Introduction Financial Management

Introduction to Financial Management
Course Objectives
• Explain What is Financial Management
• List the Objectives of Financial Management
• Explain the Various Elements of Financial Management
• Describe the Role of a Financial Manager
• Describe the Role of Reporting in Financial Management

Introduction
• You know that the primary

objective or goal of any
business is to make profits.
Also, each and every
business always deals in
large amounts of money.
• Hence, you can understand
that finance and financial
management play a crucial
role in the successful and
smooth functioning of any
business.
© ManagementStudyGuide.com. All rights reserved.

Introduction
• Also, when financial

management is ignored and
not closely scrutinized, it
can lead to extremely
damaging consequences for
an organization.
• Let us understand this by
looking at how a successful
company saw its downfall
due to its poor financial
management practices and
understand what happens
when good financial
management norms are not
followed.
Introduction
• Thornton Inc. was an

American oil & natural gas
company based in California.
It was formed by Keith
Walker after several years of
experience in the field of oil,
natural gas and energy.
• Thornton Inc. grew into a
giant business in just 15
years to become America's
seventh largest company.
However, in reality, the firm's
success turned out to have
involved an elaborate scam.

Introduction
• Thornton Inc. became the

synonym of the word
‘scandal’ when its large-
scale scandal shook the
corporate world. Thornton’s
Scandal came to light in
November 2003.
• Thornton was involved in
the use of accounting
loopholes, special purpose
entities, and poor financial
reporting and was able to
hide billions of dollars in
debt from failed deals and
projects.
Introduction
• Thornton had also lied

about its profits and was
accused of a range of shady
dealings, including
concealing debts so they
didn't show up in the
company's accounts.
• Thornton was forced to file
bankruptcy under the
Chapter 11 bankruptcy in
December as the depth of
the deception unfolded and
the investors and creditors
retreated.

Introduction
• The Thornton incident

made everyone realize the
importance of good
financial management for
a company and forced
everyone to question the
existing financial
management practices in
several organizations.

Introduction
• The doctored accounts

which flouted all the
established norms of the
accountancy practices, false
financial statements and the
Thornton executives who
pocketed millions of dollars
by selling their share of
stocks while laying-off the
20% of the organization’s
workforce, painted a grim
picture for the financial
management scenario and
investors.

Introduction
• Also, it was a real shock to

financial experts across
the globe that external
agencies like auditors,
credit rating agencies and
security analysts had
failed to identify the scam
and had failed to see the
real picture.

Introduction
• Hence, you can understand

that good financial
management practices and
a close scrutiny of the
financial management
practices in an organization
can prove to be the
difference between success
and failure for any business.
• The financial management
practices of a company can
also have a large impact on
Let us learn about the Introduction the shareholders, society as
to Financial Management in detail. well as the employees of
the company.
What is Financial Management?
Financial management is concerned with the acquisition, financing, and

management of assets with some overall goal in mind.
It is the art and science of managing money. Financial management is the

most essential requirement of any organized business or activity.
It is the process of procuring and judicious use of resources with a view to

maximize the value of the firm. Financial management is interdependent
with other areas of management.
Financial Management means planning, organizing, directing and

controlling the financial activities such as procurement and utilization of
funds of the enterprise. It means applying general management principles
to financial resources of the enterprise.
What is the Goal of an Organization?
The two main goals of an organization are:
Profit
ion
• Maximizat
This goal ignores:
• TIMING of Returns
• UNCERTAINTY of Shareho
lder We
Returns Maximiz alth
ation
•
Value creation occurs when
we maximize the share price
for current shareholders.
This is the same as:
Roll your mouse • Maximizing Firm Value
over the icon,
• Maximizing Stock Price
to learn more.
Did You Know?
The following are the main Legal Forms of
Business:
• Sole Proprietorship: A business owned by a
single individual. The owner maintains title to
the firm’s assets.
• Partnership: Partnership is similar to a sole
proprietorship, except that there are two or
more owners.
• Limited Liability Company (LLC): This is a cross
between a partnership and a corporation.
Owners have limited liability, but the firm
runs and is taxed like a partnership.
• Corporation: A business entity that legally
functions separate and apart from its owners.
Owners’ liability is limited to the amount of
their investment in the firm.

