CH 1

Financial Management-I
Chapter One
An
An
Overview
Overview
Financial Management:
Meaning of Finance
 In our present day economy, finance is defined as the
provision of money at the time when it is required.
 Every enterprise, whether big or small, needs finance

to carry its operations and to achieve its targets.
 In fact finance is so indispensable today that it is

rightly to be said the lifeblood of an enterprise.
Areas of Finance
 Finance is the art and science of managing money
Concerned with the process, markets, and instruments

involved in transfer of money.
 “The Science on study of the management of funds’

and the management of fund as the system that
includes the circulation of money, the granting of credit,
the making of investments, and the provision of
banking facilities.
Cont….…..
Finance consists of three interrelated areas:
1. Money and capital markets, which deals with

securities markets and financial institutions;
2. Investments, which focuses on the decisions made by

both individual and institutional investors as they
choose securities for their investment portfolios; and
Cont….…..
3. Financial management, or “Business finance,”
which involves decisions within firms.
 The career opportunities within each field are many

and varied, but financial managers must have a
knowledge of all three areas if they are to do their jobs
well.
Introduction to Financial Management
Financial management is generally defined as the
management of capital resources and uses in order
to achieve a desired goal.
The role of the financial manager is to ensure that there

is capital sufficient enough to finance activities, and this
capital is available at the right amount, at the right time
and at the lowest cost.
Cont……
Financial management can be defined as the management
of the finances of an organization in order to achieve the
financial objectives of the organization.
 Profitability – for the organization to minimize cost
and to maximize return
 Liquidity – the ability to meet its operating
activities
 Safety or security – to overcome undue risk
Financial Management Decisions
Investment Decision
It begins with a determination of the total amount of assets needed
to be held by the firm.
Picture the firm’s balance sheet in your mind for a

moment.
The financial manager needs to determine the dollar amount that

appears above the double lines on the left-hand side of the balance
sheet – that is, the size of the firm. Even when this number is
known, the composition of the assets must still be decided.
Financial Decisions….…..
Two important aspects of investment
decision are:
 The evaluation of the prospective
profitability of new investment, and
 The measurement of a cut-off rate against that
the prospective return of new investments
could be compared.
Investment proposal should be evaluated in terms of
both expected return and risk.
Cont…….
Financing decision
The central issue is to determine the appropriate
proportion of equity and debt (Capital Structure)
The financial manager must strive to obtain the best

financing mix or the optimum capital structure.
In addition, dividend policy must be viewed as an integral

part of the firm’s financing decision.
Cont…….
Asset Management Decision
Once assets have been acquired and appropriate

financing provided, these assets must still be
managed efficiently. The financial manager is
charged with varying degrees of operating
responsibility over existing assets.
FUNCTIONS OF FINANCE MANAGER
 Forecasting Financial Requirements:
 Acquiring Necessary Capital
 Investment Decision
 Cash Management
 Interrelation with Other Departments
Importance Of Financial Management
Each and every business concern must maintain
adequate amount of finance for their smooth
running of the business concern and also maintain the
business carefully to achieve the goal of the business
concern.
Cont…….
Some of the importance of the financial management is

as follows:
 Financial Planning
 Acquisition of Funds
 Use of Funds
 Proper
 Financial Decision
 Improve Profitability
 Increase the Value of the Firm
 Promoting Savings
Scope Of Financial Management
Financial management is one of the important parts of
overall management, which is directly related
with various functional departments
 Economics
 Accounting
 Mathematics
 Production Management
 Marketing
 Human Resource
Goal Of Financial Management
Typical goals of the firm include
(1) Growth;
(2) Survival;
(3) Stockholder wealth maximization;
(4) Profit maximization;
(5) Managerial reward maximization;
(6) Behavioral goals; and
(7) Social responsibility

Profit Maximization versus Stockholder
Wealth Maximization
Profit maximization is basically a single-period or, at
the most, a short-term goal. It is usually
interpreted to mean the maximization of
profits within a given period of time.
Cont…….
In contrast, stockholder wealth maximization is a long-
term goal, since stockholders are interested in future as
well as present profits.
Wealth maximization is generally preferred because it

considers
(1) wealth for the long term;
(2) risk or uncertainty;
(3) the timing of returns; and
(4) the stockholders’ return.

Cont…….
Drawbacks of Profit Maximization
Profit maximization objective consists of certain drawback also:
 It is vague
 It ignores risk
 It ignores the time value of money
 Assumes Perfect Competition
 In new business environment profit maximization is
regarded as Unrealistic, Difficult, Inappropriate and Immoral.

AGENCY RELATIONSHIPS
Agency relationship is a description of the relationship
between management and shareholders expressing
the idea that managers act as agent for the
shareholders, using delegated power to run the
company in the shareholders best interest.
A company has stakeholders such as employees, debt-

holders, consumers, suppliers, government and
society.
Cont…….
Managers may perceive their role as reconciling conflicting
objectives of stakeholders. This stakeholders’ view of
managers’ role may compromise with the objective of SWM.
Managers may pursue their own personal goals at the cost of
shareholders, or may play safe and create satisfactory wealth for
shareholders than the maximum.
Managers may avoid taking high investment and financing risks
that may otherwise be needed to maximize shareholders’
wealth. Such “satisfying” behaviour of managers will frustrate
the objective of SWM as a normative guide.
Cont…….
Issues where there may be conflict of interest between
managers and shareholders are:
 Information asymmetry
 Rewards
 Risk
 Takeover
 Time horizon
Conflict resolution
Goal and incentive alignment
Control of the firm
Market force
Agency cost
Chapter End

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Financial Management-I

 Every enterprise, whether big or small, needs finance

 In fact finance is so indispensable today that it is

Concerned with the process, markets, and instruments

 “The Science on study of the management of funds’

1. Money and capital markets, which deals with

2. Investments, which focuses on the decisions made by

 The career opportunities within each field are many

The role of the financial manager is to ensure that there

Picture the firm’s balance sheet in your mind for a

The financial manager needs to determine the dollar amount that

The financial manager must strive to obtain the best

In addition, dividend policy must be viewed as an integral

Once assets have been acquired and appropriate

Some of the importance of the financial management is

(3) Stockholder wealth maximization;

(4) Profit maximization;

(5) Managerial reward maximization;

(6) Behavioral goals; and

(7) Social responsibility

Wealth maximization is generally preferred because it

(1) wealth for the long term;

(2) risk or uncertainty;

(3) the timing of returns; and

(4) the stockholders’ return.

Profit maximization objective consists of certain drawback also:

 It ignores the time value of money

 Assumes Perfect Competition

 In new business environment profit maximization is

regarded as Unrealistic, Difficult, Inappropriate and Immoral.

A company has stakeholders such as employees, debt-

Control of the firm

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