Financial Management

BBA 5th
Madan Kandel
 Finance
• Finance is a broad term that describes activities
associated with banking, leverage or debt,
credit, capital markets, money, and investments.
• Basically, finance represents money
management and the process of acquiring and
investment of funds.
• Finance also encompasses the oversight, creation,
and study of money, banking, credit, investments,
assets, and liabilities that make up financial
systems.
 Area of Finance
The  main areas of finance are
Corporate finance.
Investments Finance.
Financial Institutions and Markets.
International finance.
Public Finance
 Financial management
• Financial management is an integral part of overall
management which is concerned with the application of
general management principles to the areas of financial
decision making.
• The term financial management h is concerned with the
efficient use of an important economic resource namely,
capital funds”.
• The most popular and acceptable definition of financial
management as given by S.C. Kuchalis that “Financial
Management deals with procurement of funds and their
effective utilization in the business”.
• Thus, financial management is mainly
concerned with procuring financial resources
in the most economical and prudent manner,
• deploying these resources in the most
profitable way, planning future operations and
controlling current and performance and
development through different tools.
• In fact application of general management
principles to the areas of financial
management.
 Importance of financial management
• Strategic planning, organising, directing,
and controlling of financial activity.
• Management of financial as well as real
assets
Procurement of Funds:
Since funds can be obtained from different
sources therefore their procurement is always
considered as a complex problem by business
concerns.
Funds procured from different sources have
different characteristics in terms of risk, cost
and control.
The cost of funds should be at the minimum
level for that a proper balancing of risk and
control factors must be carried out.
Equity:
• The funds raised by the issue of
equity shares are the best from the risk
point of view for the firm.
• From the cost point of view, however
equity capital is usually the most
expensive source funds. This is because
the dividend expectations of Aspects of
Financial Management Procurement of
Funds
Debentures:
Debentures as a source of funds are comparatively cheaper
than the shares because of their tax advantage. However,
debentures entail a high degree of risk since they have to be
repaid as per the terms of agreement.
Funding from Banks:
Commercial Banks play an important role in funding of the
business enterprises. They provide short term and long term
loan of a business enterprise such as, Cash Credit, Overdraft,
Term Loans, Working Capital, Bill Purchase/Discounting,
Guarantee, Letter of Credit, etc.
International Funding:
Funding today is not limited to domestic market. With
liberalization and globalisation a business enterprise has
options to raise capital from international markets also. Foreign
Direct Investment (FDI) and Foreign Institutional Investors (FII).
 Financing Decision:
• All the funds are procured at a certain cost
and alter entailing a certain amount of risk.
• In these funds are not utilised in the manner
so that they generate an income higher than
the cost of procuring.
• It is crucial to employ the funds properly and
profitably. Some of the aspects of funds
utilisation are:
 Utilization of Fixed Assets:
• The funds are to be invested in the manner so
that the company can produce at its optimal level
without endangering its financial solvency.

• Capital Budgeting (or investment appraisal) is the

planning process used to determine whether a
firm’s long term investments such as new
machinery, replacement machinery, new plants,
new products, and research development projects
would provide the desired return (profit).
Utilisation for Working Capital:
The finance manager must also keep in view
the need for adequate working capital and
ensure that while the firms enjoy an optimum
level of working capital they do not keep too
much funds blocked in inventories, book
debts, cash etc.
Evolution of Financial Management
Traditional Phase this phase lasted for about four decades.

• The focus of financial management was mainly on certain events

like formation, issuance of capital, major expansion, merger,
reorganization, and liquidation in the life cycle of the firm.
• The instruments of financing, the institutions and procedures
used in capital markets, and the legal aspects of financial events
formed the core of financial management.
• The outsider’s point of view was dominant. Financial
management was viewed mainly from the point of the
investment bankers, lenders, and other outside interests.
Transitional Phase This phase started in 1940s and
continued till 1950s
Similar to that of the traditional phase, greater emphasis
was placed on the day-to-day problems faced by finance
managers in the areas of fund analysis, planning and
control. Working Capital management was emphasised
in this phase.
Modern Phase The modern phase began in the mid-1950s.
Several significant developments have taken place not only
in the areas of basic financial decision making.
New fields of financial management such as efficient market
theory, option pricing theory, valuation models etc.
• End of 1950 : capital budgeting, valuation, and
dividend policy 
• Around 1960 : development of portfolio theory.
• Around 1970 : CAPM model and APT model
that can be used to value the financial assets 
• Around 1980 : focus on uncertainty,
asymmetric information, financial signalling
• Around 1990 : multinational financial
management, behavioural finance, enterprise
risk management, good corporate governance.
• Around 2010 Again merger, Human capital
,Financial reengenering ,necked finance etc.
 Finance Functions
Financing functions

