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Financial Management Lacture notes, Commerce Department Shah Abdul Latif University, Khairpur, By Sir Anil Kumar

Financial Management Lacture notes, Commerce Department Shah Abdul Latif University, Khairpur, By Sir Anil Kumar

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Financial Management Lacture notes, Commerce Department Shah Abdul Latif University, Khairpur, By Sir Anil Kumar
Financial Management Lacture notes, Commerce Department Shah Abdul Latif University, Khairpur, By Sir Anil Kumar

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Financial ManagementManagement Definition
: "Coordinating work activities so that they arecompleted efficiently and effectively with and through other people"(Robbins & Coulter, 2006)
Basically five functions of management were proposed by aFrench industrialist named Henri Fayol but now condensed to four functions:namely: Planning, Organizing, Leading, Controlling.
Financial ManagementDefinition:
“The process of procurement of funds and the efficient and wiseallocation and use of the funds and resources".
Nature of Financial Management
The term nature refers to its
relationship with the closely related fields of economics and accounting
, its
Relationship with the fields of Economics and AccountingFinance and EconomicsMacro Economics:
Overall institutional environment in which a firmoperates. It looks at the economy as a whole.Financial managers should understand the economic environment,specifically:
Recognize and understand how monetary policy affects the cost andavailability of funds
Be versed in fiscal policy and its effects on the economy
Be aware of the various financial institutions and
Understand consequences of various levels of economic activity andchanges in economic policy for their decision environment and so on.
Micro Economics:
Economic decisions of individuals and organizations.The concepts and theories relevant to financial management are:
Supply and demand relationships and profit maximization strategies.
Issues related to the mix of productive factors, optimal sales level and product pricing strategies.
Measurement of utility preference, risk and the determination of value
The rationale of depreciating assets.
Comparison of marginal revenue and marginal cost.
Finance and AccountingAccounting provides basic financial input in shape of financial statementsFinancial Management analyses this input to determine past performanceand future direction of a firm.Key Differences between finance and accounting are:
Treatment of fundsIn accounting accrual system is followed.In Financial management Cash flows system is followed.
Decision MakingAn Accountant is primarily concerned with the collection and presentation of dataA Financial manger is concerned with the financial planning,controlling and decision making.Thus finance begins where accounting endsFinance and other related disciplinesMarketing, Production, Quantitative methods etc.Scope of Financial ManagementApproach to the scope is divided into 02 categories.1.Traditional Approach
This approach evolved during 1920’s and continued uptill the early fifties.
In initial stages it was known as corporate finance (CF)
CF was concerned with procurement of funds externally from capitalmarket institutions and through various financial instruments and did notconsider proper allocation of capital.Limitations of Traditional Approach
Based on outsiders (e.g.: investors, bankers etc.) looking in approach andinsider looking in approach is ignored.
Focus was on financing problems of a corporate enterprise and non – corporate enterprise was outside its scope.
More attention was given to episodic events e.g.: promotion,incorporation, merger, consolidation, reorganization etc and day to dayfinancial problems did not receive much attention.
Focus was on long term financing and working capital management wasnot in preview of finance function.
2.Modern ApproachIt views FM in broader sense and covers not only procurement of funds butefficient and wise allocation of funds as well.In modern sense it can be divided into three major decisions as
functions of financial management
1.Investment DecisionIt relates to the selection of assets in which funds will be invested by a firm.These assets fall into two categories.I. Long term assets or Fixed assetsII. Short term assets or Current AssetsIn this regard investment decisions fall into two categories:I.Capital BudgetingLong term investment decisions regarding the selection of fixed assets or aninvestment proposal whose benefits are likely to be received in future over the lifetime of a project.The main elements of capital budgeting decisions are:a) the long term assets and their composition (b) the business risk complexion of the firm (c) concept and measurement of the cost of capitalII.Working Capital ManagementMaintaining the proper liquidity position of a firm by achieving trade-off  between the profit and risk (liquidity).2.Financing decisionsDecisions regarding the capital structure (Proportion of debt and equityfinancing) or leverage of a firm.A reasonable proportion of debt and equity capital is called the optimumcapital structure.Financing decisions cover two interrelated aspects.Its one dimension called the capital structure theory is whether there is anoptimum capital structure? And in what proportion should funds be raised tomaximize the return to the shareholders?Its second dimension called the capital structure decision is to determine anappropriate capital structure, given the facts of a particular case.3.Dividend Policy DecisionDecisions’ regarding what proportion of the profit is paid to the shareholdersas dividend and what is utilized in the investment opportunities available.

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