NOTES FINANCIAL

MANAGEMENT
Financial Management (Selection of Investment Proposal)
2. Working Capital Decision
-AKA, as Managerial finance, Corporate (Determination of Working Capital)
Finance or Business finance. 3. Financing Decision
-Is concerned with the acquisition, financing, (Raising of funds to finance the assets)
and management of assets with some overall 4. Dividend Decision
goal in mind. (Allocation of profit for dividend)
- means planning, organizing, directing, and
controlling the financial activities such as Objectives of financial Management
procurement and utilization of funds of the
enterprise. 1.To ensure regular and adequate supply of
- Is the ways and means of managing money, funds to the concern.
with aim of achieving some particular goals or 2. To ensure adequate return to the shareholders.
objectives. 3. To ensure optimum funds utilization.
-(HOWARD & UPTON) FM is the application 4. To ensure safety on investment.
of planning and control function of the finance 5. To plan a sound capital structure.
function.
FUNCTIONS OF FINANCIAL
Financial Management includes: MANAGEMENT

1.Procurement- raise funds and create value. 1. Estimation of Capital Requirement

2.Allocation- funds allocated to investments to - Make estimation to capital requirement
maximize profits. this depend upon expected cost and
3.Monitoring- closely monitored to determine if profits and future programs.
being utilized effectively.
4. Planning- raise and utilize firms fund for 2. Determination of capital composition
maximum profitability. - Capital structure have to be decided,
involving long and short term debt
NATURE AND SCOPE OF FINMAN equity analysis.

1. Maximization of Profits 3. Choice of sources of funds

- Profit earning is the main aim of every - Issuing of shares and debentures, loans
economic activity. from fin institutions, Public deposits.
- maximizing the income of the firm. - Choice of factor will depend on relative
- total revenue is greater than the total cost. merits and demerits of each source and
period of financing.
2. Maximization of Return
- provides a basic guideline by which
financial decision should be evaluated. 4. Investments of funds
- Allocate fund into profitable ventures so
3. Maximization of Wealth that is safety on investment and regular
- (Solomon Ezra of Stanford University) returns is possible.
Ultimate goal of financial management should
be maximization of the owners wealth. 5. Disposal of surplus
- the value of corporate wealth may be - Dividend Declaration- it includes
interpreted in terms of the value of the company identifying the rate of dividend and
total assets. other benefits like bonus.
- Retained Profits- the volume has to be
FINANCIAL DECISION PROCESS decided which will depend upon the
expansional, innovational,
1.Investment Decision diversification plans of the company.

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NOTES FINANCIAL
MANAGEMENT
4. Mergers and Acquisitions- changes in
6. Management of Cash financial markets at the height of Asian
- Finance Managers has to make decisions Integration.
with regards to cash management for 5. Socio Economic Impact – increases in
immediate expenses like wages and job oppo. Elevates the standard of
salaries. living.

7. Financial control AGENCY THEORY

- Controls over Finances, like doing ratio States owner can assure themselves that the
analysis, financial forecasting, cost and agents will make optimal decisions only if
profit control. appropriate incentives are given and only if
the agents are monitored .
3 MAJOR TYPES OF DECISION OF
FINANCE MANAGER Guiding Principles for FM Systems

1. Investment Decision 1. Consistency – financial policies and

2. Financing Decision systems must remain consistent over
3. Dividend Decision time
2. Accountability – able to demonstrate
*All these decision aim to maximize the and explain how you have used your
shareholders wealth through maximization of resources
firm’s wealth 3. Transparency - making information
available to all stakeholders
IMPORTANCE OF FM 4. Integrity- must be open and with
honesty and propriety.
1. Broad Applicability 5. Financial Stewardship – must take good
2. Reduction of Chances of Failure care of the financial resources.
3. Measurement of return on Investment
INVESTMENT DECISION
*FM applies to both profit- oriented and non-
profit oriented organizations. -Most important decision (among the three)
when it comes to value creation.
-Determines the total amount of asset to be held
MAIN FUNCTIONS OF A FINANCIAL by the firm.
MANAGER\ -Financial Managers determine the size of the
firm and the composition of its assets.
1. Raising Funds - Left side of basic accounting equation.
2. Allocating Funds -“how much the firm’s total assets be devoted to
3. Profit Planning cash or to inventory or to receivable.
4. Understanding Capital Markets -Assets that can no longer be economically
justified may need to be reduced.
Challenges and Issues in Business Finance
-Since the future is uncertain therefore there are
1. Foreign Exchange Risk (Forex) – the difficulties in calculation of expected return.
business recession in Europe affecting Along with uncertainty comes the risk factor
the world market. which must be taken into consideration.
2. International and Local Market- the
effects to the merchants of the free -This risk factor plays a very significant role in
enterprise system. calculating the expected return of the
3. Rapid Technological Changes- strengths prospective investment.
of business on the E-Commerce law:

