INTRODUCTION

BY - Devender singh

Financial Management
Financial management is concerned with the managerial

decisions that result in the acquisition and financing of short term and long term credits for the firm
Financial Management deals with procurement of funds and

their effective utilization in the business

Financial Management involves in two broad aspects: a) Procurement of funds: (1)Identification of sources of Finance (2)Determination of Finance Mix (3)Raising of funds (4)Division of profits between dividends & retention of profits. b) Effective Utilization of Funds: Finance managers is also responsible for effective utilization of funds.

Scope of Financial Management

We may divide the scope of Financial management under two different approaches: Traditional approach: under this approach the role of finance manager was restricted to only procurement of funds & it include:

(1)Study & analysis of the institution and other sources of finance which can be used for raising funds
(2)Study and analysis of financial instrument which can be used for raising funds (3)Analysis of legal and accounting relationship between a firm and its sources of funds

Limitations of Traditional Approach

Limited Scope
It ignored working capital financing It ignored routine problems

Limited use only corporate enterprise.

Modern Approach
Modern approach enlarged the scope of financial management & it covers: (1)What is the total volume of funds an enterprise should commit? (2)What specific assets should an enterprise acquire? (3)In what form should the firm hold its assets? (4)What should be the composition of liabilities?

Modern Approach encompasses three major decisions of financial management: (1) Investment decisions (2) Financing decisions (3) Dividend Policy decisions

Functions of Finance Manager

(a) Formulation of objectives (b) Forecasting and estimating capital requirement (c) Designing the capital structure (d) Determining the suitable source of finance

(e) Procurement of funds

(f) Investment of funds (g) Dispersal of profits (h) Maintaining the proper liquidity (i) Maintaining relations with outside agencies (j) Evaluating financial performance (k) Keeping touch with stock exchange quotations and behavior of share price

Tools & Techniques of Financial Management

Capital budgeting techniques Cost of capital Leverage Cash Management

Receivables Management
Inventory Management

FINANCIAL SYSTEM
A set of complex and closely connected institutions,

agents, practices, markets, transactions, claims, and liabilities in the economy. It is a market for creation and exchange of financial assets and services. Indian financial system consists of financial markets, financial instruments ,financial services , financial intermediaries and the regulatory framework.

Functions of the financial system

Facilitates the pooling of funds and channelizing them

into productive avenues. It provides with a huge information base . It provides a platform for transfer of resources, both temporary and permanent. It provides a payment mechanism for exchange of goods and services. It ensures smooth functioning of all financial markets. It helps individuals and corporates in managing and controlling risk.

Participants Of Financial system

1. FINANCIAL MARKETS :
Nature of Claim -Debt & Equity market Seasoning of Claim- Primary & Secondary markets

Maturity of Claim- Money & Capital Markets

Organizational structure OTC & Exchange Traded

Markets Timing of delivery- Spot & Derivatives Markets

2. FINANCIAL INTERMEDIARIES :
Banks Financial Institutions Insurance Companies NBFCs Housing Finance Cos., Hire Purchase &

leasing Finance Cos., Venture Capital Finance Cos. Financial Service Providers- Merchant Bankers, Credit Rating Agencies, Depositories, etc.

3. FINANCIAL INSTRUMENTS:
a) MONEY MARKET INSTRUMENTS Commercial Paper Certificates of Deposits Treasury Bills Call or Term Money

b) CAPITAL MARKET INSTRUMENTS Equity Shares Preference Shares Debentures Bonds

4.

REGULATORY INFRASTRUCTURE : RBI SEBI

OBJECTIVE OF FINANCE
Finance is referred to as "Funds" or "Capital", when referring to

the financial needs of a corporate body. To ascertain whether a company is efficient in financial management, it has to have an overall goal. Wealth maximization of Shareholders talks about the value of the company generally expressed in terms of the value of the stock. Profit Maximization refers to how much rupee profit the company makes. These are two most common goals that corporate aim at. Although Profit maximization was the traditional concept, all firms now look at maximizing wealth for their shareholders

Profit Maximization
This implies that the finance manager has to make his decisions in

manner so that the profits of the concern are maximized. The guiding principle of profit maximization objective is to select assets, projects and decisions which are profitable and reject those which are not. For maximizing the profit, either production is to be maximized from limited resources or the costs should be minimized for a particular level of production volume. The Profit maximization objective is justified on the following grounds: a) Maximization of Social Benefit. b) Efficient Allocation and Uses of Resources. c) Measurement of Success of Decisions. d) Source of Incentive.

