MBAFM/BI/BE-6214

Financial Management
January-May: 2023

Dr. Shambhu Nath Singh

Associate Professor (Economics & Finance)
Department of Banking, Economics & Finance
Bundelkhand University, Jhansi
 Syllabus: Financial Management
 Unit I: Nature of Financial Management: Concepts and
Objectives of Financial Management; Approaches of
Financial Management.
 Unit II: Time Value of Money, Valuation of Securities, Risk
and Return, Beta Estimation, Cost of Capital.
 Unit III: Investment Analysis: Capital Budgeting Decisions,
Determining Cash Flow for Investment Analysis, Complex
Investment Decision and Risk Analysis in Capital Budgeting
 Unit IV: Capital Structure: Instruments of Long and short
term sources of funds, Capital Structure Theories, Leverages
Analysis, Dividend Theories and Policies
 Unit V: Working Capital Management Concepts and its
Types, Estimation of Working Capital, Determinants of
Working Capital, Credit Policy, Receivable Management,
Cash Management, Marketable Securities, Inventory
Management;
 Unit -1 Financial Management
Meaning, Nature and Scope of Financial
Management
Objective of Financial Management
Approaches of Financial Management
Investment Decision, Financing Decision
and Dividend decisions
Financial Goal- Profit versus Wealth
Maximization
 Finance
Money required for any activity is known as
finance. Every activity whether economic or non
economic requires money to run it.
The activity related to production, distribution,
exchange and consumption of goods and services is
known as economic activity. For example- a worker
works in a factory and gets the wages.
The human activities which are not performed for
expectation of money or money’s worth are called
non- economic activities. For example- a person
goes to temple, a boy help his friend in studies etc.
Finance is defined as the provision of money at the
time when it is required.
 Financial Management
Finance is required not only to start the
business but also to operate it, to expand or
modernise its operations and to secure stable
growth.
Thus financial management refers to that part
of management activity which is concerned
with the planning and controlling of firm’s
financial resources. It deals with finding out
various sources for raising funds for the firm.
The sources must be suitable and economical
for needs of the business.
 Nature of Financial Management
1. It is essential part of management. It is an
integral part of business decision making process.
2. It is a continuous process.
3. It is centralised nature of finance function i.e.
investment, financing and dividend decision.
4. It helps in the decision making of top
management.
5. It helps in measurement of performance of
business.
6. It has wide scope and all form of business
organisation; either big or small needs to manage
finance.
 Importance of Financial Management
1. Financial planning and successful promotion of
an enterprise
2. Acquisition of funds and when required at the
minimum possible cost
3. Proper use and allocation of funds
4. Taking the sound financial decisions
5. Improving the profitability through financial
controls
6. Increasing the wealth of the investors and the
nation; and
7. Promoting and mobilising individual and
corporate savings.
Approaches of Financial Management

The approaches of financial

management can be divided
into two categories-
1.The Traditional Approach
2.The Modern Approach
 The Traditional Approach
 The traditional approach was used in initial stages of its evolution
during 1920s and 1930s when the term corporate finance was used
to describe the financial management.
 According to this approach, the scope of finance function was only
the procurement of funds needed by a business. The traditional
approach has been discarded due to many limitations:
1. It considers only external decision making and ignores internal
decision making as to the proper utilisation of funds.
2. The focus of traditional approach was on procurement of long
term funds. Thus, it ignores the decisions of working capital
management.
3. The issue of allocation of funds, which is so important today, is
completely ignored.
4. It does not focus on day to day financial problems of an
organisation.
 The Modern Approach..
The modern approach covers the finance function
in broader sense.
It includes procurement of funds as well as their
effective utilisation.
The cost of raising funds and the returns from their
use should be compared.
The funds raised should be able to give more
returns than the cost involved in procuring them.
The modern approach considers the three basic
management decisions i.e. investment decisions,
financing decisions and dividend decisions within
the scope of finance function.
The Modern Approach...
The Modern Approach...
 Objective of Financial Management
The objective of financial management
may be-
1. To maximise profit
2. To maximise earning per share
3. To maximise market share
4. To maximise the current value of the
company’s stock
5. To minimise costs
 Scope of Financial Management
The main objective of financial management is to arrange
sufficient finances for meeting short term and long term
needs. These funds are procured at minimum costs so
that profitability of the business is maximised. With
these things in mind, a financial manager will have to
concentrate on the following areas of finance functions-
1. Estimating Financial Requirements
2. Deciding Capital Structure
3. Selecting a source of Finance
4. Selecting a Pattern of Investment
5. Proper Cash Management
6. Implementing Financial Controls
7. Proper use of Surpluses
 Financial Goal
Profit versus Wealth Maximization
The main objective of a business is to
maximise the owner’s economic
welfare. This objective can be
achieved by-
1. Profit Maximisation, and
2. Wealth Maximisation
 Profit Maximisation
 It is considered as the main objective of business. Though it is
the main objective but it has been criticised on many grounds.
 Sometimes, a firm pursing the objective of profit maximisation
starts exploiting workers and consumers. Hence it is unethical
and leads to a number of corrupt practices.
 It is argued that profit maximisation should be the objective in
the conditions of perfect market competition, but in today
scenario there is no perfect market competition.
 A company is financed by shareholders, creditors and financial
institutions and is controlled by professional managers.
 Workers, customers, government and society also concerned
with it. So, one has to reconcile the conflicting interests of all
these parties concerned with the firm.
 Thus, profit maximisation as an objective of financial
management has been considered inadequate.
 Wealth Maximisation
Wealth maximisation is the appropriate objective
of the firm.
Financial theory proved that wealth maximisation
is the single substitute of a stockholder’s utility.
 When the firm maximises the stockholder’s
wealth, the individual stockholder can use this
wealth to maximise his individual utility.
It means that by maximising stockholder’s wealth
the firm is operating towards maximising
stockholder’s utility.
A stockholder’s current wealth in the firm =number
of shares owned*current stock price per share.
 Profit versus Wealth Maximisation
Profit Maximisation versus Wealth Maximisation
S.No. Profit Maximisation Wealth Maximisation
1. It does not take into It takes into account the
account the time value time value of money.
of money.
2. It does not take into It takes into
consideration the consideration the risk
uncertainty of future factor.
earnings.
3. It does not cosider the It cosiders the effect of
effect of dividend dividend policy on
policy on market price market price of shares.
of shares.
4. It does not It considers the different
differentiate between strategies for long term
short term and long and short term profits.
term profits.
Functional Areas of Financial Management
The important functional areas of financial
management are as follows-
1. Determining Capital Needs
2. Selecting the Sources of Funds
3. Financial Analysis and Interpretation
4. Cost-Volume-Profit-Analysis
5. Capital Budgeting
6. Working Capital Management
7. Profit Planning and Control
8. Dividend Policy
 With the Best Compliments
Thanking to all…..
By

Dr. Shambhu Nath Singh

Associate Professor
(Former District Economic & Statistical Officer)
M. Sc. (Physics), MBA (Finance), MA (Economics)
JRF in Management, NET in Economics
Coordinator Ph. D. Coursework
Bundelkhand University, JHANSI
Mobile-09450075770; 08299233527 (WhatsApp)
Email-drsnsinghbujhansi@gmail.com
 Unit 1 is over.
Thank You so much....

Dr. Shambhu Nath Singh