Introduction to Financial

Management

Dr. Muhamamd Farooq

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 Learning Objectives

Definition of financial management

Significance of financial management for non-finance students and professionals
Important concepts and areas in financial management
The position of financial managers in organizational hierarchy and their respective work
domains.
Different business legal entities, their advantages and limitations.
The external and internal business environments and their relevance to financial
management.
Different types of financial and real assets markets.
Important concepts and areas in financial management 1-2
What is FM?
 FM is the management of financial
resources – how to best find and use
investments and
 financing opportunities in an ever-
changing and increasingly complex
environment

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Why should study FM?
 Financial management is a core life skill; almost every
one needs to understand some concepts of finance to
manage his/her business & personal finances.
 It is generally and quite rightfully said, “Money makes
the world go round”. Finance is like a life-blood for a
company.
 Even the best of the companies and CEOs go out of
the business because of poor financial management
policies.

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Definitions
 Finance
 Finance is the science of managing financial resources in an
optimal pattern i.e. the best use of available financial
sources.
 Finance consists of three interrelated areas:
 Money & Capital markets, which deals with securities markets &
financial institutions.
 Investments, which focuses on the decisions of both individual and
institutional investors as they choose assets for their investment
portfolios.
 Financial Management, or business finance which involves the actual
management of firms.

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Major Concepts of Financial
Management
 Analysis of Financial Statements
 Financial performance and financial health
of a company are analyzed.
 Profit & Loss Statement or Income
Statement.
 Balance Sheet
 Statement of Shareholders’ equity
 Statement of Cash Flows
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Major Concepts of Financial
Management
 Investment Decisions & Capital
Budgeting
 Interest rate formulas
 Time Value of Money
 Discounted Cash Flows
 Net Present Value
 Internal Rate of Return

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Major Concepts of Financial
Management
 Risk & Return
 Uncertainty
 Risk
 Portfolio Theory
 Capital Asset Pricing Model

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Major Concepts of Financial
Management
 Corporate Financing & Capital Structure
 Cost of Capital
 Leverage
 Dividend Policy
 Debt Instruments

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Major Concepts of Financial
Management
 Valuation
 Share
 Bond
 Option
 Corporate

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Major Concepts of Financial
Management
 Working Capital & Inventory
Management
 Working capital and inventory
management pertains to the effective
management of current assets.

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 Role of Finance in a Typical
Business Organization
n Board of Directors

n President

n VP: Sales n VP: Finance n VP: Operations

n Treasurer n Controller

Credit Manager
n n Cost Accounting

n Inventory Manager n Financial Accounting

Capital Budgeting Director

n nTax Department

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Alternative Forms of Business
Organization
 Sole proprietorship
 Partnership
 Corporation

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Sole proprietorships &
Partnerships
 Advantages
 Ease of formation
 Subject to few regulations
 No corporate income taxes
 Disadvantages
 Difficult to raise capital
 Unlimited liability
 Limited life

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Limited Liability Partnership (LLP)
 A form of partnership allows limited
liability to the owners and avoids double
taxation.

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Corporation
 Advantages
 Unlimited life
 Easy transfer of ownership
 Limited liability
 Ease of raising capital
 Disadvantages
 Double taxation
 Cost of set-up and report filing

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Financial Markets
 Capital Markets
 Stock Exchange
 Long Term Bond Markets
 Money Markets
 Short term Bonds
 Call Money, Inter-bank short-term and
overnight lending & borrowing
 Leases, Insurance policies, Certificate of
Deposits (CD’s) 1-17
Real Assets or Physical Asset
Markets
 Cotton Exchange, Gold Market, Clothes
Market
 Property (land, house, apartment,
warehouse)
 Computer hardware, Used Cars, Wheat,
Sugar, Vegetables, etc.

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Differences Among Financial Management,
Economics & Financial Accounting
 Objective of Economics:
 The objective of economics, as a subject, is
profit maximization
 In economics, we can talk about profit
maximization for an individual, the whole
society, particular class or group, the whole
world in global terms.
 In capitalistic economics we may study
individual or company’s profit
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Differences Among Financial Management,
Economics & Financial Accounting
 Objective of Financial Management (FM):
 Financial management is more focused.
 Financial management, talks about
maximize the shareholders wealth in the
present terms.
 Financial practitioners usually use the
discounting and the net present value
techniques while calculating the increase in
the wealth of shareholders.
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Differences Among Financial Management,
Economics & Financial Accounting
 Objective of Financial Accounting (FA):
 Financial accounting is about collecting
accurate, systematic, and timely financial
data and other financial information, and to
compile and consolidate it in an organized
and systematic way, according to the
principles and rules of accounting, for
reporting purpose.
 The financial managers use these reports
to assess the financial position. 1-21