• Estimating the Capital requirements

Use long-range planning techniques. This is because, every
business enterprise requires funds not only for long-term
purposes for investment in fixed assets, but also for short
term so as to have sufficient working capital.
• Determining the Capital Structure
The Capital Structure is mix of different sourcess of capital.
The Financial Manager can decide proportion of various
sources of capital only after the requirement of Capital Funds
has been decided.
• Investment Function
It refers to the acceptance or rejection of long
term investment proposal by using capital
budgeting and cost of capital methods.
Allocation of fund
Assets purchase or replacement decision.
Assets mix decision
Make or buy decision
Lease or purchase decision
• Dividend Functions: The Financial Manager
should decide the extent of the surplus that is to
be retained and to be distributed as dividend to
shareholders.
• must carefully evaluate such influencing factors
as— (a) the trend of earnings (b) market price of
its shares; (c) funds required for meeting the
self-financing needs of the company; (d) the
future prospects; (e) the cash flow position,
etc. .
• More importantly Dividend policy affects the
market value of the firm.
Efficient Management of cash:
Cash is absolutely necessary for maintaining
enough liquidity. The Company requires cash
to— (a) pay off creditors; (b) buy materials; (c)
make payments to parties; and (d) meet
routine expenses.
Functions of Financial Manager
Finance in Org Stricture.
 Objectives of Financial Management
It is generally agreed that the financial goal of the
firm should be the maximization of owners’
economic welfare. Owners’ economic welfare could
be maximised by maximising the shareholders’
wealth as reflected in the market value of shares.
Objectives of Financial Management may be broadly
divided into two parts such as,
• Profit maximization and
• Wealth maximization.
• Profit maximization It has traditionally been argued that the primary
objective of a company is to earn profit.
• Management focused on optimum utilization of different factors of
production
• If the profit of a firm is maximized it will be able to maximize its earning
per share.
Drawbacks
It is vague: In this objective, profit is not defined precisely or correctly. It
creates some unnecessary opinion regarding earning habits of the
business concern.
It ignores the time value of money: Profit maximization does not consider
the time value of money or the net present value of the cash inflow. It
leads certain differences between the actual cash inflow and net present
cash flow during a particular period.
It ignores risk: Profit maximization does not consider risk of the business
concern. Risks may be internal or external which will affect the overall
operation of the business concern.
Wealth Maximization
• The prime objective of a business entity is to
maximize value for its owners.
• Wealth maximization means maximizing the ‘net
present value which is the difference between
the present value of its benefits and the present
value of its costs.
• From the owners’ point of view, the wealth
created by a firm reflected in the market value of
the firm’s share so it is maximization of the
market value of the firm’s share.
• Wealth maximization is also known as value
maximization.
Point of Differences Profit Maximization Wealth Maximization
Concept maximization of difference maximization of net
between revenue and cost. present value, i.e. the
difference between
present value of cash flows
and cost incurred
Objective considers profit as the objective the shareholders’
most appropriate wealth is used as the most
performance of a business. appropriate indicator for
measuring the
performance of the
company
Approach It is a quantitative It is a quantitative as well
approach as risk and as qualitative approach
uncertainty are not because it considers the
considered. degree of certainty with
which the value may be
generated.
Market The existence of perfect The existence of an
competition in the product efficient capital market is s
is assumed. the objective.
Time ignores the differences in This approach considers
the time pattern of the the time dimension in
profit earned. measuring wealth of the
organisation.
 Agency Problem
• According to the theory of the relationship
between principals (owners) and agents
(managers) – principal-agent theory – owners
hires managers to run the firm on their behalf.
• Objective was maximization of the market
value of the company, often is not compatible
with the interests of managers, as they prefer
to ma-ximize their own personal interests this
conflicting interests leads to agency problem.
• Managers prefer greater levels of consumption
and less intensive work.

Managers prefer less risky investments and

lower financial leverage, because in this
managers prefer short-term investment horizon
• Managers avoid problems stemming from
reductions in employment levels.
 Relationship with other functions of
management.
• Financial management and Economics
• Financial management and accounting
• Financial management and Marketing
• Financial management and HR
• Financial management and Production
management.