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Finance Function

The finance function of management focuses on effectively managing capital funds to create shareholder value through investment, financing, and dividend decisions. Key concerns include returns, risk, liquidity, and the trade-off between insolvency and profitability. Financial management aims to maximize shareholder wealth and improve the market value of shares while considering the interests and influences of stakeholders.

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2 views

Finance Function

The finance function of management focuses on effectively managing capital funds to create shareholder value through investment, financing, and dividend decisions. Key concerns include returns, risk, liquidity, and the trade-off between insolvency and profitability. Financial management aims to maximize shareholder wealth and improve the market value of shares while considering the interests and influences of stakeholders.

Uploaded by

amitgupta6491
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Finance Function of

Management
Structure of Finance Function
Finance Function
Effective Management of money (capital funds) in a business

Goal of a business

Create value to shareholders


Business Finance is the
Two Basic Functions : Requires decision making about: activity concerned with
Analysis Investments planning, raising,
Decision Making controlling and
Financing administering the funds
Dividends

Market value of company stocks


Enhanced Dividends
Financial Management Decisions
• Investment decisions
– Where are we going to invest our money

• Funding Decisions
– How are we going to fund our investments

• Dividend decisions
– How much do we pay
Investment Decisions
• Capital Assets Asset: Anything tangible or
intangible that can be owned or
– Land, Buildings, Machineries etc. controlled to produce value

– Generate returns

Key concerns on capital asset investment decisions:

• Returns
• Risk
• Short term profitability (New technology, ERP etc.)
• Liquidity
Investment Decisions
• Working Capital:
– To make capital investments work
– Cash required to buy inventory, employ people, offer credit to customers
– Increase to avoid insolvency
– Minimize to increase profitability

Key concerns on capital asset investment decisions:


Trade off between Insolvency and Profitability

Working Capital = Current Assets - Current Liabilities


A measure of short term financial health
Investment Decisions
• Financial Assets

Key Concerns
Short Term
 Return
Long Term
 Risk
 Liquidity
1- Risk 1- Return
2- Liquidity 2- Risk
3. Return 3.Liquidity
Financing Decisions
• Fund Requirements
– How much funds are needed ?
• Investments/Disposals in/of Existing CA
• Change in WC
• Fund Raising (Sources ?)
– Internally Generated Funds
• Retained Earnings – the cash generated from operations
• Adjusted with new loans, redemptions, shares Issued
– Externally Sourced Funds
• Debt or Equity ? (Going for bank loans or issuing more shares ?)
• Short term debt or long term debt ?
Dividend Decisions
• How much of the profit share should be distributed
among the shareholders ?
• Key Issues
– Profitability
– Liquidity
– Growth
– Investor’s Expectations
– Legal Restrictions
Aim of Financial Management
PROFIT WEALTH
MAXIMIZATION MAXIMIZATION
• Primary aim:
Concept The main objective of The ultimate goal
– Maximize the a concern is to earn a of the concern is
shareholder’s wealth larger amount of to improve the
profit. market value of its
• How ? shares.
– Maximize the profit Emphasizes on Achieving short term Achieving long
• PBIT objectives. term objectives.
– Maximize Sales Consideration No Yes
of Risks and
– Satisfice Uncertainty
(satisfactory profit with Advantage Acts as a yardstick for Gaining a large
minimum risk) computing the market share.
operational efficiency
of the entity.

Recognition of No Yes
Time Pattern
of Returns
Stakeholders

Interested in ……….Business

Affected by ………….Business

Influence on ………..Business

• Play important role an in the success of a business.


• Distribute the Available Return – in proportion to the
influence stakeholders have in the business

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