Profit Maximization
The process by which a firm determines the price and output levels that give the maximum profits. This goal , however , is not as all inclusive as the Wealth maximization as it suffers from the following limitations: Concept of Profit ambiguous- Profit could mean PAT, PBT, EBIT , etc. Profit Maximization objective Ignores timing of benefit (Time value of money) it has a short-term focus it ignores the timing of earnings.

Wealth Maximization
Wealth maximization means maximizing the wealth of the shareholders in terms of market value of the share and value of the firm. This involves increasing the Earning per share of the shareholders. Wealth maximization is regarded as operationally and managerially the better objective because:
(1) (2) (3)

Time value of money The risk or uncertainty of future earning Effect of dividend policy on the market price of the share

Steps for achieving the objective of wealth maximization

In short the objectives of financial management are such that they should be beneficial to owners, management, employees & customers. These objectives can be accomplished only by maximizing the value of the firm through the following ways: (1) Increase in profits (2) Reduction in cost (3) Sources of funds (4) Minimize risk (5) Long run value (6) Good track record of dividend payment

Wealth Maximization is superior criteria than profit maximization

Profit Maximization Vs Wealth Maximization wealth maximization is superior criteria than profit maximization
Profit Maximization It does not specify the time of expected returns It does not take into consideration the uncertainty of future earning It does not consider the effect of dividend policy on market price of shares It ignores the interest of outsiders It does not differentiate between the short term and long term profits Wealth Maximization It takes into account time value of money It takes into account the risk factor It takes into account

It considers the interests of outsiders It consider the fact

Financial management and other areas of Management

1. 2. 3. 4. 5.

Financial management and marketing management Financial management and personnel management Financial management and production management Financial management and cost management Financial management and financial Accounting.

Risk & Return Analysis

Higher the risk, higher the gain
1.

RETURN -

Return means the benefits which accrued on the investment made by the firm. There are different approaches to measure the return namely:
a) b) c) d)

Profit approach Income approach Cash flow approach Ratios approach

2. Risk Risk may be defined as the variation of actual outcome from the expected outcome Risk = Actual Return Expected Return

Types of Risk: (1) Systematic Risk: also called non diversifiable and uncontrollable risk. It Includes : (a) market risk (b) interest rate risk (c) purchasing power risk

2. Unsystematic Risk : also called diversifiable and controllable risk which effects a particular firm or business. It includes: (1) Business Risk (2) Financial Risk

Relationship between Risk and Return

Return is directly proportional to the amount of the risk taken by the firm. Higher the risk, larger the return of the firm. The relationship between the return and the risk can be explained with the help of following equation: Rate of return= risk free return+ premium for risk taking

Time value of Money

Time value of money means that worth of a rupee received today is different from the worth of a rupee to be received in future. Money has a time value on account of the following reasons: An investor can invest a rupee received today for a greater value to be received tomorrow or after a certain period Generally individuals prefer current consumption The money received today should have greater purchasing power than the same to be received in future during boom or inflation

Time preference of money

Reasons attributed to the individuals time preference for money : 1. Risk : there is uncertainty about the receipt of money in future. 2. Preference for present consumption. 3. Investment Opportunities.

Importance of time value of money

The concept of time value of money helps in arriving at the comparable values of the different rupee amount arising at different point of time into equivalent values of a particular point of time. The cash flows arising at different periods of time can be made comparable by using any one of the following two ways:
(1) By compounding the present money to a future date i.e. by finding out the value of the present money. (2) By discounting the future money to present date i.e. by finding out present value (pv)of future money