MBA-CG-203 FINANCIAL MANAGEMENT

Objective:

The objective of this course is to acquaint the students with the broad framework of
financial decision making. It is intended to develop skills in using the techniques of
financial analysis of business problems , with a view to familiarize students with
decision making process of corporate finance managers.

COURSE CONTENT

Unit - 1 - Financial Management - Introduction (8 Sessions)

Meaning , Scope, Objectives, Finance-Interface with others areas, Role of Finance

Manager in changing environment, Time value of Money-concept and meaning , Future
value and present value of the single cash flow, multiple flows and annuity,

Unit 2 - Capital Budgeting (8 Sessions)

Investment decision - long term and short term, capital budgeting - meaning, process,
estimating cash flows, methods of capital budgeting evaluation, cost of capital - concept
and measurement, ranking of projects, conflicts of ranking, resolving conflict in
ranking.

Unit 3 - Working Capital Management (8 Sessions)

Short term investment decision or working capital management - concept, components,

Estimating working capital requirement, and cash cost of working capital, management
of cash and marketable securities - introduction, Cash Budget, Baumol's Model, Miller
and Orr's Cash Management Model, Management of Account Receivables - Terms of
Credit, Inventory management - introduction, ABC analysis, EOQ Model.

Unit 4 - Financing Decision (8 Sessions)

Leverage- Operating leverage, financial leverage, total leverage, Capital structure

Decision- Theories of capital structure - Net Income approach, Net operating Income
approach, traditional approach, Modigliani and Miller's proposition I and II,MM with
taxes, Tradeoff Theory, Pecking order theory, EBIT-EPS analysis, factors influencing
capital structure.

Unit -5 Dividend Decision (8 Sessions)

Dividends- introduction, meaning, forms, why companies pay dividends?, dividend

policy- meaning, theories determining dividend policy- Walter's Model, Gordon's
model, Modigliani and Miller's model, legal and procedural aspects of paying dividends
in India, factors determining dividend policy.

PEDAGOGY:

The teaching methodology used in this course will be a judicious mix of lectures,
numerical problems, case analysis and discussion, assignments, quizzes, project work
and presentations.

Suggested Readings

1. Damodaran, Aswath: Corporate Financial- theory 7 Practice 1997, John Wiley &
Sons.
2. Dr. Prasana Chandra: Financial Management- Theory and Practice, Fourth Edition
1998, Tata McGraw Hill.
3. MY Khan and Jain: Financial Management, 6th edn, 2011, Tata Mc Graw Hill
Education.
4. IM Pandey:Financial Management, 11th edn 2015, Vikas Publishing House.
5. Brealey, Richard A. Myers, & Stewart C. Principles of Corporate Finance,
1996(Fourth Edition), Tata McGraw Hill.
6. Hampton, John J. Financial Decision Makin, Concepts, Problems & Cases,
1996(Fourth Edition), Prentice Hall of India.
7. Clark, John, Hindland, Thomas J. & Pritchard, Robert E: Capital Budgeting –
Planning and control of capital Expenditure. 1989, Prentice Hall.
8. Hill, Ned C. &Sartoris William L., Short Term financial Management- Text and
Cases, 1995(Third edition), Prentice Hall.
UNIT-I

Meaning of Financial Management

Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.

Finance is an essential and indispensable part of any organization. It is difficult for

organizations, whether profit-making or otherwise, to sustain themselves for long without
proper finances. Not just that, the efficient management of these financial resources is essential
to be sustainable and viable in the long-run.

Financial management helps organizations to do so. Financial management refers to the

effective and efficient planning, organizing, directing and controlling the financial activities and
processes of an organization. This includes but is not limited to fund procurement, allocation of
financial resources, utilization of funds, etc.

Scope/Elements

1. Investment decisions includes investment in fixed assets (called as capital budgeting).

Investment in current assets are also a part of investment decisions called as working
capital decisions.
2. Financial decisions - They relate to the raising of finance from various resources which
will depend upon decision on type of source, period of financing, cost of financing and
the returns thereby.
3. Dividend decision - The finance manager has to take decision with regards to the net
profit distribution. Net profits are generally divided into two:
a. Dividend for shareholders- Dividend and the rate of it has to be decided.
b. Retained profits- Amount of retained profits has to be finalized which will
depend upon expansion and diversification plans of the enterprise.

Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and control of
financial resources of a concern. The objectives can be-

1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders which will depend upon the earning
capacity, market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be
utilized in maximum possible way at least cost.
4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that
adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be sound and fair composition of capital
so that a balance is maintained between debt and equity capital.

Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to make estimation with

regards to capital requirements of the company. This will depend upon expected costs
 and profits and future programmes and policies of a concern. Estimations have to be
made in an adequate manner which increases earning capacity of enterprise.
2. Determination of capital composition: Once the estimation have been made, the
capital structure have to be decided. This involves short- term and long- term debt
equity analysis. This will depend upon the proportion of equity capital a company is
possessing and additional funds which have to be raised from outside parties.
3. Choice of sources of funds: For additional funds to be procured, a company has many
choices like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source and period
of financing.

