Chapter 01 - Introduction To Financial Management

Chapter
1
INTRODUCTION TO FINANCIAL MANAGEMENT
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FINANCIAL MANAGEMENT, FINANCIAL MANAGEMENT, Dr. RATNESH Dr. Sudhindra CHATURVEDI Bhat
Excel Chapter-1 Books
Meaning of Business Finance:

Business Finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of business enterprises.
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What is Financial Management?
Financial Management is broadly concerned with the acquisition and use of funds by a business firm. Its scope may be defined in terms of the following questions :
How large should the firm be and how fast should it grow? What should be the composition of the firms assets?
What should be the mix of the firms financing ?

How should the firm analyze, plan and control its financial affairs?
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EVOLUTION OF FINANCIAL MANAGEMENT

Financial management has emerged as a distinct field of study only in the early part of this century as a result of consolidation movement and formation of large enterprises. Its evolution may be divided into three phases viz.,
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The Traditional phase, The Transitional phase and Modern phase

FINANCIAL MANAGEMENT, FINANCIAL MANAGEMENT, Dr. RATNESH Dr. Sudhindra CHATURVEDI Bhat Excel Chapter-1 Books
Traditional Approach
The traditional approach, which was popular in the early stage, limited the role of financial management to raising and administering of funds needed by the corporate enterprises to meet their financial needs. It deals with the following aspects : Arrangement of funds from financial institutions Arrangement of funds through financial instruments like share, bonds etc/. Looking after the legal and accounting relationship between a corporation and its sources of funds.
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Main limitations of Traditional Approach

External Approach Ignored routine problems
Ignored non-corporate enterprise.

Ignored working capital financing No Emphasis on allocation of funds Time value of money is not considered
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Modern Approach :
According to modern approach the term financial management provides a conceptual and analytical framework for financial decision-making. That means, the finance function covers both acquisition of funds as well as their allocation. The new approach views the term financial management in a broader sense. It is viewed as an integral part of over-all management.
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Financial management, in the modern sense of the term, divided into four major decisions :
Financial Management
Investment Decision
Financing Decision
Dividend Decision
Funds Requirement Decision
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SCOPE AND FUNCTIONS OF FINANCIAL MANAGEMENT 1. Liquidity: It is ascertained on the basis of three important considerations. a) Forecasting cash flows i.e., matching the inflows against cash outflows b) Raising funds i.e., financial manager will have to ascertain the sources from which funds may be raised and the time when these funds are needed. c) Managing the flow of internal funds.
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2. Profitability: While ascertaining profitability, the following factors are taken into account. a) Cost control b) Pricing c) Forecasting future profits d) Measuring cost of capital 3. Management: Asset management has assumed an important role in financial management. It includes : (a) the management of long term funds. (b) The management of short term funds.
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Functional Areas of Modern Financial Management

Determining Financial need Determining Sources of Funds Financial analysis Optimal Capital Structure Cost Volume Profit Analysis Functional Areas Of Financial Management Profit Planning and Control
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Functional Areas of Modern Financial Management

Fixed Assets Management Project Planning and Evaluation Capital Budgeting Working Capital Management Dividend Policies Acquisition and Mergers Corporate Taxation
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OBJECTIVE OF FINANCIAL MANAGEMENT :
Maximization of Profit : Profit maximization is a term which denotes the maximum profit to be earned by an organization in a given time period. The profit- maximization goal implies that the investment, financing and dividend policy decision of the enterprise should be oriented to profit maximization.
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Merits of the Profit Maximization:

Best Criterion on Decision-Making: The goal of profit maximization is regarded as the best criterion of the decision of making as it provides a yard-stick to judge the economic performance of the enterprises. Efficient allocation of Resources: It leads to efficient allocation of scarce resources as they tend to be diverted to those uses which, in terms of profitability, are the most desirable. Optimum Utilization: Optimum utilization of available resource is possible. Maximum Social Welfare
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Drawbacks of Profit maximisation :

Time Factor Ignored
it is Vague
The Term Maximum is also Ambiguous It Ignores Time Value
it Ignores the Risk Factor

In new business environment profit maximization is regarded as Unrealistic
Difficult
Inappropriate Immoral.
1 15
Maximizing return or EPS

Ignores timing and risk of the expected benefit. Market value is not a function of EPS. Hence maximizing EPS will not result in highest price for company's shares. Maximizing EPS implies that the firm should make no dividend payment so long as funds can be invested at positive rate of returnsuch a policy may not always work.
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Wealth Maximization
Maximizes the net present value of a course of action to shareholders.
Accounts for the timing and risk of the expected benefits. Benefits are measured in terms of cash flows. Fundamental objectivemaximize the market value of the firms shares.
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Significance of Wealth- Maximization:

The company although it cares more for the economic welfare of the shareholders, it cannot forget the others who directly or indirectly work for the overall development of the company. Thus
Wealth- Maximization takes care of

Lenders or creditors Workers or Employees
Public or Society
Management or Employer
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Significance of wealth - Maximization

Other objective Ensuring fair return to shareholder, Building up reserves for growth and expansion, ensuring financial discipline in the management
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Method of Financial Management/tools

Cost of Capital
Capital budgeting appraisal Ratio analysis ABC analysis Funds flow and Cash flow analysis
Working capital management

Trading on equity
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Organisation of the Finance Functions

Reason for placing the finance functions in the hands of top management Financial decisions are crucial for the survival of the firm. The financial actions determine solvency of the firm Centralisation of the finance functions can result in a number of economies to the firm.
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Functions of The Finance Controller/ Manager :
Accounting
Budgeting Internal Audit Finance Planning Profit Planning Investment Decisions Economic appraisal.
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Financial management Process : Financial Analysis Financial Decision Financial Planning Financial Control
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Chapter

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

Meaning of Business Finance:

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

What is Financial Management?

What should be the mix of the firms financing ?

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

EVOLUTION OF FINANCIAL MANAGEMENT

The Traditional phase, The Transitional phase and Modern phase

INTRODUCTION TO FINANCIAL MANAGEMENT

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

Main limitations of Traditional Approach

Ignored non-corporate enterprise.

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

Funds Requirement Decision

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

Functional Areas of Modern Financial Management

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

Functional Areas of Modern Financial Management

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

OBJECTIVE OF FINANCIAL MANAGEMENT :

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

Merits of the Profit Maximization:

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

Drawbacks of Profit maximisation :

it Ignores the Risk Factor

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

Maximizing return or EPS

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

Significance of Wealth- Maximization:

Wealth- Maximization takes care of

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

Significance of wealth - Maximization

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

Method of Financial Management/tools

Working capital management

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT

Organisation of the Finance Functions

Excel Chapter-1 Books

INTRODUCTION TO FINANCIAL MANAGEMENT