FINANCIAL

MANAGEMENT
 Syllabus
 Introduction: Definition, Scope and Objective of Financial
Management.
 Basic Financial Concepts
 Long Term Sources Of Finance
 Capital Budgeting Principal Techniques
 Concept and Measurement of Cost of Capital
 Financial Statement and Analysis
 Leverage and Capital Structure Decision
 Working Capital Decision
 Inventory Management
 Dividend Policy
 Introduction
 I am saving for retirement. Should I use a pension fund,
mutual fund, direct stock market investment ?
 I want that new car. Should I use my cash saving, lease,
borrow?
 Which is the best way to pay for my holidays, for my house?
 I’m thinking about starting a new business. Will it reward
me adequately?
 Mr. A has asked for major project financing. Should my
organization provide the funds?
 Why study finance

 To manage your personal resources

 To deal with the world of business
 To pursue interesting and rewarding career opportunities
 To make informed public choices as a citizen
 For the intellectual challenge
 Introduction
 Despite of the variations between businesses the basic
finance issues they face are essentially the same.
 The most important activities of a business firm are

 Financial Management is concerned with the finances

 Defining Finance
 Financial Management performs facilitation, reconciliation
and controls functions in an organization.
 All the decision having monetary implications comes under
the purview of financial management.
 Financial decision making involves procurement of funds
and their optimal utilization through investment, financing
dividend and working capital decisions.
 The key issue in finance are
 Where to raise financial resources from
 Where to invest the resources
 How to best manage the production distribution function
 How much of profit to distribute and how much to retain
 Finance function reconciles the conflicting interest of
the varied stakeholders.
 Defining Finance
 Finance is analytical.
 Finance is based on economic principles.
 Finance uses accounting information as an input for
decision-making.
 Finance is international in perspective.
 Finance is constantly changing.
 Finance is the study of how to invest and raise
money productively
 Finance is the study of how people allocate scarce
resources over time
- costs and benefits are distributed over time
- but the actual timing and size of future cash flows
are often known only probabilistically
 Finance Functions
1. Investment or Long Term Asset Mix Decision
 Function of investing raised funds in assets are known as
investment decision.
 Examples include Expansion, Modernization, Replacement of
Long Term Assets, R & D (having long term implications).
 The 2 important aspect of investment decision are
(a) Evaluation of the prospective profitability of new
investments
(b) The measurement of a cut-off rate; against that the
prospective return of new investments could be compared.
 Decisions are taken in the light of their impact on the wealth of
shareholders.
 The decision involve huge capital outlay, have long term
implications, and are usually irreversible.
 Investment decision also referred as Capital Budgeting decisions.
 Finance Functions
2. Financing or Capital Mix Decision
 Financing decisions are mainly concerned with the identification
of potential sources of funds and tapping of these sources.
 Main issue involved in such decisions are
 Where from to procure the requisite funds?
 How much should be the proportion of short term and long
term funds?
 How do the expectations of providers of each source of capital
change with alteration in capital mix?
 What should be the optimal mix of debt and equity in capital?
 The mix of debt and equity is known as the firm’s capital
structure.
 They determine the financial risk profile of the business.
 The thrust of financing decision is on bringing down the cost
of financing keeping the risk constant.
 Finance Functions
3. Dividend or Profit Allocation Decision
 Distributing returns earned from assets to shareholders are known
as dividend decision.
 The financial manager must decided whether the firm should
distribute all profits, or retain them, or distribute a portion and
retain the balance.
 Such a decision depends on trade off between the future financing
needs of the firm and current consumption requirement of
shareholders.
 The proportion of profits distributed as dividends is called the
dividend payout ratio and the retained portion of profits is known
as retention ratio.
 Normally firms follow a policy of stable dividend, but firms with
high growth rate generally offers a high retention and low payout
ratio.
 Dividends are generally paid in cash, but it can also be given in
form of bonus shares.
 Finance Functions
4. Working Capital Decision/ Liquidity Decision
 Working Capital decisions are related to the management of
current assets.
 The two key decision points in working capital management are
level of investment in current assets and financing of such assets.
 Current asset management affect the firm’s liquidity.
 A firm attempts to balance cash inflows and outflows while
performing these functions. These are called liquidity decisions.
 A conflict exists between profitability and liquidity while
managing current assets. Hence, a proper trade-off must be
achieved between profitability and liquidity.