Financial Management:

Goals and Systems

 What should the CFO strive for?

 What Planning and Controlling

System should the CFO put in place?
 What should the CFO strive for?

Exploring the Goal(s)

of
Financial Management
[and for that matter, the business itself]
What should the CFO strive for?

ROLE OF ENTREPRISE IN
SOCIETY

GOAL OF
BUSINESS
ENTERPRISE

GOAL OF
FINANCE
DEPARTMENT
 What should the CFO strive for?

Exploring the Role of

Business Institution in Society
Business Institution
stands for
Value Creation
?

Value Creation
and

Finance Managers
 Understanding the Value Creating Role of
Business Institution in Society
The Process Model…..

INPUTS OUTPUT
Business
COSTS REVENUE
Process

Land (RM): Rent Value

Creation Sale Price
Labour: Wages & Salaries
Capital (D+E): Cost of Capital (Div. Int.) + Depreciation
.Entrepreneur: (Economic) Profit
ECONOMIC Profit = Revenue - Costs
What are the Sources of Profit?
1. Exploitation
2. No Exploitation
Given the assumption of fully competitive economy i.e. perfect market…
ECONOMIC Profit = Value Created
Business as a Process of Value Creation….

What could be the RIGHT GOAL of Business

Enterprise in its Societal Context?

Economic Profit = Value Created

ECONOMIC PROFIT MAXIMIZATION

The Natural Goal of Business
Alternative Measures of Profit

Societal Perspective:
Economic Profit
Vs.

Internal Perspective:
Company / Accounting Profit
Profit: The Internal / Accounting Perspective….

Revenue

Profit Financing
Investment
= Decision
Decision
Value

Costs
Value: The Shareholders’ / Value / Finance Perspective....

Cash
Inflows

Investment Economic Financing

Decision Value Decision

Cash
Outflows
 What is the Test of
Shareholders’ Wealth / Value ?
Shareholders’ Value is reflected in the
Market Value of Shares.

So the mandate to the CFO is:

Maximize the Share/Firm Value
How does the Finance Function create the Shareholder Value?

MAXIMIZATION OF SHAREHOLDERS’ WEALTH

BY MAXIMIZING THE PRESENT VALUE OF THEIR NET CASH FLOWS

CASH INFLOWS & OUTFLOWS

CONDUCTING PHYSICAL OPERATIONS

CREATING ENVIRONMENT FOR OPERATIONS

FINANCING INVESTMENT
 What is the guarantee that the
Managers
would actually work for attaining
Shareholerds’ Wealth / Value
Maximization?

Agency Problem
Handling Internal Implications of the
Agency Problem
CORPORATE STRATEGY
the value proposition…

PLANNING IMPLEMENTATION CONTROLLING

MOTIVATION

What should the Finance Head do about it?

 Handling External Implications of the
Agency Problem
The Colour of Agency Problem in India
In India, very peculiarly, it manifests as
‘The Dominant Shareholder Problem’

Addressing the Agency Problem in India

In India, Clause 49 of Listing Agreement as
specified by SEBI strives for ensuring
‘Good Corporate Governance’
How does the Finance Function integrate with other functions?
CEO is finally held responsible for this. He
MAXIMISATION OF SHAREHOLDERS’ WEALTH delegates this job to the CFO. Towards that,
BY MAXIMIZING THE PSRESENT VALUE OF THEIR NET CASH FLOWS
CFO designs the Financial Planning and
Controlling System within which he and other
Area Managers make the decisions.

CFO is responsible for Planning and

CASH INFLOWS & OUTFLOWS
Controlling the cash flows (i.e. the financial
implications) of the companywide operations.

Other Area Managers are solely responsible

CONDUCTING PHYSICAL OPERATIONS
for conducting their specific operations.

CFO either directly makes WCM decisions or

CREATING ENVIRONMENT FOR OPERATIONS provides guidelines to other Area Managers
for the same.

CFO makes these decisions in consultation

FINANCING INVESTMENT with CEO. Other Area Managers may be
invited to submit their investment proposals.