Introduction To FM

Financial Management
(FM)
B. Com III H Semester V
UNIT I
INTRODUCTION TO
FINANCIAL
MANAGEMENT
Introduction
Meaning of Finance
• 1finances plural : money or other liquid resources of a government, business,

group, or individual - https://www.merriam-webster.com/dictionary/finance
• 2the science or study of the management of funds.
Finance Vs Funds
Finance Includes
• Procuring
• Investing
• Saving
• Lending
• Budgeting
• Forecasting
BUDGETING VS FORECASTING
Budget - A plan for where you want to go

Forecasting - Pointing out where the Business
may go
Types of Finance
• Personal Finance
• “Corporate Finance”
• Public Finance
Difference between Accounting & Finance
S. No Accounting Finance
1. More Specific General strategy

2. Executory in nature Involves a lot of Planning and Analysis
3. Backward Looking Forward Looking
4. Recording, Maintaining, Planning, Investing & “Wealth creation”
summarising, classifying &
Reporting
5. Thought process is “Rule Thought process is “Analysis Based”
Based”
Financial System
• The Financial System intermediates the flow of funds
• Financial System mostly refers to “Financial Dualism”
Formal Structure
Financial Institution Financial Markets Financial Services

Evolution of Corporate Finance
Tra
E Tr
D Mo
A
diti der
pi
ona an
ay na
n
so
l sit
to ly
Ph
Pha ase
di
se io
D tic
Lo
c
For na
ay al
gic
mat al
E
ion lA A
Em
ve
Me P
na pp
pha
rge
nt
r
ha
ly ro
sis
We
s
Liq se
si ac
alt
uid
ati
s hh
Mg
on
t
Approaches to Financial Management
Traditional •Procurement of “LONG TERM” funds needed by Business

•Allocation of funds was “OUT OF PURVIEW”
Approach
•It didn’t even recognise financial problems as important
Modern •Includes both raising & utilisation of funds efficiently

•Logical focus on cost of raising finance
•Returns > Cost
Approach •Financial control

AIM of Finance Function
• Acquiring sufficient Funds

• Appropriate utilisation of Funds
• Focus on Improving profitability
• Maximise Firm’s value
Scope of Financial Management
7. Proper Use of Surpluses
Objectives/Goals of Financial Management
Profit •Revenue > Cost

•Protects against Risk
Maximisation
Wealth •Maximise shareholder’s wealth
•It adds value to both shares & Debentures
Maximisation
Wealth Maximization
“Wealth is generated by any financial

decision if the present value of future cash
flows relevant to that decision is greater
than the costs incurred to undertake that
activity"
WEALTH MANAGEMENT FOCUS
Any shareholder would like

• To get good return on his investment
• Safety of his capital
• Better market value of his share
So Wealth maximisation means:
Increase in Wealth/WM =
Present Value of future cash inflows
–
Cost.
Advantages of Wealth Management
• It is based on cash flows and not on profits
• It focuses on long time sustainability
• It considers the time value of money
• It considers the Risk and uncertainty factor while considering
the discounting rate.
Profit Maximisation Vs Wealth Maximisation
Basis of Difference Profit Maximisation Wealth Maximisation
Concept The main objective of a The ultimate goal of the
concern is to earn a larger concern is to improve the
amount of profit. market value of its shares.
Emphasizes on Achieving short term Achieving long term
objectives. objectives.
Consideration of Risks No Yes
and Uncertainty
Benchmark for computing the operational Is to Gain a large market
efficiency of the entity. share.
Exploitation YES NO
Risk Vs Return
Systematic •Market Risk

•Interest Rate Risk
Risk •Inflation Risk
Unsystematic •Business Risk

Risk •Financial Risk
• Market Risk – Political Turmoil / Government collapse / Forex risk
• Purchase Power Risk – Inflation Risk and resultant Monetary policy change
• Interest Rate Risk –
Interest goes up Price goes up
Price Reduces Interest Reduces

Unsystematic Risk
Business Risk : Consumer Preference/ Dwindled Demand or

Supply/ Competition/ Govt. Regulation
Finance Risk : Mismanagement
Systematic Vs Unsystematic Risk
S. No Basis Systematic Risk Unsystematic Risk
1. Meaning Risk/ Threat associated with Risk/ Threat associated with a
entire market segment as a specific firm or Industry
whole
2. Impact Affects stock of all Industries Stocks of select firm/ Industry gets
affected
3. Controllability Cannot be controlled Could be controlled
4. Responsible External Internal

factor
5. Types Market, Interest Rate & Business Risk& Financial Risk
Purchasing Power
Liquidity Vs. Profitability
Liquidity
the ease at which a business can meet its immediate and short-term financial
obligations
Liquidity = Cash + Assets > more than the short-term
obligations .
Profitability is a measure of business success.
Profit = Revenue - Expenses
Financial Decisions
• Investment Decision ( Long term & Short term)
Long term decision Risk/Return trade off & Short term decision Liquidity
/Profitability trade off
• Financing Decision ( Optimum Capital Structure Decision)
• Dividend Decision ( Quantum to be distributed or ploughing back)
Functions of Finance Manager
• Financial Forecasting & Planning
• Acquisition of Funds
• Investment of Funds
• Helping in strategic decisions
• Maintain adequate liquidity
• Financial Engineering

Introduction To FM

Uploaded by

Copyright:

Available Formats

Introduction To FM

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Introduction To FM

Uploaded by

Copyright:

Available Formats

Financial Management

• 1finances plural : money or other liquid resources of a government, business,

Budget - A plan for where you want to go

1. More Specific General strategy

Financial Institution Financial Markets Financial Services

Traditional •Procurement of “LONG TERM” funds needed by Business

Modern •Includes both raising & utilisation of funds efficiently

Approach •Financial control

• Acquiring sufficient Funds

Profit •Revenue > Cost

“Wealth is generated by any financial

Any shareholder would like

Systematic •Market Risk

Risk •Inflation Risk

Unsystematic •Business Risk

• Interest Rate Risk –

Interest goes up Price goes up

Price Reduces Interest Reduces

Business Risk : Consumer Preference/ Dwindled Demand or

4. Responsible External Internal

You might also like