Financial management-Introduction

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FINANCIAL MANAGEMENT
Dr.R.Vasanthagopal

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Management
Management is that field of human behavior in which
managers plan, organize, staff, direct, and control
human, financial resources in an organized group
effort in order to achieve desired individual and
group objectives with optimum efficiency and
effectiveness.

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Theories of Management
 Classical theory- production of efficiency and
productivity through the one best way
 Neoclassical theory-importance of human element in
management
 Modern organizations theory- Functions are universal
but their application is situational.

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Managerial Skills
Conceptual Skill
Human Relations
Skill
Technical Skill
Top Management
Middle Management
Lower Management

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Importance of Management
 Acquisition and utilization of resources
 Environmental adaptation
 Goal achievement
 Problem solving
 Performance control
 Social responsibility

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Finance
 The word finance is derived from French word (18th
century) means" the management of money.”
 Generally, Finance is the management of money and
other valuables, which can be easily converted into
cash.“
 Entrepreneurs-Finance is concerned with cash.
Cont..

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Finance
 Academics-Finance is the procurement of funds and
effective utilization of funds.
 Oxford dictionary- the monetary resources and affairs
of a state, organization, or person.
 Thus, Finance may be of two
Public Finance and Private Finance

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Public Finance
Requirements, Receipts and Disbursement of funds of
governmental institutions viz. Central government, State
government and local government and public
corporations

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Private Finance
Requirements, Receipts and Disbursement of funds of
individuals, sole proprietorships, partnerships and
company form of organizations.
Thus, private finance may be of two:
Personal finance and Corporate finance

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Personal Finance
 Requirements, Receipts and Disbursement of funds
of an individual or a family

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Corporate Finance
Requirements, Receipts and Disbursement of funds
of company form of organizations engaged in non-
financial fields of activities.
It is often called as
Managerial Finance/Business Finance/Financial
Management

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Concept of Financial Management
 Planning, raising, financing, and management of
financial resources to achieve some specific goals
 prior to 1920s (economics)
 post 1920s (subject on its own)

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Importance of Financial Management
 Ensures availability of funds at the right time to
meet the needs of the business.
 Ensures rational matching of funds to their uses in
every finance decision.
 Ensures effective utilization of resources
 Gives emphasis on risk-return trade-off in all
financial decision making areas
 Ensures the best mix of debt and equity in the total
capitalization
 Ensures that funds are collected at minimum cost.
 Ensures effective investment, financing and
dividend decisions

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Functions (Scope) of Financial
Management
 Estimating the fund requirement (Consider the
vision, mission, objectives, strategies and action
plans (VMOSA) of the organization)
 Financing Decisions (Determination of Optimum
capital structure)
 Investment Decisions (Capital Budgeting+ Working
capital)
 Dividend Decisions (determination of D/P ratio)
 Financial control

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Contribution of the Finance Function
 Strategic Role
formulating long-term plans to ensure long-term
availability of funds and viability of the company
 Operational Role
day-to-day management to ensure that events
conform to the plans. e.g working capital
management

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Finance and Related Disciplines
1. Investment analysis
2. Working capital management
3. Sources & Cost of funds
4. Capital structure analysis
5. Dividend Policy
6. Analysis of risk and return
Primary Disciplines
1. Accounting
2. Macroeconomics
3. Micro economics
Other Related Disciplines
1. Marketing
2. Production
3. QT
Shareholder wealth Maximization
Resulting in
Support
Support

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Objectives of Financial Management
 Profit maximization and
 Wealth maximization

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Profit Maximization
 Means maximizing the rupee income of an
organization.
 The advocates of this view argue that a business
being an economic institution must earn profit to
cover its costs and provide funds for growth and
hence profit maximization is considered as the
ultimate objective of financial management.

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Profit Maximization- Arguments to support
 No business can survive without earning profit.
 Profit is a measure of efficiency of a business.
 Profit also serves as a cushion against risks which
cannot be anticipated.
 Profitability is essential for fulfilling social goals
 The accumulated profits enable a business to face
risks like fall in prices, competition from other
businesses, sudden price level changes, adverse
government policies etc.
 Profits are the main sources of finance for the
growth and development of a business

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Profit Maximization- Arguments Against
 A firm works with the objective of profit
maximization starts exploiting workers and the
consumers.
 In the wake of imperfect competition today, it
cannot be the legitimate objective of a firm.
 Normally we can find conflicting interests among
the various stake holders connected with the firm.
Hence one has to reconcile the interests of all
these parties.

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Profit Maximization- Limitations
 It is vague
The term 'profit' is amenable to different
interpretations by different people. For example,
profit may belong-term or short-term. It may be total
profit or rate of profit or profit per share. It may be
net profit before tax or net profit after tax.
 It ignores time value of money
It does not make a distinction between returns
received in different time periods.
 It ignores risk factor
It ignores fluctuations in the streams of benefits
associated with the financial course of action.

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Wealth Maximization
 Wealth maximization is also called Value
Maximization or Net Present-Worth maximization.
 Wealth maximization means maximizing the net
present value of a course of action.
 The net present worth of course of action is the
difference between gross present value and the
amount of capital investment required to achieve the
benefits.
 Gross present value represents the present value of
expected cash benefits.
 A financial action which has a positive present value
creates wealth other wise not.

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W= A1 + A2 + A3 +…………+ An __ Co
(1+k)1 (1+k)2 (1+k)3 (1+k)n
Where,
A1, A2, A3.., An = Streams of benefits from a course of action
K= Cost of capital
Co= Amount of original investment
 Wealth Maximization is considered as the appropriate
and operationally feasible objective of financial
management as it posses the three requirements of a
suitable operational objective of financial courses of
action such as unambiguous, risk factor and time
value of money considerations.

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Wealth maximization-Arguments in Favour
 The wealth maximization objective protects the
interests of different stake holders in the organization
viz. suppliers of capital, employees, management and
society at large.
 It protects the interest of owners in the form of increased
wealth,
 suppliers of borrowed capital in the form of prompt payment
of interest and principal,
 employees in the form of increased monetary and non-
monetary benefits,
 management in the form increased confidence of
shareholders and
 finally the society in the form of best and efficient product
and services.

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Wealth maximization- Criticism
 It is a prescriptive idea as it does not suggest things
to be done to create or increase wealth.
 It is not necessarily socially desirable. It is criticized
that wealth maximization is not possible without
disturbing the society.
 It is given prominence to maximize the wealth of
owners. It seldom considers the interest of debenture
holders, preferred shareholders etc.
 The objective of wealth maximization is also being
questioned on the ground that the management in
most cases may try to utilize funds for maximizing
their utility than the utility of the owners.

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Conclusion
In spite of all the criticisms, it is generally observed
that that wealth maximization objective is the most
appropriate objective of financial management.
Further, it tries to protect the interest of the different
stake holders’ viz. owners, suppliers of borrowed
funds, creditors, employees, management and the
society at large.

Financial management-Introduction

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