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Introduction to

financial
Management
IMPORTANCE OF FINANCE
• It is Life Blood of any Business Enterprise
• Lays the Basic Foundation for all Economic
Activities
• Holds the Master Key for all Manufacturing
and Merchandizing Activity
• Efficiency of Business of any size has to be
closely linked to Management of Finance

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Financial Management

• Financial Management encompasses the


procurement of funds in the most economic
and prudent manner and employment of
these funds in the most optimum way to
maximize the return to the owner.
Objective of Financial Management

• To Maximize Profit

• To Maximize Earning Per Share

• To Minimize Cost

• To Maximize the value of companies stock


Scope of financial management
• Financial Management provides a conceptual
and analytical framework for decision making
• Financial Management can be broken down
into two major decisions as functions of
finance
1. Investment decision
2. Financing Decision
Investment decision
 It relates to selection of assets in which
funds will be invested by a firm.
 The assets are long term assets which yield a
return over a period of time in future. Or
short term assets which are converted into
cash within a short period of time.
 The first aspect is known as capital
budgeting and second is known as working
capital management.
Financing Decision

Capital Structure refers to the proportion of debt


and equity capital
 The financing decision of a firm relates to the
choice of the proportion of these sources to
finance the investment requirement
The use of debt implies a higher return to the
shareholder but is also increases the financial risk
A capital structure with reasonable proportion of
debt and equity is called optimum capital
structure
Financial
Management

Sources of Fund
Application of Fund
(Financing
(Investing Decision)
Decision)

Short Term Short Term


Long Term Long Term
Funds Investment
Funds Investment

Own Funds Borowed Funds


Current Liabilities Current Assets Fixed Assets
(Capital
(Capital Structure (Working Capital (Working Capital (Capital
Structure
Decision) Management) Management) Budgeting
Decision)
Market Value, Financial Decisions and Risk
and Return tradeoff

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Organization Chart

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Interface Between Finance and
Other Functions
 Marketing- Finance
Significant impact on profitability of firm.
Impact of credit extended to customers
Eagerness to meet sales target with liberal credit
terms
Cost of maintaining large inventory
Product Pricing
Sales promotion and advertisement
Choice of product mix and
Distribution policy

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Production - Finance
Controls major part of investment in
◦ Equipment, material and man power
◦ Effective use of equipment and man power
◦ Inventory of working process, stores and
spares
◦ Cost of output
◦ Make, Buy or Lease decisions.

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Top Management and finance
• Interested in ensuring achievement of overall
objectives
–Use of financial statements as means
for information and effectiveness
– Strong linkage with finance for strategic planning,
management control and other relevant basic
inputs for effective and efficient management.

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Financial System
• Financial system comprises of "a set of
complex and closely interconnected financial
institutions, markets, instruments, services,
practices, and transactions”.
• The financial system includes a complex of
institutions and mechanisms which affect the
generation of savings and their transfer to
those who will invest