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Overview
Fundamental Valuation Concepts
Cost of Capital
Capital Budgeting
Working Capital Management
Leverage
Capital Structure
Dividend Policy
FINANCIAL MANAGEMENT : AN
OVERVIEW
OUTLINE
• Introduction
• Evolution of Financial Management
• Financial Decisions in a Firm
• Goal of Financial Management
• The fundamental Principle of Finance
• Risk-return Tradeoff
• Forms of Business Organizations
• Agency problem
• Emerging Role of the Financial Manager in India
Introduction
Finance: art and science of managing
money.
Major areas:
– Financial services: concerned with the design
and delivery of advice and financial products to
individuals, businesses and governments within
the areas of banking and related institutions,
personal financial planning, investments, real
estate, insurance and so on.
Introduction(cont.)
– Financial management: Financial Management
or business finance is concerned with managing
an entity’s money.
For example, a company must decide:
− where to invest its money.
− whether or not to replace an old asset.
− when to issue new stocks and bonds.
− whether or not to pay dividends.
EVOLUTION OF FINANCIAL MANAGEMENT
• Financial management emerged as a distinct field of study at
the turn of the 20th century. Its evolution may be divided into
three broad phases - the traditional phase, the transitional
phase, and the modern phase.
Investors Investors provide the initial cash required The business proposal
• Shareholders to finance the business proposal
• Lenders
Capital Budgeting
Decisions
Return
Capital Structure
Decisions
M arket Value of
the Firm
Dividend
Decisions
Risk
W orking Ca
pital
Decisions
FORMS OF BUSINESS ORGANISATIONS
Sole Proprietorship
• One owner
• Very simple
• Unlimited liability
• The firm has no separate status from a legal and tax
point of view
Partnership
• Two or more owners
• Fairly simple
• Unlimited liability
• The firm has a separate status
Private Limited Company
• Upto 50 owners
• Not too complex
• Limited liability
• A distinct legal person
FORMS OF ORGANISATION
Public Limited Company
• Many owners
• Somewhat complex
• Limited liability
• Distinct legal person
• Free transferability of shares
24
Organisation of the finance function
ALL MANAGERS ARE FINANCIAL MANAGERS
• The engineer, who proposes a new plant, shapes the
investment policy of the firm
• The marketing analyst provides inputs in the process of
forecasting and planning
• The purchase manager influences the level of investment
in inventories
• The sales manager has a say in the determination of the
receivables policy
• Departmental managers, in general, are important links
in the finance control system of the firm
Functions of the Treasurer and
the Controller
Treasurer Controller
Obtaining finance Financial accounting
Banking relationship Internal auditing
Cash management Taxation
Credit administration Management accounting
Capital budgeting and control
ORGANISATION OF FINANCE FUNCTION
Chief Finance
Officer
Treasurer Controller
Financial Cost
Cash Credit
Accounting Accounting
Manager Manager
Manager Manager
Portfolio Internal
Manager Auditor
EMERGING ROLE OF THE
FINANCIAL MANAGER IN INDIA
The job of the financial manager in India has become more
important, complex and demanding due to the following factors:
• Liberalisation
• Globalisation
• Technological developments
• Volatile financial prices
• Economic uncertainty
• Tax law changes
• Ethical concerns over financial dealings
• Shareholder activism
EMERGING ROLE OF THE
FINANCIAL MANAGER IN INDIA
• Finance theory, in general, rests on the premise that the goal of financial
management should be to maximise the wealth of shareholders.
• A business proposal raises the value of the firm only if the present value
of the future stream of net cash benefits expected from the proposal is
greater than the initial cash outlay required to implement the proposal.
• In general, when you take a financial decision, you have to answer the
following questions : What is the expected return ? What is the risk
exposure ? Given the risk-return characteristics of the decision, how
would it influence value ?
• The important forms of business organisation are : sole proprietorship,
partnership, private limited company, and public limited company.
While each form of organisation has certain advantages and limitations,
the public limited company form of organisation generally appears to be
the most appropriate form from the point of view of shareholder wealth
maximisation.