Financial Management 1

Subodh G Krishna
Assistant Professor
School of Business Management,
Mount Zion College of Engineering,
Kadammanitta
 Module 1

Introduction
 Finance
In our present day economy, finance is defined as
the provision of money at the time when it is
required.
Every enterprise, whether big , medium or small,

needs finance to carry on its operations and to

achieve its targets.
In fact, finance is so indispensable today that it is

rightly said to be the lifeblood of an enterprise.

Without adequate finance, no enterprise can
possibly accomplish objective.
 The subject of finance has been traditionally
classified into two categories

Public Finance
&
Private Finance
Classification of Finance

Finance

Public Finance Private Finance

Personal Finance
Business Finance
Finance of Non- Profit Organizations
 Private Finance
 Personal Finance
Deals with the analysis of principles and practices
involved in managing one’s own daily need of funds
 Business Finance
The study of principles, practices , procedures and
problems concerning financial management of profit
making organization engaged in the filed of
industry trade and commerce
 Finance of non profit organizations
The study of principles, practices , procedures and
problems concerning financial management of
Charitable, educational, social, religious and other
similar organizations
 Business Finance
 Corporation finance or broadly speaking business
finance can be defined as the process of raising,
providing and administrating of all money / funds
to be used in a corporate (business) enterprise.
 Thus, the scope of corporation finance is so wide

as to cover the financial activities of a business

enterprise right from its inception to its growth
and expansion and in some cases its winding up
also.
 Corporation finance usually deals with financial

planning, acquisition of funds, use and allocation

of funds and financial control
 Business Finance - Definition
 According to Wheeler, Business finance defined as
“that business activity which is concerned with the
acquisition and conservation of capital funds in
meeting the financial needs and overall objectives
of business enterprise ”

 According to Gutthmann and Dougall “Business

finance can be broadly defined as the activity
concerned with the planning, raising, controlling
and administrating the funds used in the business”
 Finance Function / Financial Management

 The Finance Function is a part of financial

management.
 Financial Management is the activity concerned

with control and planning of financial resources.

 In a business, the finance function involves the

acquiring and utilization of funds necessary for

efficient operations.
 Finance is the lifeblood of a business without it

things wouldn’t run smoothly.

 It is the source to run any organization, it provides

the money, it acquires the money

 Definition of FM
 According to Solomon
“Financial management is concerned with the
efficient use of an important economic resource,
namely Capital Funds”

 According to J.F Bradley

“Financial Management is the area of business
management devoted to the judicious use of
capital and careful selection of source of capital
on order to enable a spending unit to move in the
direction of reaching its goals”
 Importance of corporation finance / Financial
Management
 Financial planning and successful promotion of an
enterprise
 Acquisition of funds as and when required at the

minimum possible cost

 Proper use and allocation of funds
 Taking sound financial decision
 Improving the profitability through financial

control
 Increasing the wealth of the investors and nation
 Promoting and mobilizing individual and corporate

savings
 Approaches to Finance Function/FM
1. The traditional Approach
2. Modern Approach
The
traditional
Approach

Modern Finance
Approach Function
1. The traditional Approach
 It is evolved during 1920s and 1930s
 The scope of finance function was confined to

only procurement of funds needed by a business

on most suitable terms
 The utilization of funds was considered beyond

the purview of finance function

 The institutions and instruments for raising funds

were considered to be part of finance function

 It does not lay focus on the day to day financial

problems of the organization

 It is outsider looking in approach that completely

ignores internal decision making as to proper

utilization of fund
2. Modern Approach

 Broader approach
 It includes raising of funds as well as effective

utilization of funds
 The finance function not stop only by finding out

sources of raising fund their proper utilization is

also ensured
 The utilization of funds requires decision making
 So finance function according to this approach ,

covers financial planning, raising of funds,

allocation of funds, financial control etc
 The new approach is a analytical way of dealing

with financial problems of a firm

Aims of Finance Function/ Fianacial Management

 Acquiring Sufficient Funds

 Proper Utilization of Funds
 Increasing Profitability
 Maximizing Firm’s Value
Scope or Content of FM

1 Estimating Financial Requirements

2 Deciding Capital Structure
3 Selecting a source of finance
4 Selecting a pattern of investment
5 Proper Cash Management
6 Implementing Financial Control
7 Proper Use of Surplus
Finance Function / Functions of FM

Functi ●
Investment

ons of ●
Decision
Financing Decision

FM
●
Dividend Decision
 1. Investement Decision
 Investment decision relates to the determination of
total amount of assets to be held in the firm.
 Investment Decision can be classified into

Investment Decision

●
● Capital Budgeting / Long Term Decision
●
● Working Capital / Short Term Decision
1.1 Capital Budgeting Decision
 Investment Decision in Capital Expenditure
 Expenditure benefit of which are expected to

be received over long period exceeding one

year
 The investment decision is important not only

for the setting up of new business but also

for the expansion of existing business,
replacement of permanent assets, research
and development purpose etc
1.2 Working Capital Decisions
 Relates to the allocation of funds as among
cash and equivalence, receivables and
inventories
 Such a decision in influenced by trade off

between liquidity and profitability

2. Financing Decision
 Proper Asset Mix
 Capital Structure – Combination of Debt and

Equity
 The aim of capital structure is maximizing

profit
 Maintain a proper balance between Debt and

Equity Combination
3. Dividend Decision
 Dividend is the return earned by the share holders
for their investment in stock/share
 It is the share of profit earned by the firm
 The decision is regarding How much of profit is
distributed among shareholders and how much
should be retain as reserve
Decla
ring
as
Divid
end

Profit

Retai
ning
of
Profit
 Module 2

Valuation Technique and Risk and

Return Analysis
TIME VALUE OF MONEY

The time value of money (TVM) is the idea that

money available at the present time is worth more
than the same amount in the future due to its
potential earning capacity.

Time Value of Money (TVM) is an important

concept in financial management.

It can be used to compare investment alternatives

and to solve problems involving loans, leases, savings.
Introduction.
 There are certain reason which determine that
money has time value following are the reason;

1. Risk and Uncertainty – As we know future is never

certain and we can’t determines the risk involved
in future because outflow of cash is in our hand as
payment where as there is no certainty for future
cash inflows.
2. Inflation - In an inflationary economy, the money
received today, has more purchasing power than
the money to be received in future. In other
words, a rupee today represents a greater real
purchasing power than a rupee in future. Reason
for Time value of Money.
3. Consumption - Individuals generally prefer
current consumption to future consumption.
4. Investment opportunities - An investor can
profitably use the received money today to get
higher return tomorrow or after a certain period of
time.

e.g :
if an individual is given an alternative either to
receive Rs.10,000 now or after one year, he will
prefer Rs.10,000 now.
This is because, today, he may be in a position to
purchase more goods with this money than what he
is going to get for the same amount after one year.
 There are two techniques for adjusting time value of
money.
They are:
1. Compounding Techniques/Future Value Techniques

The process of calculating future values of cash

flows. In this concept, the interest earned on the
initial principal amount becomes a part of the
principal at the end of the compounding period.
2. Discounting/Present Value Techniques

 Present value, also called "discounted value," is the

current worth of a future sum of money or stream of
cash flow given a specified rate of return.
 Future cash flows are discounted at the discount

rate; the higher the discount rate, the lower the

present value of the future cash flows.
 Determining the appropriate discount rate is the key

to properly valuing future cash flows, whether they

are earnings or obligations