FINANCIAL MANAGEMENT

HENRY FORD Money is an arm or a leg. You either use it or lose it.

ARTHA SACHIVAH- Finance reigns supreme.

Finance

Financial Management

TRADITIONAL VIEW
MODERN VIEW

TRADITIONAL
EXTERNAL RAISING OF FUNDS EPISODIC LONG TERM ONLY CORP RECURRING

MODERN
FREQUENCY NATURE

EXECUTIVE NON-REC INCIDENTAL

TRADITIONAL MODERN- ON THE BASIS OF FREQUENCY. NON RECURRING Episodic Events

1. RECURRING a. Planning b. Raising c. Allocation

d. Appropriation
e. Control


1. 2.

3.
4.

Planning Financial planning Quantum of funds Duration Make/ composition. Synchronisation of inflows and outflows Profitability/ liquidity/ risk. Capital structure- Mgt philosophy. Budgetory control.

 1. 2. 3.

RAISING OF FUNDS Sources- debt ,equity, IPO, Pvt placement, Banks. Costs involved Formalities

1. 2.

3.

ALLOCATION OF FUNDS Importance Profitability Competing uses.

 1. 2.

3.
4. 5.

APPROPRIATION OF INCOME Repayment of debt Dividend Retention Partial retention Investment in projects. CONTROLLING Compare actual with planned Analyse credit policy

1. 2.

EXECUTIVE FINANCE FUNCTIONS.

Supervision over the receipt and payment of cash. Safeguarding of cash balance. Custody and safeguarding of securities, insurance policies and other valuable documents. Record keeping Reporting.

PROFIT MAXIMISATION
Vague Risk factor Time value of money Ignores dividend policy.

1. 2. 3. 4.

WEALTH MAXIMISATION/VALUE MAXIMISATION

Maximization of net present value.

Present value of a future cash flow (inflow or outflow) is the amount of current cash that is of equivalent value to the decision-maker. Discounting is the process of determining present value of a series of future cash flows. The interest rate used for discounting cash flows is also called the discount rate.

The time preference for money is generally expressed by an interest rate. This rate will be positive even in the absence of any risk. It may be therefore called the risk-free rate. An investor requires compensation for assuming risk, which is called risk premium. The investors required rate of return is: Risk-free rate + Risk premium.

CFt NPV (1 k )t t 1

-Co

Benefits are measured in terms of cash flows. Maximise EPS. Maximize the market value of the firms shares.

A project requires an investment of ` 35000 and the benefits expected over the next 5 years are 10,000, 8000 15000 and 5000 at the end of each year respectively. Discount rate is 10%.

FINANCING DECISIONS
INVESTMENT DECISIONS DIVIDEND DECISIONS.