FINANCIAL MANAGEMENT

MEANING OF FINANCIAL MANAGEMENT
 Financial management consist two word

q FINANCE MEAN Ø Finance is the art &science of managing fund or money. q MANAGEMENT :  THE FIRST MANAGEMENT GURU: Ø CHANAKYA o THE MODERN MANAGEMENT FATHER: Ø PETER.F.DRUCKER q MANAGEMENT MEAN Ø TIME. Ø TALENT. Ø TACTFULLY. Ø TECHNIQUE.

q Ø

MANAGEMENT MEAN
The mean of starting. The excellence of man & material. Deciding suitable place & time.

MEANING OF FINANCIAL MANAGEMENT
It is the managerial activities which is concern with

planning & control of the firm’s financial resources. F.M is done by financial manager. F.M is concerned with the duties of financial manager in business firm. F.M is profit seeking & not for profit. F.M has become more demanding & complex.

PUBLIC FINANCE
Govt. Institution States Local self Govt. Central Govt.

CONCEPT OF FINANCE

PRIVATE FINANCE
Personal finance Business finance Finance of non profit organization.

FUNCTION OF FINANCE MANAGER
Deciding capital structure. Financial analysis & planning. Selecting a source of finance. Estimating financial requirements. Proper use of surplus. Implementing financial control. Proper cash management.

Financial decision area
Investment decision analysis. Working capital management. Source & cost of fund. Determination of capital structure. Dividend policy. Analysis of risk & return. 

Scope of finance function or responsibility of finance manager
Finance planning. Raising of necessary fund. Controlling the use of fund. Disposition of profit.

1.Pay dividend. 2.Retain earning.

Objective of financial management
Maintain liquidity of the firm. Maximize the profitability. To maximize wealth the shareholder.

Scope of financial management
Classified two categories.

1.Traditional view. 2.Modern approach.

Traditional view
 Finance function evolved during 1920’s & 1930 &

dominate academic thinking during forties & through the early fifties.  Scope of financial management refer to its subject matter.  A separate branch of academic study.  The term procurement used in a broad sense.  The study & analysis of financial institution.  The study & analysis of financial instrument share, bond etc.  Analysis of legal & accounting relationship b/w firm & its source of fund.

 

Modern approach
Modern approach is called as financial decision

area. There are three decision: 1.Investment decision. 2.Finance decision. 3.Dividend decision.

Investment decision
1.Capital budgeting :Capital Budgeting relate selection of course of action whose benefit are likely available in future over the life time of project. o There are three aspect: I. First aspect- Choice of new asset out of alternative available. II.Second aspect-Analysis of risk & return. III.Finally aspect- Standard against which benefit are to judge. 5.Working capital management decision

2.Working capital management decision
It is concern with the management of current

asset. It is an important & integral part of F.M. One aspect of W.C.M is trade off b/w profitability & liquidity

Finance decision
Which source of fund are collect. How many requirement of fund. Which source will be use. Financial decision we can also say financial mix

,capital structure ,leverage.  Source of fund o Equity share. o Debenture. o Preference share. o Borrowed goods(short term).

Dividend decision
Dividend refer to that portion of firm’s net earning

which are paid out to the shareholder. Dividend is that part of company’s profit which is distributed among its shareholder as reward of investment.  Decision § Dividend distribute or not. § Retained earning or not.

MEANING OF TIME VALUE OF MONEY
Means that value of unit of money is different in

different period of money. T.V.M is also known as Time Preference of money. Time value of a sum of money receive today is more than its value receive after some time.  Reason of T.V.M § Preference for consumption. § Investment opportunity.

MEANING OF TIME VALUE OF MONEY
Means that value of unit of money is different in

different period of money. T.V.M is also known as Time Preference of money. Time value of a sum of money receive today is more than its value receive after some time.  Reason of T.V.M § Preference for consumption. § Investment opportunity.

TIME VALUE OF MONEEY
Future value. Present value.

Technique of T.V.M
1.Compound future value. 2.Discounting technique.

Compound future value
Double period method. Multiple compounding period. Effective rate of interest in case of multiple period

compounding. Future value of sense of payment. Compound value of an annuity.

Discounting technique
Present value of series of payment. Present value of series of an annuity. Present value of series of infinite life annuity. Present value of series of annuity growing at

constant rate.

FORMULA OF T.V.M
 COMPOUND INTEREST :

Vn=V o(1+i)

n

o IN DOUBLY PERIOD : o RULE OF 72 = 72/i o RULE OF 69 =(0.35+69)/rule of interest vMULTIPLE COMPOUNDING PERIOD:

Vn=V o(1+i/m )

n*m

vEFFECTIVE RATE OF INTEREST

n-1 =(1+i/m)

UNIT-III

FINANCING DECISION

SOURCE OF FINANCE

MEANING OF SHARE
The entire capital of the company is divided in to

small part .Each small part known as share. It is to be noted if a company is bound up then share holder will get maximum face value.

EQUITY SHARE
They represent owner’s capital. The holder of share. It is real owner of own capital. Dividend paid after preference share to equity

share. Equity share participate in decision. Voting right.

MERIT OF EQUITY SHARE TO COMPANY
Equity share not create any obligation to pay fixed

rate of dividend . It is a permanent source of capital. It provide flexibility in usage of fund. It is permanent source of fund without repayment liability. Company not pay dividend at time of loss.

DEMERIT OF EQUITY SHARE TO COMPANY
If only equity share issue the company cannot take

advantage trading on equity(debt). As equity share cannot be redeemed. Centralization of management & control. Change in management policy.

PREFERENCE SHARE
P.S means share which has to preference. First priority as to payment of dividend whenever

dividend will be pay. Repayment of capital at the time when winding up of company. Cumulative. Non Cumulative. P.S is cannot issue for life time & more than 20 years. It carries fixed rate of dividend. It rank higher than equity.

Feature of PREFERENCE SHARE
Claim on income /asset. Cumulative dividend. Redeemability- preference share has a limited life. Fixed dividend. No voting right. Control. Maturity.

Merits of PREFERENCE SHARE(company’s point of view)
There is no legal obligation to pay dividend on

preference share. Preference share provide long-term capital to company. No carry voting right. It enhance credit worthiness of a firm.

De-Merits of PREFERENCE SHARE(company’s point of view)
Involve high capacity. Tax. Expensive source of finance. Permanent burden. No voting right.

MEANING OF RETAINED EARNING
Retained earning is technique of financial magt.

under which all profit of company are not distributed amongst the shareholder as dividend but a part of the profit is retained or re-invested in the company. This process of retained profit year after year their utilization in the business is also known as retained earning.

Term loan
Term loan also known as term /project finance. Primary source of such loan are financial

institutions. Commercial bank also provide term finance in a limited way which is generally payable more than one year but less than ten year.

Feature OF Term loan
Maturity(6-10 years in comparison 3-5 years of

bank advances). Negotiated –The term loan are negotiated b/w borrower & the lenders. Security – All term loan are secured.

Debenture/bonds/notes
Debenture represent creditorship security &

debenture –holder are long term creditors of company. Creditorship security is also known as debt capital. A company raise long term finance by public borrowing, the loan are raised by the issue of debenture.

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