CHAPTER I

INTRODUCTION TO FINANCIAL MANAGEMENT

Concept
Financial management is the combinations of two words financial and management. The term 'financial’
refers to finance or money management is concern with the management of money. Therefore, financial
management is the art and science of managing money within organization or corporations.
Financial management is the part of management which is concerned mainly with raising funds in the
most economic and suitable manner,- using these funds as profitably as possible, planning future
operations and controlling current performances and future developments through financial accounting
statistics and other means.

Function of financial management

Executive functions
Executive finance functions are those functions that require managerial skills in their planning, execution
and control. It is also known as managerial functions.
Estimating capital requirements: The Company must estimate its capital requirements (needs) very
carefully. This must be done at the promotion stage. The company must estimate its fixed capital needs
and working capital need. If not, the company will become over-capitalized or under-capitalized.
Financing decision: Financing Decision, also known as capital structure decision, is concerned with
determining the sources of funds and deciding upon the proportionate mix of funds from different
sources. It calls for raising funds from different sources maintaining an appropriate mix of capital. Under
the financing decisions, the financial manager should assess what amount of capital is needed and which
sources could be relied upon. The funds can be collected from various short-term and long- term sources.
However, the financing decision is generally concerned with determining the proportionate mix of long-
term sources of financing like common stock, preferred stock, debt etc.
Estimating cash flow: Cash flow refers to the cash which comes in and the cash which goes out of the
business. The cash comes in mostly from sales. The cash goes out for business expenses. So, the finance
manager must estimate the future sales of the business. This is called Sales forecasting. He also has to
estimate the future business expenses.
Investment Decisions: The investment decision, also known as capital budgeting decision, is the
managerial decision regarding investment in long-term investment proposals. It includes the decisions
concerned with the acquisition, modification, and replacement of long-term assets. The financial manager
should at first estimate the expected risk and return of the long-term investment and then should evaluate
the investment proposals in terms of both expected return and risk. The financial manager accepts the log-
term investment proposal only if the investment maximizes the shareholder's wealth. Shareholder wealth
is maximized only if the present value of benefits from the investment proposal exceeds the present value
of cost.
Negotiating for additional finance: The finance manager has to negotiate for additional finance. That is,
he has to speak to many bank managers. He has to persuade and convince them to give loans to his
company. There are two types of loans, viz., short-term loans and long-term loans. It is easy to get short-
term loans from banks. However, it is very difficult to get long-term loans.

Routine functions
Routine finance functions are those financial functions which generally do not require managerial
involvement to carry out. Routine finance functions are performed for the effective execution of
managerial finance functions. These functions are carried out by the people at lower levels. Routine
finance functions include the following tasks as follows:
Supervision of cash receipts and cash payment
Custody and safeguarding cash balances and valuable papers such as securities, insurance policies,
certificates of property, contract paper etc.
Taking care of mechanical details regarding all new outside financing employed by the firm.
Maintaining records of firm's activities which have financial implications
Timely reporting to facilitate financial manager

Goals of financial management

Profit Maximization
Profit maximization is offered as the proper objective of the firm. However, under this goal, a manager
could continue to show profits increases by merely issuing stock and using the proceeds to invest in short-
term, high liquid, low risk securities. The term profit maximization means maximizing the rupee income
of a firm by generating excess revenue over costs. The principal goal of the corporation is to maximize
profit.
Argument in favor of Profit Maximization
(i) Understandable: Objective or goal of profit maximization is simple and straight forward. It is easily
understandable.
(ii) Decision criterion: Every alternate is evaluated on the basis of maximizing profit and profit
maximizing alternate will be selected and allocation of resources will be made on the same basis.
(iii) Incentive to work: Profit is the better incentive to work.
(iv) Measurement of efficiency: Maximum profit indicates efficiency of management, thus, to fulfill or to
satisfy the different stakeholders profit is needed to fulfill the different stakeholder such as customers
employee, government, creditors, shareholders etc. it measures the efficiency.
(iv) Maximize social welfare: A profitable firm contributes to the society by providing better goods and
services, employment surplus generation and reinvestment for production etc.

Wealth Maximization
Wealth maximization means the goal of the firm should be to maximize the market value of its equity
shares which represents the value of the firm to its equity shareholders. In the present concept, value
maximization is almost universally accepted as appropriate operational decisional criteria for financial
management decision. Wealth maximization means to maximize the net present value of a firm. The net
present value is the difference between the present value of its benefit and the present value of its costs.

