Financial management

INTRODUCTION
Module No. Module 1: Financial Management
Topics Topics Covered
Covered  Meaning, Nature, and Scope of Financial Management
 Goals of Financial Management (Profit Maximization, Wealth Maximization, and
Stakeholder Value Creation)
 Concept of Time Value of Money (TVM)
Course CO1
Outcome
No.
No. of 5
Lecture
Hours
Pre-Class · Assigned Reading: Providing students with a short article or excerpt from a textbook on the
Activity importance of financial management in strategic decision-making.
· Discussion Preparation: Informing students to:
 Identify examples of financial decisions in businesses.
 Reflect on how the concept of the time value of money might apply to personal or
organizational finances.
Instructional 1. Presentation
techniques  Begin with an overview of financial management principles using a PowerPoint presentation.
 Highlight real-life examples of financial management practices in businesses.
 Explain goals of financial management using case studies of companies balancing
profitability and sustainability.
2. Interactive Discussion
 Pose questions like, “Why do organizations focus on wealth maximization over profit
maximization?”
 Use scenarios to discuss the implications of ignoring time value in investment decisions.
3. Problem-Solving
 Solve basic TVM problems (e.g., calculating the future value of an investment or present
value of future cash flows).
Assessment · Discussion Participation: Grade based on the quality of engagement in classroom discussions.
· Short Quiz: Include a mix of objective (MCQs) and short-answer questions on the goals of
financial management and TVM.
· Problem-Solving Test: Assign simple time value of money problems.
T level T4
K level K2
 Lifeblood of any
entity

Finance – provision of
money when required

Required to carry
on operations
and achieve
targets
 FINANCE

Public Finance Private Finance

1. Government 1. Personal
Institutions Finance
2. State 2. Business
Governments Finance
3. Local Self-govts 3. Finance of Non-
4. Central profit
Government Organizations
 Business
- The term business includes industry, trade and commerce
- All those activities relating to production and distribution of
goods and services for satisfying human wants is known as
business

Finance
Provision of money when required

BUSINESS FINANCE

According to Guthmann and Dougall, “Business finance can be

broadly defined as the activity concerned with the planning,
raising, controlling and administering the funds used in the
business.”
Finance function
– no business can exist without money
– will be selected based on the implications attached
with them.
– to generate profits which can be used to repay the
investor.
• Finance function has led to financial management
 Approaches of
Finance
Function

Traditional Modern

- Confined only to - Includes both raising as well

procurement of funds as effective utilization
needed - Was considered as an
- Considered instruments and integral part of overall mgt
institutions for raising funds - It covers financial planning,
as part of finance raising of funds, allocation of
- Ignored the importance of funds, financial control, etc.
working capital and - It considers 3 basic mgt
allocation of funds decisions: investment,
- Day to day financial issues financing, dividend.
were not looked into
Aims of Finance Function
Acquiring Sufficient Funds

Proper Utilization of Funds

Increasing profitability

Maximizing Firm’s Value

Meaning of Financial management
• Financial management refers to that part of the
management activity which is concerned with the
planning and controlling of firm’s financial resources.
• Finding out sources of funds as per needs of the
business.
• Three main activities under financial management:
1. Ascertaining the financial requirements.
2. Finding the sources of finance.
3. Allocating the funds acquired.
Scope of financial
management
• Estimating financial requirements.
• Deciding capital structure.
• Selecting a source of finance.
• Selecting a pattern of investment.
• Proper cash management.
• Implementing financial controls.
• Proper use of surpluses.
Objectives of Financial
management

WEALTH
MAXIMIZATION

PROFIT MAXIMIZATION
Profit measures Business cannot
efficiency of a firm. survive without
profit.