Objectives of Financial Management
Financial management is generally concerned with procurement, allocation
and control of financial resources of a concern. The objectives of financial
management are:
• To ensure regular and adequate supply of funds to the concern.
• To ensure adequate returns to the shareholders; this will depend upon the
earning capacity, market price of the share and expectations of the
shareholders.
• To ensure optimum funds utilization. Once the funds are procured, they
should be utilized in maximum possible way at least cost.
• To ensure safety on investment, that is, funds should be invested in safe

ventures so that adequate rate of return can be achieved.
• To plan a sound capital structure. There should be sound and fair

composition of capital so that a balance is maintained between debt and
equity capital.
Elements of Financial Management
The following are the key elements of financial management:
• Investment Decisions
• Financial Decisions
• Dividend Decision
Let us look at each in detail.

Investment Decisions
• Investment Decisions
Investment Decisions:
• Investment Decisions includes

investment in fixed assets
known as capital budgeting.
• Investment in current assets is

also a part of investment
decisions known as working
capital decisions.

Financial Decisions
• Financial Decisions
Financial Decisions:
• Financial Decisions relate to the

raising of finance from various
resources which depends upon
decisions regarding the type of
source, period of financing, cost
of financing and the returns
thereby.

Dividend Decision
• Dividend Decision
Dividend Decision:
• The finance manager has to take

decisions with regard to the net
profit distribution.
• Net profits are divided into two:

o Dividend for shareholders-
Dividend and the rate of it has to
be decided.
o Retained profits- Amount of
retained profits has to be
finalized which will depend upon
expansion and diversification
plans of the enterprise.
Investment Decision
One of the most important
finance functions is to
intelligently allocate capital to
long term assets. This activity is
also known as capital budgeting.
It is important to allocate capital
in those long term assets so as to
get maximum yield in future.
Following are the two aspects of

investment decision:
• Evaluation of new investment
in terms of profitability
• Comparison of cut off rate
against new investment and
prevailing investment
Investment Decision
As the future is uncertain, hence
there are difficulties in
calculation of expected return.
Along with uncertainty comes
‘risk factor’ which has to be
taken into consideration.
This risk factor plays a very

significant role in calculating the
expected return of the
prospective investment.
Therefore, while considering
investment proposal, it is
important to take into
consideration both expected
return and the risk involved.
Investment Decision
Investment decision not only
involves allocating capital to long
term assets but also involves
decisions of using funds which are
obtained by selling those assets
which become less profitable and
less productive. It is advisable to
decide to decompose depreciated
assets which are not adding value
and utilize those funds in securing
other beneficial assets. An
‘opportunity cost of capital’ needs
to be calculated while dissolving
such assets. The correct ‘cut off
rate’ is calculated by using this
opportunity cost of the ‘Required
Rate of Return’ (RRR).
Financial Decision
Financial decision is yet another

important function which a financial
manager must perform. It is important
to make wise decisions about when,
where and how a business should
acquire funds. Funds can be acquired
through many ways and channels.
Broadly speaking, a correct ratio of
equity and debt has to be maintained.
This mix of equity capital and debt is
known as a firm’s ‘capital structure’. A
firm tends to benefit most when the
market value of a company’s share
maximizes which is not only a sign of
growth for the firm but also maximizes
shareholders’ wealth.
Financial Decision
On the other hand, the use of debt

affects the risk and return of a
shareholder. Although, it is more risky,
it may increase the return on equity
funds. A sound financial structure is
said to be one which aims at
maximizing shareholders’ return with
minimum risk. In such a scenario, the
market value of the firm will maximize
and hence an optimum capital
structure would be achieved. Other
than equity and debt, there are several
other tools which are used in deciding
a firm’s capital structure.

