Course Title

Financial Management
2 year MBA 2nd Semester
Book Ref: Principles of Managerial Finance
By: Lawrence J. Gitman
 Course Instructor

AFSANA YESMIN
Assistant Professor & Coordinator
Discipline: Finance
Department of Business Administration
Premier University
Chottrogram
Objectives of the Course:
• To know the concept of Financial Management & the responsibilities
of a financial manager.
• To diagnosis the financial health of a corporation by analyzing the
financial statement.
• To know about the concepts for making short term & long term
financial decisions of a firm/corporation.
• To make the financing decisions by minimizing the cost of capital
which also maximize the firms shareholders wealth.
 Chapter : 1
Introduction to Financial Management

Finance:
Finance can be defined as the art & science of managing money.
Money Management: 1. Collection of fund
2. Disbursement of fund
Finance is concerned with the process, institutions, markets, and
instruments involved in the transfer of money among individuals,
business, and governments.
Financial Management:
• Financial Management or Managerial Finance is concerned with the
duties of the financial manager in the Business firm.
• Financial Management means planning, organizing, directing and
controlling the financial activities such as procurement and utilization
of funds of the enterprise.
• Financial management may be defined as the area or function in an
organization which is concerned with profitability, expenses, cash and
credit, so that the "organization may have the means to carry out its
objective as satisfactorily as possible;"  the latter often defined as
maximizing the value of the firm for stockholders.
Origin & Development
• The term ‘nature’ as applied to financial management refers to its
relationship with the closely related fields of economics and
accounting, its functions, scope and objectives.

• In the early year of its evaluation it was treated synonymously with

the raising funds. In the current literature pertaining to financial
management , a broader scope so as to include, in addition to
procurement of fund, efficient use of resources is universally
recognized.
The Managerial Finance Function

• The managerial functions of Finance can be described by considering

the following three aspects:

1. Organization of the Finance Function

2. Relationship with economics & accounting
3. Primary activities of financial managers
Organization of the Finance Function

• The size and importance of the managerial function depend on the

size of the firm.
For small firm – Accounting department
For Large firm – Separate department(treasurer & controller)
Relationship with Economics

• Economic principle that states that financial decisions should be made

and actions taken only when the added benefit exceed the added
cost. i.e.,
Marginal Benefit > Marginal Cost
Relationship with Accounting
• 1. Emphasis of Cash flow
Accrual Basis
Cash Basis
• 2. Decision Making
Investment Decision
Financing Decision
Primary Activities of Financial Manager

• In addition to ongoing activities in financial analysis and planning, the

financial manager’s primary activities are making optimal investment
decisions and financing decision to maximize the wealth of the
organization.
Approaches of Financial Management
• The approach to the scope and functions of financial management is
divided into two categories:
a) The traditional approach
b) The modern approach
Traditional Approach:
The scope of finance function was treated by the traditional approach
in the narrow sense of procurement of funds by corporate enterprise to
meet their financing needs.
Traditional Approach
• The main limitation of this approach is that no consideration was
given to the viewpoint of those who had to take internal financial
decisions. The traditional treatment was, in other words, the outsider-
looking-in approach. Insider-looking-out was completely ignored.
• The traditional approach implied a very narrow scope for financial
management. The modern approach provides a solution of the
shortcomings.
Modern Approach
• The modern approach views the term financial management in a
broad sense and provides a conceptual and analytical framework for
financial decision making. Three major decisions as functions of
finance are:
1. Investment Decision
2. Financing Decision
3. Dividend policy Decision.
Modern Approach
Balance Sheet

Liabilities & Owners Taka Assets Taka

Equity
Financing
Short term Liabilities *** Current Assets ***
Decisions Long term Liabilities *** Fixed Assets *** Investment
Owners Equity ***
Total *** Total ***
Decisions
Financial Decisions:
• 1.Investment Decision
The investment decision relates to the selection of assets in which
funds will be invested by a firm. The assets which can be acquired fall
into two broad groups:
a) Capital Budgeting Decision/LT or FA investment decision
b) Working Capital Management Decision/ ST or CA Inv Dec.
CBD: Three aspects of capital budgeting decision are:
i. Choice of new asset
ii. The analysis of risk and uncertainty
iii. Evaluation of the asset based on cost & benefit.
Cont.

WCMD: Its called the current asset management decision. The main
aspects of this decision are:
i. Trade off between liquidity and profitability
ii. Efficient management of current assets
• 2.Financing Decision:
The concern of the financing decision is with the financing mix or
capital structure or leverage. Two aspects of financing decision are:
i. Capital Structure theory
ii. Capital Structure decision based on cost of capital
Cont.

• 3. Dividend Policy Decision:

The third major decision of financial management is the decision
relating to the dividend policy. Two alternatives are available in dealing
with the profit of a firm. One is distribution of the fund to the
shareholders and other one is to retain the profit for reinvestment.
The main two aspects of dividend decision are:
i. DPR and RR
ii. Factors influencing the dividend policy
Goals of the Firm
• Goals of a corporation can be divided as
Profit Maximization
Wealth Maximization
• Profit maximization:
Corporation commonly measure profit in terms of Earning per
share (EPS). EPS can be calculated by dividing the period’s total
earnings available for the firm’s common stockholders by the number
of shares of common stock outstanding.
Cont .
But profit maximization is not a reasonable goal. Because it ignores
the following concepts:
1. Timing
2. Cash flow
3. Risk
• Wealth Maximization:
The goal of the firm, of all managers and employees, is to
maximize the wealth of the owners for whom it is being operated. The
wealth of corporate owners is measured by the share price of the stock.
Cont .
Financial Institutions & Markets
• Financial Institutions:
An intermediary that channels the savings of individuals, business, and
governments into loans or investments.
• Major Financial Institutions:
1. Commercial Banks 2. Saving Unions & loans
3. Credit Unions 4. Saving Banks
5.Insurance Company 6. Mutual Fund
7. Pension Fund
Financial Markets
• Financial markets are forums in which suppliers of funds and demanders
of funds can transact business directly.
• The two key financial markets are:
Money Market
Capital Market
• Money Market:
The money market is created by a financial relationship between
suppliers and demanders of short term funds. The money market brings
together the suppliers and demanders of seasoned or short term funds.
Money Market Instruments

• Treasury Bills
• Commercial Papers
• Banker’s Acceptance
• Certificate of Deposits
• The money market instruments are issued by government, business
and financial institution respectively.
Capital Market
• The capital market is the market that enables supplier and demanders of
long term funds to make transactions.
• Key instruments of Capital market are
Bond
Stock
• Bonds are long term debt instruments used by business and government
to raise large sum of money, generally from a diverse group of lenders.
• Shares of common stock are units of ownership, or equity, in a
corporation. And Preferred stock is a special form of ownership that has
features of both a bond and common stock.
Cont.

• Capital Market can be divided n the two ways: one is primary market
and another one is secondary market.
• All securities are initially issued in the primary market. This is the only
market in which the corporate or government issuer is directly involved
in the transaction and receives direct benefit from the issue.
• Once the securities begin to trade between saver and investors, they
become part of secondary market. The secondary market can be viewed
as a “preowned” security market.
Ways of Transactions in the Markets:

• Two ways of share transaction in primary market are

Private Placement
Initial Public Offering
• Two ways of share transaction in the secondary market are:
Broker market/ OSE
Dealer market/OTC
Functions of Financial Management
• Estimation of capital requirements
• Determination of capital composition
• Choice of sources of funds
• Investment of funds
• Disposal of surplus
• Management of cash
• Financial controls