Module 1
Introduction to Financial Management
Classification
Public Finance
Deals with requirements, receipts &
disbursements of funds incase of Govt
institutions.
Private Finance
Incase of an individual, profit seeking
org & non-profit org
Classified as : Personal, Business
finance & finance of NPO
Meaning of Business Finance
Finance of Business activities
Finance is provisioning of money at the
time when it is required
Business – production & distribution
activities carried out for satisfying human
needs
Classified as
Proprietary finance
Partnership finance
Corporate finance/Financial Mgt
Financial Management
Process of raising, providing &
administering of all funds to be used in a
corporate enterprise
Also called as corporate/business finance
Refers to that part of the management
activity which is concerned with the
planning and controlling of firm’s financial
resources
Evolution
Initial stages : sourcing & financing
1930 – economic recession raising funds from banks
& other FI’s were tough
Hence gained importance of planning & ctrling sound
finl str of firm was needed
Post worldwar – Need for finl str & capital budgeting
was felt
Today’s modern phase – various theories sharpe’s
CAPM & Black & scholes pricing models are developed.
Emergence of financial engineering – design develop
& implemention of innovative finl instruments and
optimal models/solutions to the finance problems
Importance
Financial planning
Acquisition of funds
Proper use & allocation of funds
Taking sound finl decisions
Improvising profitability
Improvising wealth of the investors & the nation
Promoting & mobilising individual & corporate savings
Finance function
Discuss the importance
Approaches:
Traditional
Narrow scope
Includes only sourcing of funds & not allocation
Does not focus on day to day finl problems – this is
done by somewhere & by someone in the org
Modern
More broader scope
Includes both raising & utilising finance
Also covers finl planning, raising, utilising & finl
controlling
Objectives of Finance function
Acquiring sufficient funds
Proper utilisation of funds
Increase profitability
Maximize firm’s wealth
Scope of Finance function
Estimating finl requirements
Deciding capital structure
Selecting a source of finance
Selecting a pattern of investments
Proper cash mgt
Implementing finl controls
Proper use of surpluses
Relationship of finance with other
business functions
Purchase function
Production
Distribution
Accounting
Personnel
R&D
Objectives of Finl Mgt
Profit maximisation
Wealth Maximisation
Arguments for Profit maximisation
For :
It should be the definite objective
Economic conditions do not remain
same – hence retained earnings is
important
Profits are only source for growth &
devp
Contd…
Against
Very vague term
It ignores time value of money
Risk factor is not considered
Effect of dividend on share value is
ignored
Arguments for Shareholders wealth
For:
Long term view
Indicator of firm’s condition
Report card of its progress
Against
Not clear about what to be done
Other claimers are ignored
Faces difficulty when ownership & mgt
separates in case of large org
Financial Decisions
1. Investment Decision:
Decision which is related to the selection of assets, composition of business risk
Classification : Financial
Short term : Working capital mgt Decisions
Long term : capital budgeting
2. Financing Decision:
Investment Financing Dividend
Determination of proportion of debt and equity in
Decision capital structure,
Decision how to finance
Decision
new assets, optimum capital structure
3. Dividend Decision:
•Its part of profit to be distributed to shareholde
•It involves determination of portion of EPS to be declared as dividend per share.
Inter-relation among Financial
Decisions
• Investment and Financing decision
• Financing and Dividend decision
• Dividend and Investment decision
Board of Directors
Organisation of Finance Managing Director
Function
Vice-President Vice-President Vice-President
Operations Finance Sales
Treasurer Controller
Capital
Data Processing
Cash Cost
Budgeting Manager
Management Accounting
Manager
Commercial Banking
Credit
and Investment
Management Tax Manager
Banking Financial
Accounting
Manager
Fund raising
Portfolio
Manager Financial
Manager Internal Audit
Statements
Preparation
Inventory
Preparing
Manager
Budgets
Who is a controller and treasurer?
Controller:
The controller or Chief Accounting Officer is responsible
for the maintenance of adequate internal control and
for the preparation of accounting records and financial
statements such specialized activities
as budgeting, tax planning and preparation of tax
returns are usually placed under the controller's
jurisdiction.
Treasurer:
The Treasurers has custody of the company funds and is
generally responsible for planning and controlling
the company cash position.
The treasurer's department also has responsibility for
relations with the company's financial institutions and
major creditors.