Dividend Decision
Earning a profit or a positive return is a
common aim of all businesses. But the
key function that a financial manger
performs in case of profitability is to
decide whether to distribute all the
profits to the shareholders or retain all
the profits or distribute part of the
profits to the shareholders and retain
the other half in the business. It’s the
financial manager’s responsibility to
decide an optimum dividend policy
which maximizes the market value of the
firm. Hence, an optimum dividend pay-
out ratio is calculated. It is a common
practice to pay regular dividends in case
of profitability. Another way is to issue
bonus shares to existing shareholders.
Liquidity Decision
It is very important to maintain a
liquidity position of a firm to avoid
insolvency. Firm’s profitability, liquidity
and risk are associated with the
investment in current assets. In order to
maintain a trade-off between
profitability and liquidity, it is important
to invest sufficient funds in current
assets. As current assets do not earn
anything for business, it is crucial that
proper calculations must be done before
investing in current assets. Current
assets should be valued properly and
disposed off from time to time, once
they become non profitable. Currents
assets must be used in times of liquidity
problems and in times of insolvency.
Role of Finance Function in Organizational Processes
Contemporary organizations need

to practice cost control if they
want to survive the recessionary
times. Given the fact that many
top tier companies are currently
stuck with low growth and less
activity situations, it is imperative
that they control their costs as
much as possible. This can happen
only when the finance function in
these companies is diligent and
has a hawk eye towards the costs
being incurred.

Apart from this, companies also have

to introduce efficiencies in the way
their processes operate and this is
another role for the finance function
in modern day organizations. Further,
there must be synergies between the
various processes and this is where
the finance function can play a critical
role. Lest one thinks that the finance
function, which is essentially a support
function, has to do this all by
themselves, it is useful to note that,
many contemporary organizations
have dedicated project office teams
for each division, which perform this
function.
In other words, whereas the

finance function oversees the
organizational processes at a
macro level, the project office
teams indulge in the same at the
micro level. This is the reason why
finance and project budgeting and
cost control have assumed
significance because after all,
companies exist to make profits
and finance is the lifeblood that
determines whether organizations
are profitable or failures.

Video
Look at the video given below to understand the basics of financial
management.
Click on the video link

to play it!
https://www.youtube.com/watch?v=Vm3kufJ9l-o

Pension Fund Management & Tax Activities of Finance Function
• The next role of the finance function is

in payroll, claims processing, and
acting as the repository of pension
schemes and gratuity.
• Of course, only large organizations

have dedicated pension fund trusts to
take care of these aspects and the
norm in most other organizations is to
act as facilitators for the Pension Fund
scheme with the local or regional PF
(Provident Fund) commissioner.
• The third aspect of the role of the

finance function is to manage the
taxes and their collection at source
from the employees.

Pension Fund Management & Tax Activities of Finance Function
• In many countries of the Western

world, it is mandatory for
organizations to deduct tax at
source from the employees
commensurate with their pay and
benefits.
• The finance function also has to

coordinate with the tax authorities
and hand out the annual tax
statements that form the basis of
the employee’s tax returns.
• Often, this is a sensitive and critical

process since the tax rules mandate
very strict principles for generating
the tax statements.
Payroll, Claims Processing, & Automation Activities of Finance Function
The other role of the finance function is to process

payroll and associated benefits in time and in tune with
the regulatory requirements.
Further, claims made by the employees with

respect to medical, and transport allowances have
to be processed by the finance function.
Often, many organizations automate this routine activity

wherein the use of ERP (Enterprise Resource Planning)
software and financial workflow automation software
make the job and the task of claims processing easier.

