FINANCIAL MANAGEMENT

An overview
Financial Management – The Basic Concept

What it is?
The meaning of Financial Management is
embedded into the interpretation of the two
terms:
Finance; &
Management
 Finance – The Meaning

Finance basically refers to money though it

takes different names like Cash, Funds,
Capital etc, in different situations with
different implications. In a broader sense,
finance envisages not only money but all
assets which money is converted to and
liabilities which are supposed to be met with
money.
 The Meaning of Financial Management
Financial Management refers to the sequential activities of:

 Procurement of money,

 Utilization of the procured money i.e. investment i.e.

conversion of money into assets and for making expenses to
generate income

 Ensuring pre-determined targeted minimum returns on

such investments and expenses; and

 Allocation of the excess of returns over investments i.e.

to retain a part of the excess in the business and to distribute
the rest to the owners of the business
The General Model of Financial Management

INVESTORS

DEBT EQUITY

MONEY

RECURRING EXPENSES EXCESS

RETURNS
OVER
CURRENT ASSETS / INVESTMENT
WORKING CAPITAL IN ASSETS
BUSINESS HOUSE
AND
FIXED / CAPITAL ASSETS EXPENSES
Four Decisions – Quadra Pod of Financial
Management

RISK AND RETURN DECISION

INVESTMENT FINANCING
DECISION DECISION

LIQUIDITY DIVIDEND
DECISION DECISION
 The Balancing Acts of Financial Management

• INVESTMENT Determination of amount of money required to be invested

DECISION

FINANCING Loan money [Debt] Debt-

Sourcing of money Equity
DECISION Own money [Equity] Balance

Invest in assets Liquidity

LIQUIDITY
Profitability
DECISION Liquid balance Balance
Maximize return Risk
RISK-RETURN Return
DECISION Minimize risk Balance

Pay dividend Payout

DIVIDEND
Retention
DECISION Retention of profits Balance
 Salient Features of Financial Management

Financial management techniques revolve

around two key concepts :

 The concept of cash flow i.e. the outflow

(investment) and cash inflow (returns);
and
 Time value of money
 The Goal of Financial Management
The goal of financial management is to enrich
the shareholders by maximizing their wealth.
Shareholders’ wealth means returns to
shareholders i.e. the owners of the business.
Returns to shareholders can be in
 recurring form i.e. dividends; and
 in the form of capital appreciation of their
investments.
 The Inter-disciplinary Nature of
Financial Management
Mathematics /
Financial & Financial
Statistics /
Management Psychology Institutes &
Operations
Accounting Markets
Research

Derivatives &
FINANCIAL Foreign Exchange
Risk
MANAGEMENT Management
Management

Economics Auditing Law Taxation