4. Investment of funds: The finance manager has to decide to allocate funds into
profitable ventures so that there is safety on investment and regular returns is possible.
5. Disposal of surplus: The net profits decision have to be made by the finance manager.
This can be done in two ways:
a. Dividend declaration - It includes identifying the rate of dividends and other
benefits like bonus.
b. Retained profits - The volume has to be decided which will depend upon
expansional, innovational, diversification plans of the company.
6. Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and salaries,
payment of electricity and water bills, payment to creditors, meeting current liabilities,
maintainance of enough stock, purchase of raw materials, etc.
7. Financial controls: The finance manager has not only to plan, procure and utilize the
funds but he also has to exercise control over finances. This can be done through many
techniques like ratio analysis, financial forecasting, cost and profit control, etc.

Finance and Other Related Disciplines

As you pursue your study of financial management, you should keep in mind that financial
management is not a totally independent area in business administration. Instead, it draws
heavily on related disciplines and fields of study. The most important of these
are accounting and economics; in the latter discipline,
both macroeconomics and microeconomics are significant. Marketing, production, human
resources management, and the study of quantitative methods also have an impact on the
financial management field. Each of these is discussed here.

Accounting

Financial managers play the game of managing a firm’s financial and real assets and securing
the funding needed to support these assets.Accountants are the game’s scorekeepers. Financial
managers often turn to accounting data to assist them in making decisions. Generally a
company’s accountants are responsible for developing financial reports and measures that
assist its managers in assessing the past performance and future direction of the firm and in
meeting certain legal obligations, such as the payment of taxes. The accountant’s role includes
the entrepreneurial ISSUES

Shareholder Wealth Maximization

Entrepreneurial finance deals with the financial issues facing small businesses an important
sector of the U.S. economy. Small business firms may be organized as sole proprietorships,
partnerships, or corporations. According to criteria used by the Small Business Administration,
over 95 percent of all business firms are considered small.

These firms account for the majority of private sector employment and nearly all of the recent
net growth in new jobs. It is difficult to arrive at a precise definition of a small, or
entrepreneurial, business; however, the characteristics of small business firms can be identified.
In general, small businesses are not the dominant firm in the industries in which they compete,
and they tend to grow more rapidly than larger firms. Small firms have limited access to the
financial markets, and they often do not have the depth of specialized managerial resources
available to larger firms. Small firms also have a high failure rate.

In our discussion of the goals of the firm, we concluded that the predominant goal of financial
managers is to maximize shareholder wealth, as measured by the price of the firm’s stock.
Many entrepreneurial corporations are closely held, and their stock trades infrequently, if ever.
Other entrepreneurial firms are organized as sole proprietorships or partnerships. In these cases,
there is no readily accessible external measure of performance. Consequently, these firms often
rely more heavily on accounting based measures of performance to track their progress.

Accounting based measures of performance are discussed in Inspite of the lack of an objective,
readily available measure of performance, the fundamental decisions made by entrepreneurs
are unaltered.That is, the firm should invest resources in projects expected to earn a rate of
return at least equal to the required return on those projects, considering the project’s risk.
However, because many entrepreneurs are poorly diversified with respect to their personal
wealth (that is, they have a large proportion of their personal wealth tied up in the firm), these
owners are often more concerned about avoiding risks that could lead to financial ruin than are
managers of public corporations.

As discussed earlier, in the large modern corporation, there is a concern that a firm’s managers
may not always act in the interests of the owners (the agency problem). This problem is less
severe in many entrepreneurial businesses because managers and owners are one and the same.
An entrepreneur who consumes “excessive” perks is merely reducing his or her ability to
withdraw profits from the firm. But to the extent that the manager is the owner, there is no
owner manager agency problem. Of course, the potential for agency related conflicts between
entrepreneurs and lenders still exists and may be greater in the closely held firm. As a
consequence, many small firms find it difficult to acquire capital from lenders without also
giving the lender an option on a part of the ownership in the firm or having the entrepreneur
personally guarantee the loan.
Throughout this book, we will identify situations where the entrepreneurial financial
management of small businesses poses special challenges. In general, we find that small firms
often lack the depth of managerial talent needed to apply sophisticated financial planning
techniques. Also, because significant economies of scale are often associated with using
sophisticated financial management techniques, these techniques are frequently not justified
on a cost benefit analysis basis in many entrepreneurial companies.

Development of financial statements, such as the balance sheet, the income statement, and
the statement of cash flows.

Relationship between Financial Management and Other Disciplines

Financial managers are primarily concerned with a firm’s cash flows, because they often
determine the feasibility of certain investment and financing decisions. The financial manager
refers to accounting data when making future resource allocation decisions concerning long -
term investments, when managing current investments in working capital, and when making a
number of other financial decisions (for example, determining the most appropriate capital
structure and identifying the best and most timely sources of funds needed to support the firm’s
investment programs).

In many small and medium-sized firms, the accounting function and the financial management
function may be handled by the same person or group of persons. In such cases, the distinctions
just identified may become blurred.