You must remember that the finance function has

to do its due diligence on the claims being
submitted to ensure that bogus claims and
suspicious activities are found out and stopped.
This is the reason why many organizations have

experienced chartered accountants and financial
professionals in charge of the finance function so
that these aspects can be managed professionally
and in a trustworthy manner.

The key aspect here is that the finance function

must be headed by persons of high integrity and
trust that the management reposes in them must
not be misused.
In conclusion, the finance function though a non-

core process in many organizations has come to
occupy a place of prominence because of these
aspects.

Role of a Financial Manager
Financial activities of a firm is one of
the most important and complex
activities of a firm. Therefore, in
order to take care of these activities
a financial manager performs all the
requisite financial activities.
A financial manager is a person who

takes care of all the important
financial functions of an
organization. The person in charge
should maintain a far sightedness in
order to ensure that the funds are
utilized in the most efficient manner.
His actions directly affect the
Profitability, growth and goodwill of
the firm.
Role of a Financial Manager
Following are the main functions of a Financial
Manager:
Raising of Funds
Allocation of Funds
Profit Planning
Understanding Capital
Markets

Raising of Funds
Manager:
Raising of Funds Raising of Funds:
In order to meet the obligation of the business

it is important to have enough cash and
Allocation of Funds
liquidity.
A firm can raise funds by the way of equity and

Profit Planning debt.
It is the responsibility of a financial manager to

Understanding Capital decide the ratio between debt and equity. It is
Markets important to maintain a good balance between
equity and debt.

Allocation of Funds
Manager:
Raising of Funds
Allocation of Funds:
Allocation of Funds
Once the funds are raised through different
channels the next important function is to
allocate the funds.
Profit Planning
The funds should be allocated in such a manner
that they are optimally used.
Markets

Allocation of Funds
Manager:
•In order to allocate fu
nds in the best possib
manner the followin le
Raising of Funds g p oint must be conside
red
o The size of the fi
rm and its growth
cAllocation
apability of Funds:
Allocation of Funds o Status of assets w
Once the funds arehraised
etherthrough
they aredifferent
long term
ochannels
r short tethe m next important function is to
o Mallocate
o d e b ythe funds.
which the funds are
Profit Planning raised
o ThThe esefunds
finanshould
cial debe
cisallocated
ions direin
c
such a manner
tly and
inthat
direthey
c tly are
in optimally used.
fluence other manag
Understanding Capital erial
Markets
a c tiv itie s. Hence formation o
f a good asset
mix and proper alloc
ation of funds is one
the most important of
activity

Profit Planning
Manager:
Profit Planning:
Raising of Funds
Profit earning is one of the prime functions of
any business organization.
Allocation of Funds
Profit earning is important for survival and
sustenance of any organization.
Profit Planning
Profit planning refers to proper usage of the
profit generated by the firm.
Markets Profit arises due to many factors such as pricing,
industry competition, state of the economy,
mechanism of demand and supply, cost and
output.
Profit Planning
Manager:
• A healthy mix of vari
able and fixed factors
prodProfit
uctioPlanning:
n can lead to an incre of
Raising of Funds profitability of the fi ase in the
rm.
Profit earning is one of the prime functions of
• Fixedany
cosbusiness
ts are inorganization.
curred by the use of
factors of production fixed
Allocation of Funds such as land and
machProfit
ineryearning
. In ordeisr important
to maintafor in a
survival and
tandem it is
imposustenance
rtant to con oftiany organization.
nuously value the
Profit Planning depreciation cost of
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Profit planning refers tocoproper usage ofothe
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• An opprofit
portugenerated
nity cost m byuthe
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e calculated in
order to replace tho
Understanding Capital se factors of producti
whichProfit
has garises
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Markets rowton many factors such
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not noindustry
ted thencompetition,
these fixedstate of the economy,is
fluctuamechanism of demand
cand
ostsupply,
can caucost
se hand
uge
tions in profit.
output.
Understanding Capital Markets
Manager:
Raising of Funds
Understanding Capital Markets:
Shares of a company are traded on stock

Allocation of Funds exchange and there is a continuous sale and
purchase of securities.
Profit Planning Hence a clear understanding of capital market is

an important function of a financial manager.
Understanding
Capital When securities are traded on stock market
Markets
Markets there involves a huge amount of risk involved.

