Shareholder
Wealth!
Shareholders’ wealth can be measured
as the current value per share of
existing shares.
Shareholder’s wealth = current value per
share x No. of shares
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 Strengths of Shareholder
Wealth Maximization
 Takes account of: current and future
profits and EPS; the timing,
duration, and risk of profits; dividend
policy; and all other relevant factors.
 Thus, share price serves as a
barometer for business performance.
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 The Modern Organization
(Public / listed Companies)

Public Companies

Shareholders Management

There exists a SEPARATION

between owners and managers.
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 Role of Management
Management acts as an agent for
the owners (shareholders) of the
firm.
 An agent is an individual
authorized by another person,
called the principal, to act in the
latter’s behalf.
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 Agency Theory
 Jensen and Meckling developed a
theory of the firm based on agency
theory.
 Agency Theory is a branch of
economics relating to the behavior
of principals and their agents.

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 Agency Theory

 Principals must provide incentives

so that management acts in the
principals’ best interests and then
monitor results.
 Incentives include stock options
and bonuses.
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 Business Case: Thomas Cook
[British Travel Company and Airline]
 Thomas Cook, a 178-year-old British travel company and
airline, declared bankruptcy early Monday morning,
suspending operations and leaving hundreds of thousands of
tourists stranded around the world.
 The travel company operates its own airline, with a fleet of
nearly 50 medium- and long-range jets, and owns several
smaller airlines and subsidiaries, including the German
carrier Condor. Thomas Cook still had several flights in the
air as of Sunday night but was expected to cease operations
once they landed at their destinations.

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 https://en.wikipedia.org/wiki/Arjuna_
Mahendran
http://island.lk/index.php?
page_cat=article-
details&page=article-
details&code_title=197020

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 Thank You.

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