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NOTES FINANCIAL
MANAGEMENT
-Therefore, while considering investment -Right side of the basic accounting equation
proposal, it is important to take into -“If I were to maintain this size of assets or
consideration both expected return and the risk acquire asset, how should I finance this?”
involved. -Debt and equity financing (mix of debt and
equity chosen to finance investments)
-Investment decision not only involves -How best to acquire the needed funds
allocating capital to long term assets but also -Short term? Long term? What is the cost of
involves decisions of using funds which are financing?
obtained by selling those assets which become
less profitable and less productive. -Financial decision is yet another important
function which a financial manger must
-It is a wise decision to decompose depreciated perform. It is important to make wise decisions
assets which are not adding value and utilize about when, where and how a business should
those funds in securing other beneficial assets. acquire funds. Funds can be acquired through
An opportunity cost of capital needs to be many ways and channels.
calculating while dissolving such assets. The
correct cut off rate is calculated by using this -Broadly speaking a correct ratio of an equity
opportunity cost of the required rate of return and debt has to be maintained. This mix of
(RRR). equity capital and debt is known as a firm’s
capital structure.
-Investment decision refers to financial resource
allocation. Investors opt for the most suitable -A firm tends to benefit most when the market
assets or investment opportunities based on risk value of a company’s share maximizes this not
profiles, investment objectives, and return only is a sign of growth for the firm but also
expectations. maximizes shareholders wealth. On the other
hand, the use of debt affects the risk and return
-the top-level management undertakes capital of a shareholder. It is more risky though it may
budgeting and fund allocation into long-term increase the return on equity funds.
assets. Managers overseeing business operations
opt for short-term investments to ensure DIVIDEND DECISION
liquidity and working capital. Investment
decisions are also influenced by the frequency of -Earning profit or a positive return is a common
returns, associated risks, maturity periods, tax aim of all the businesses. But the key function a
benefits, volatility, and inflation rates. financial manger performs in case of
profitability is to decide whether to distribute all
Investing decision of a Finance Managers the profits to the shareholder or retain all the
profits or distribute part of the profits to the
1. Evaluation and Selection of capital shareholder and retain the other half in the
investment proposal business.
2. Determination of the total amount of
funds that a firm can commit for -It’s the financial manager’s responsibility to
investment. decide a optimum dividend policy which
3. Prioritization of Investment maximizes the market value of the firm. Hence
Alternatives an optimum dividend payout ratio is calculated.
4. Funds allocation and its rationing It is a common practice to pay regular dividends
5. Determination of the levels of in case of profitability Another way is to issue
investment in working capital. bonus shares to existing shareholders.

FINANCING DECISION LIQUIDITY DECISION

-Second major decision

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NOTES FINANCIAL
MANAGEMENT
-It is very important to maintain a liquidity understanding of capital market is an important
position of a firm to avoid insolvency. Firm’s function of a financial manager. Its on the
profitability, liquidity and risk all are associated discretion of a financial manager as to how to
with the investment in current assets. distribute the profits.

-In order to maintain a tradeoff between

profitability and liquidity it is important to
invest sufficient funds in current assets. But
since current assets do not earn anything for
business therefore a proper calculation must be
done before investing in current assets.

-Current assets should properly be valued and

disposed of from time to time once they become
non profitable. Currents assets must be used in
times of liquidity problems and times of
insolvency.

MAIN FUNCTION OF A FINANCIAL

MANAGER

RAISING FUNDS

-In order to meet the obligation of the business it

is important to have enough cash and liquidity.
A firm can raise funds by the way of equity and
debt. It is the responsibility of a financial
manager to decide the ratio between debt and
equity.

ALLOCATION OF FUNDS

-In order to allocate funds in the best possible

manner the following point must be considered
✓ The size of the firm and its growth capability
✓ Status of assets whether they are long-term or
shortterm ✓ Mode by which the funds are raised

PROFIT PLANNING
-Profit earning is one of the prime functions of
any business organization. Profit earning is
important for survival and sustenance of any
organization. Profit planning refers to proper
usage of the profit generated by the firm.

UNDERSTANDING CAPITAL MARKETS

Shares of a company are traded on stock

exchange and there is a continuous sale and
purchase of securities. Hence a clear

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