Unit 1 Introduction to Financial Management

UNIT 1 INTRODUCTION TO FINANCIAL MANAGEMENT CHAPTER 1 Nature, Purpose and Scope of Financial Management Financial Management (Managerial Finance, Corporate Finance and Business Finance)  decision making process concerned with planning, acquiring and utilizing funds in a manner that achieves the firms desired goals. Finance  body of facts, principles and theories relating to raising and using money by individuals, businesses and governments.  The goal of Financial Management is to maximize the current value per share of the existing stock or ownership in a business firm. Scope of Financial Management: Traditional  Procurement of short-term as well as long-term funds from financial institutions.  Mobilization of funds through financial instruments.  Compliance with legal and regulatory provisions. Scope of Financial Management: Modern  The total funds requirement of the firm.  The assets or resources to be acquired.  The best pattern of financing the assets. Types of Financial Decision  Investment Decision – how scarce or limited resources in terms of funds of the business committed to projects.  Financing Decision – assert that the mix of debt and equity chosen to finance investments should maximize the value of investments made.  Dividend Decision – concerned with the determination of quantum of profits to be distributed to the owners, the frequency of such payments and the amounts to be retained by the firm. SIGNIFICANCE OF FINANCIAL MANAGEMENT  Broad Applicability  Reduction of Chances of Failure  Measurement of Return on Investment RELATIONSHIP BETWEEN FINANCIAL MANAGEMENT, ACCOUNTING AND ECONOMICS  Microeconomics – deals with the economic decisions of individuals and firms.

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Macroeconomics – looks at the economy as a whole in which a particular business concern is operating.

CHAPTER 2 Relationship Of Financial Objectives To Organizational Strategy And Other Organizational Objectives STRATEGIC FINANCIAL MANAGEMENT  Strategic Planning – is long – range in scope and has its focus on the organization as a whole.  Strategic Financial Planning – involves financial planning, financial forecasting, provision of finance and formulation of finance policies which should lead the firm’s survival and success. SHORT-TERM AND LONG-TERM FINANCIAL OBJECTIVES OF A BUSINESS ORGANIZATION - Short and Medium-term  Maximization of return on investments  Growth in earnings per share and price/earnings ratio  Minimization of finance charges  Efficient procurement and utilization of shortterm, medium-term and long-term funds. - Long-term  Growth in the market value of the equity shares and sustained growth in dividend to shareholders.  Survival and sustained growth of the firm. 2 Competing Viewpoints On Financial Objective Of The Entity  The shareholder’s perspective which hold that the only appropriate goal is to maximize shareholder’s wealth.  The stakeholder’s perspective which emphasizes on social responsibility over profitability. Responsibilities to Achieve the Financial Objectives  Investing  Financing  Operating – working capital management.

ENVIRONMENTAL “GREEN” POLICIES AND THEIR IMPLICATIONS FOR THE MANAGEMENT OF TBHE ECONOMY AND FIRM

CHAPTER 3 Functions of Financial Management

RELATIONSHIP WITH OTHER KEY FUNCTIONAL MANAGERS IN THE ORGANIZATION

ROLE OF FINANCE MANAGER Functional Areas of Business (Manufacturing Firm)  Manufacturing - design and production of product.  Marketing – selling, promotion and distribution of a product.  Finance – all monetary aspects of a business. It is an integral part of total management. Corporate Governance  Process of monitoring managers and aligning their incentives with shareholders goals.

Figure 3.1 The financial manager’s role in achieving the goal of the firm.

THE FINANCE ORGANIZATION  Board of Directors – appointed to represent the shareholder’s interest. It hires the CEO, evaluates management and can also design compensation contracts.  External Auditors – examine the firm’s accounting systems and comment on whether fs fairly presented the financial position.  Investment Analysts – keeps tract of firm’s performance, conduct own evaluations and report to investment community.  Investment Banks – help firms access capital markets.  Credit Analysts – examine a firm’s financial strength for its debt holders.  Government ETHICAL BEHAVIOR Ethics - Primary importance in any practice of finance.