Understanding Capital Markets
Manager:
• Therefore a financia
l manger understand
calculates the risk in s and
Raising of Funds volved in this trading
share s and debentu
Understanding Capital of
res. Markets:
• It’s on the discretion
Shares of a company of aare
fintraded
ancialon
mastock
nager as
Allocation of Funds to how distribute th
exchange and there e pisroaficontinuous
ts. sale and
• Manypurchase
investors of securities.
do not like the firm to
distribute the profits
Hence a clear amongst sof
understanding hacapital
reholdmarket
ers as is
Profit Planning dividend instead inv
est in of
an important function thae financial
businessmanager.
itself to
enhance growth.
Understanding •
Capital The pra When
cticesecurities
s of a finaare traded on stock market
ncial manager directl
Markets
Markets impacthere
t the involves
operatioanhuge y
amount of risk involved.
in capital market.

Reporting and Financial Management
It is very important to keep proper documentation of all financial

activities in the chart of accounts, general ledger, and journals,
as well as records or personnel wages and a document detailing
the organization’s financial practices.
It is also important that all bills, invoices, packing slips, time

sheets, etc. be kept in official files.
T ha n k y ou!
K e e p s afe !

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Introduction to Financial Management

• List the Objectives of Financial Management

• Explain the Various Elements of Financial Management

• Describe the Role of a Financial Manager

• Describe the Role of Reporting in Financial Management

• You know that the primary

© ManagementStudyGuide.com. All rights reserved.

• Also, when financial

• Thornton Inc. was an

© ManagementStudyGuide.com. All rights reserved.

• Thornton Inc. became the

• Thornton had also lied

© ManagementStudyGuide.com. All rights reserved.

• The Thornton incident

© ManagementStudyGuide.com. All rights reserved.

• The doctored accounts

© ManagementStudyGuide.com. All rights reserved.

• Also, it was a real shock to

© ManagementStudyGuide.com. All rights reserved.

• Hence, you can understand

Financial management is concerned with the acquisition, financing, and

It is the art and science of managing money. Financial management is the

It is the process of procuring and judicious use of resources with a view to

Financial Management means planning, organizing, directing and

© ManagementStudyGuide.com. All rights reserved.

• To ensure safety on investment, that is, funds should be invested in safe

• To plan a sound capital structure. There should be sound and fair

The following are the key elements of financial management:

Let us look at each in detail.

• Investment Decisions includes

• Investment in current assets is

© ManagementStudyGuide.com. All rights reserved.

• Financial Decisions relate to the

© ManagementStudyGuide.com. All rights reserved.

• The finance manager has to take

• Net profits are divided into two:

Following are the two aspects of

This risk factor plays a very

Financial decision is yet another

On the other hand, the use of debt

© ManagementStudyGuide.com. All rights reserved.

Contemporary organizations need

© ManagementStudyGuide.com. All rights reserved.

Apart from this, companies also have

In other words, whereas the

© ManagementStudyGuide.com. All rights reserved.

Click on the video link

© ManagementStudyGuide.com. All rights reserved.

• The next role of the finance function is

• Of course, only large organizations

• The third aspect of the role of the

© ManagementStudyGuide.com. All rights reserved.

• In many countries of the Western

• The finance function also has to

• Often, this is a sensitive and critical

The other role of the finance function is to process

Further, claims made by the employees with

Often, many organizations automate this routine activity

© ManagementStudyGuide.com. All rights reserved.

You must remember that the finance function has

This is the reason why many organizations have

© ManagementStudyGuide.com. All rights reserved.

The key aspect here is that the finance function

In conclusion, the finance function though a non-