Profit maximization

Profit earning is
Profit helps to cover the main activity
costs and increase of a business
growth
Points in favor of profit maximization
• A barometer to measure performance of a business
unit.
• Profit ensures maximum welfare of the
stakeholders.
• Increases the confidence of the management.
• It attracts the investors.
• Profit indicates the efficient use of funds for
different requirements.
Points against profit
maximization
• Profit is not a clear term – It is vague

• Encourages corrupt practices to increase profit –

encourages illegal and unethical practices to increase
the profits.
Ex: inadequate maintenance of machinery, pay low
wages to workers (results in high rate of employee
turnover)
• Does not consider the element of risk in various
investments.
 Points against profit
•maximization
Does not consider impact of time value of money.
• Attracts cut throat competition – the modern concept of
marketing does not encourage profit maximization. Instead it is
Customer satisfaction.
• Effect of dividend policy on MP of shares is not considered – If
EPS is the only objective then an enterprise may not think of
paying div at all because retaining profits in the business or
investing them in the market may satisfy this aim.
Wealth Maximization
Companies who:
- Meet their obligation to creditors
- Offers fair amount of wages and salaries to employees
- Maintain high quality of their products
- Earn profits & pay consistent dividend

• Will have a good reputation. This high image of the

firm results in capital appreciation to equity
shareholders in the stock market, which in course of
time is called “Wealth Maximization”
Wealth Maximization
• Wealth maximization attained by a company is reflected in
the market value of shares.
• Wealth of shareholder = (number of shares owned) X
(market price per share)
• It is the Net Present Value of a financial decision.
• Net Present Value = Gross Present Value of benefits –
Investments. (OR)
• NPV = PV of cash inflows – PV of cash outflows
• Therefore NPV considers time value of money.
Wealth Maximization
• +ve NPV = increase in wealth of the shareholders.
(surplus inflow indicates the wealth added to the
value of assets)
• -ve NPV = decrease in wealth of the shareholders.
Steps for Wealth
Maximization
• Avoid high level of Risk – even if profits are high, such
projects are considered to be highly risky. Hence mgt must
make decisions considering the risk involved along with the
high profits
• Regular payment of dividends - increases the firm’s
reputation and in return the firm’s shares
• Stable growth in sales – large & stable volume of sales, will
protect firm from adverse consequences of recession,
changes in customer preferences or fall in demand, etc.
• Maintain the price of the firm’s equity shares – adopt sound
investment policies, which in turn will improve the image of
the firm & increase the firm’s equity shares.
Advantages of wealth maximization
• It is a clear term. (PV of cash flows taken into
consideration)
• Considers the time value of money.
• Universally accepted.
• Helps in framing strong dividend policies.
• Considers the risk factor.
• It serves the interest of suppliers of loaned capital (both
short-term and long-term)
• Management also benefits since shareholders will not like
to change the mgt if it is able to increase the value of their
holdings
Decisions in financial
management
1.Financing decisions.
2.Investment decisions.
3.Dividend decisions.
Financing decisions
• It is the decision regarding appropriate mix of finance or
capital structure.
• Must lead to maximizing the returns to investors and
protection of interest of creditors.
• Capital can be raised through:
1. Equity.
2. Equity + Debt.
3. Equity + Debt + Preference shares.
4. Equity + Debt + Preference shares + Long term loans.
• Capital structure must be flexible so that there is scope for
gaining additional sources of funds for expansion.
Investment decisions
• It is the decision regarding the total number of assets to be
held in the firm and its composition.
• Most important financial decision.
• It can be classified into 2 types:
1. Long term investment decision (Capital budgeting) –
based on cost, risk and profitability.
2. Short term investment decision (Working capital
management) – based on liquidity and profitability.
Dividend decisions
• It is the decision regarding payment to investors who
supplied capital to the firm.
• Concerned with the quantum of profits to be distributed
among shareholders.
• Should the entire profit be divided as dividend?
• Should the entire profit be retained?
• Should a part of the profit be retained and the rest be
distributed as dividend?
Functions of finance
MANAGER
• Estimating the financial requirements.
• Selection of the right source of funds.
• Allocation of funds.
• Capital budgeting.
• Working capital management.
• Profit Planning and control
• Fair returns to the Investors
• Maintaining liquidity and wealth maximization.
TIME VALUE OF MONEY
It means that, value of a rupee received today is
different from the value of a rupee to be received in
future.

Factors that affect TVM:

• Inflation
• Risk and Uncertainty
• Inflation
• Investment Opportunities
Time value of
money
The end 

• Source: Financial Management by Shashi K. Gupta, R. K. Sharma

and Neeti Gupta.