NPV-PV of benefit-NCO (Net cash outlay)

Wealth or Stock price maximization is considered superior goal to profit maximization goal. The
arguments in favor of wealth maximization over profit maximization are as follows:
(1) It is a clear goal: This goal is very clear and understandable. It helps to reduce conflict, confusions
and dispute among the stakeholders and firms (or corporations). It provides unambiguous measure of
what financial manager should seek to maximize stock in making investment and financing decisions on
behalf of its shareholders. But profit maximization doesn’t clearly specify short term profit or long term
profit or gross profit or net profit or EBIT.
(ii) It considers time value of money: Wealth maximization considers the time value of money concept. It
gives importance to the time value of money. It gives emphasis to the timing of cash flows for financing
decision to the financial manager. It can be more clearly by given examples.

Year 1 Year 2 Total

Project A 10000 20000 30000
Project B 20000 10000 30000

From the above example, if we pursue profit maximization goal we cannot decide which project should
reliable. But if we go through wealth maximization concept we definitely select project 'B'. Because it has
higher cash flows in year 1 of which we can reinvest difference amount in year '2' which increases our
total present value of project 'B' than of project 'A' so the wealth maximization goal considers the time
value of money.
(ii) It considers risk factors: The wealth maximization (concept) goal for financial management always
(considers) keeps in mind certainty. Variability of the cash flow stream for the particulars financing
decisions or investing decisions. This can be also crystal clear for given example.

Year 1 Year 2
Project A 50000 50000
Project B 0 100000

From above example, it is clear that the project 'A' is less risky than project 'B' because project it has no
fluctuation deviation, variation, gap in its cash flows. But in project 'B', there is a gap or variability in its
cash flows so it is risky. So, if we go through wealth maximization concept, we definitely choose the
project 'A' due to the risk factor in project 'B' but we can decide which project should be selected by the
concept of project maximization goal of business firm.

(iv) It is suitable in modern environment: It is ethnical, suitable, realistic concept in the modern business
environment. No one could raise finger against corporation or business organization, if it has objective of
wealth maximization.

Financial management principles in sports industry

It is important to understand the principles of financial management in order to help an individual and
organization track its money.
Organize your finances
Sport organization should track bank accounts, credit cards, brokerage accounts, car loans, mortgages,
and retirement accounts. Budgeting software can make provisions for total solutions to tracking all these
accounts.
Spend wisely
Sport organization with financial strength should not only consume the income that the business is
generating, but it should also invest in the opportunities that are most beneficial. Business should
reinvests its income, spend money on player based on performance and league standard, creation of value.
Good financial management practice looks out for opportunities, worthy and feasible investment
opportunities.
Take into consideration the time value of money
In this case, you have to take advantage of the time value of money. Your money should not be idle, it
should be actively involved in the running of the business as well as long-term investments. If you fail to
be aware of the time value of money, you will have a higher chance of losing financially. As you put your
money to work, you have to be conscious of this subject matter and the tendency of a reduction in value
due to inflation and other factors.
Coordinate with scanning and recruitment team
Sport organization should provide careful focus on scanning and recruitment of players. They should
observe transfer market, calculate value through performance and league coefficient. It helps to avoid
overrated and overpriced players.
Understand the concept of risk
It is critical to understand that the more risk you take, the better your returns on investment. We refer to
this as a risk-return-trade-off. Investments such as stock and bonds with a higher rate of return have a
higher risk with regard to losing the principal amount invested. On the other hand, investments such as
money market accounts and certificates of deposit with a lower rate of return equally have a lower risk of
losing the principal invested. Here, a finance manager is careful in dealing with risk and return which
form the core principles of financial management.
Diversification
It is important to find creative ways of income diversification. Everyone has a special skill that can be
converted into a money-making opportunity. However, one should not limit diversification to investments
alone as it is also applicable to borrowing. Investors must be extra careful as they form a portfolio from
the investment opportunities that are available. The aim of this diversification is to make the overall
monetary risk remain affordable.
Pay attention to taxes
It is necessary to manage your tax information such as analyzing taxable investments and making
provisions for organizing tools that help in smoothening tax filings. While investing, do not fail to
consider the related tax implications that accompany every investment you do.
Prepare for uncertainties
Generally, unforeseen circumstances like natural disasters, injury of marquee player, accidents etc. are
bound to happen. It is important to save sufficient funds and stock up on insurance. This planning
prevents any form of unexpected financial exposure from derailing your long-term financial goals and
financial security.
Forecast cash flows
The pattern of cash flows is an influencing factor of financial decisions. The supply of cash and all the
activities that take place in an organization are requirements for forecasting cash flows. It is also critical
to managing the cash on the basis of these requirements. When you hold the right amount of liquid cash,
it is an expression that you are utilizing financial management principles.
Wealth maximization
While managing your finances, it is crucial for you to pay so much attention to ways in which you can
maximize the wealth or value of your organization. If your company is wealthy, it will have greater
opportunities of investing in innovative product development. In turn, the company will experience a
smoother and steady growth.