Economics

There are two areas of economics with which the financial manager must be familiar: micro-
economics and macroeconomics.Microeconomics deals with the economic decisions of
individuals, households, and firms, whereas macroeconomics looks at the economy as a whole.

The typical firm is heavily influenced by the overall performance of the economy and is
dependent upon the money and capital markets for investment funds. Thus, financial managers
should recognize and understand how monetary policies affect the cost of funds and the
availability of credit. Financial managers should also be versed in fiscal policy and how it
affects the economy. What the economy can be expected to do in the future is a crucial factor
in generating sales forecasts as well as other types of forecasts.

The financial manager uses microeconomics when developing decision models that are likely
to lead to the most efficient and successful modes of operation within the firm. Specifically,
financial managers use the microeconomic concept of setting marginal cost equal to marginal
revenue when making long-term investment decisions (capital budgeting) and when managing
cash, inventories, and accounts receivable (working capital management).

Marketing, Production, Quantitative Methods, and Human Resources Management

We depicts the relationship between financial management and its primary supportive
disciplines.Marketing, production, quantitative methods, and human resources management
are indirectly related to the key day-to-day decisions made by financial managers. For example,
financial managers should consider the impact of new product development and promotion
plans made in the marketing area because these plans will require capital outlays and have an
impact on the firm’s projected cash flows.

Similarly, changes in the production process may necessitate capital expenditures, which the
firm’s financial managers must evaluate and then finance. The tools of analysis developed in
the quantitative methods area are frequently helpful in analyzing complex financial
management problems. Compensation policies may impact the extent of agency problems in a
firm.

Major roles of financial manager

Financial managers perform tasks that are specific to their organization. For example:
Healthcare financial managers must be aware of issues regarding healthcare finances, and
similarly, government financial managers must be well versed in appropriations and budgeting
processes. Above all, they must know the tax laws and regulations like the back of their hand!

Financial decisions and controls:

Financial management and financial managers play a crucial role in making financial decisions
and exercising control over finances in the organization. They make use of techniques like ratio
analysis, financial forecasting, profit and loss analysis, etc.

Financial Planning:
The finance managers are responsible for the planning of financial activities and resources in
the organization. To this end, they use available data to understand the needs and priorities of
the organization as well as the overall economic situation and make plans and budgets for the
same.

Capital Management:
It is the responsibility of financial management to estimate the capital requirements of the
organization from time to time, determines the capital structure and composition and makes the
choice of source of funding for the capital needs.

Allocation and Utilization of financial resources:

Financial management ensures that all financial resources of the organizations are used and
invested effectively and efficiently so that the organization is profitable, sustainable and viable
in the long-run.

Cash Flow Management:

It is extremely important for organizations to have sufficient working capital and cash flow to
meet their operational expenses and emergencies. Financial management tracks account payable
and receivable to ensure there is sufficient cash flow available at all times.

Disposal of Surplus:
The decisions on how the surplus or profits of the organizations is utilized is taken by the
financial managers of the organizations. They decide if dividends should be distributed and how
much as well as the proportion of profits that must be retained and ploughed back into the
business.

Financial Reporting:
Financial management maintains all necessary reports related to the finance of the organization
and uses this as the database for forecasting and planning financial activities.

Risk Management:
Sound financial management prepares the organization to forecast risks, put in place mitigation
plans as well as to meet unforeseen risks and emergencies effectively.

Enrol yourself in a short term course in finance for working professionals and equip yourself
with the skills required to efficiently manage the finances of your organization.

A financial management online certification is a prerequisite for most jobs in the financial
industry, but what if you don’t possess one and want to work in this domain? Whilst it is more
grueling for someone with a non-finance degree to secure a job in finance, there is still hope.

Types of Financial Managers:

Controllers:
Controllers facilitate the preparation of financial statements that summarize the organization’s
financial position, be it making financial reports, analyzing income and expenses, structuring
the balance sheet etc.

Credit Managers:
Somebody needs to oversee the organization’s credit business, and this comes under the
responsibility of a credit manager. Credit managers monitor the collection of due accounts,
foresee credit ceilings, and set the credit-rating criteria etc.

Insurance Managers:
Insurance managers oversee losses and shortcomings of the organization and how best the losses
can be reimbursed through insurance policies. Their role is most important during times of risks,
or when costs are imposed by a lawsuit against a company.

Treasurers / Finance Officers:

Treasurers, also known as finance officers oversee fund investment of the organization and
make sure the budget meets the organizational goals. They further develop plans to raise capital.

Cash Managers:
Cash managers abide by the annual budget that is initially made, and keep track of the cash flow,
in and out of the organization’s business and investments.

Risk Managers:
Risk managers make sure that the company is never exposed to financial uncertainty. On the off
chance that the organization faces risks or financial loss, it is the risk manager’s responsibility
to develop strategies to control the financial risk.

Every employer wants smart, committed, and highly motivated employees who can do their jobs
well. A financial management online certification imparts skills such as financial modelling and
analysis, but may not do much to provide other skills required for success in any profession,
such as communication, time management, and problem-solving.