FINANCIAL

MANAGEMENT

SAMUEL BARBO, JR.

Nature, purpose and
scope
 FINANCIAL MANAGEMENT

Also referred to as managerial finance, corporate

finance and business finance.
Is a decision making process concerned with
planning, acquiring and utilizing funds in a manner
that achieves the firm’s desired goals.
 FINANCIAL MANAGEMENT

It is also described as the process for analysis of

making financial decisions in the business context.
A part of a larger discipline called finance.
 THE GOAL OF FINANCIAL
MANAGEMENT
To a profit-business, the goal is to make money and
add value for the owners.
To maximize the current value per share of the
existing stock or ownership in a business.
 THE GOAL OF FINANCIAL
MANAGEMENT
The financial manager in a business enterprise
must make decision for the owners of the firm.
He must act in the owners’ or shareholders’ best
interest by making decisions that increase the value
of the firm or the value of the stock.
 THE GOAL OF FINANCIAL
MANAGEMENT
The financial manager must learn how to identify
investment, arrangements and distribute satisfactory
amount of dividend or share in the profits that
favorably impact the value of the share(s).
 THE GOAL OF FINANCIAL
MANAGEMENT
In achieving these goals, the financial should not
take illegal or unethical actions in the hope of
increasing the value of the equity of the firm.
The financial manger should best serve the owners
of the business by identifying goods and services
that add value to the firm because they are desired
and valued in the free market.
 SCOPE OF FINANCIAL
MANAGEMENT
Traditionally, financial management is primarily
concerned with acquisition, financing and
management financial assets of business concern in
order to maximize the wealth of the firm for its
owner.
 SCOPE OF FINANCIAL
MANAGEMENT
Financial manager basic responsibility is to acquire
funds needed by the firm and investing those funds
in profitable ventures that will maximize the firm’s
wealth, as well as, generating returns to the
business concern.
 SCOPE OF FINANCIAL
MANAGEMENT
Traditional function of a financial manager:
1. Procurement of short-term as well as long-term funds
from financial institutions.
2. Mobilization of funds through financial instruments
such as equity shares, preference shares, debentures,
bonds, notes, and so forth.
 SCOPE OF FINANCIAL
MANAGEMENT
Traditional function of a financial manager:
3. Compliance with legal and regulatory provisions
relating to funds procurement, use and distribution as
well as coordination of the finance function with the
accounting function.
 SCOPE OF FINANCIAL
MANAGEMENT
With the modern business situation increasing in
complexity, the role of finance manager as expanded
to judicious and efficient use of funds available to the
firm, keeping in view the objectives of the firms and
expectations of the providers of funds.
 SCOPE OF FINANCIAL
MANAGEMENT
With globalization and liberalization of world
economy has created a new financial environment
which brings new opportunities and challenges to the
business enterprises and led to total reformation of
the financial function and its responsibilities in the
organization.
 SCOPE OF FINANCIAL
MANAGEMENT
Financial manager has assumed a much greater
role and is expected to analyze the business firm
and determine the following:
a. The total funds requirements of the firm
b. The assets or resources to be acquired, and
c. The best pattern of financing the assets
 TYPES OF FINANCIAL
DECISIONS
The three major type of decision that the finance
manager will be involve in are:
1. Investment decisions
2. Financing decisions
3. Dividend decisions
 TYPES OF FINANCIAL
DECISIONS
1. Investment decisions
The investment decision are those which determine ho
scarce or limited resources in terms of funds of the
business firm are committed to projects.
 TYPES OF FINANCIAL
DECISIONS
1. Investment decisions
Generally, the firm should select only those capital
investment proposals hose net present value is positive
and the rate of return exceeding the marginal cost of
capital.
Consider the profitability and creation of wealth
 TYPES OF FINANCIAL
DECISIONS
2. Financing decisions
It assert that the mix of debt and equity chosen to
finance investment should maximize the value of
investment made.
The finance decisions should consider the cost of
finance available in different forms and the risks attached
to it.
 TYPES OF FINANCIAL
DECISIONS
2. Financing decisions
The principle of financial leverage or trading on the
equity should be considered when selecting the debt-
equity mix or capital structure decision.
 TYPES OF FINANCIAL
DECISIONS
2. Financing decisions
If the cost of capital of each component is reduced, the
overall weighted average cost of capital and
maximization of risks in financing will lead to the
profitability of the organization and create wealth to the
owner.
 TYPES OF FINANCIAL
DECISIONS
3. Dividend decisions
It is concerned with the determination of quantum of
profits to be distributed to the owners, the frequency of
such payments and the amounts to be retained by the
firm.
 TYPES OF FINANCIAL
DECISIONS
3. Dividend decisions
The dividend distribution policies and retention of profit
ill have ultimate effect on the firm’ wealth.
The business firm should retain its profits in the form of
appropriation of reserves for financing its future growth
and expansion schemes.
 TYPES OF FINANCIAL
DECISIONS
To summarize, the basic objective of the
investment, financing and dividend decisions is to
maximize the firm’s wealth.
 SIGNIFICANCE OF FINANCIAL
MANAGEMENT
The importance of financial management is known
through the following aspects:
1. Broad applicability
2. Reduction of chances of failure
3. Measurement of return of investment
 SIGNIFICANCE OF FINANCIAL
MANAGEMENT
1. Broad applicability
The principles of finance are applicable wherever there
is cash flow.
Financial management is applicable to all forms of
business, non profit organizations, government
organizations, public sector, etc.
 SIGNIFICANCE OF FINANCIAL
MANAGEMENT
1. Broad applicability
The concept of cash flow is one of the central elements
of financial analysis, planning, control, and resource
allocation decision.
Cash flow is important because the financial health of
the firm depends on its ability to generate sufficient
amount of cash to pay its employees, suppliers,
creditors, and owners.
 SIGNIFICANCE OF FINANCIAL
MANAGEMENT
2. Reduction of chances of failure
A firm having latest technology, sophisticated machinery,
high caliber marketing and technical experts, and o forth
may still fail unless its finances are managed on sound
principles of financial management.
The strength of business lies in its financial discipline.
 SIGNIFICANCE OF FINANCIAL
MANAGEMENT
3. Measurement of return on investment
Anybody who invests his money will expect to earn a
reasonable return on his investment.
The owners of business try to maximize their wealth.
Financial management studies the risk-return perception
of the owners and the time value of money.
 SIGNIFICANCE OF FINANCIAL
MANAGEMENT
3. Measurement of return on investment
It considers the amount of cash flows and the risk
attached to these cash flows.
The greater the time and risk associated with the
expected cash flow, the greater is the rate of return
required by the owners.
 RELATIONSHIP OF FINANCIAL
MANAGEMENT AND ACCOUNTING
Finance is an independent specialized function
and financial management is a separate
management area.
Financial management is however, something more
than an art of accounting and bookkeeping.
 RELATIONSHIP OF FINANCIAL
MANAGEMENT AND ACCOUNTING
Financial manager ill make use of the accounting
information in the analysis and review of the firm's business
position in decision.
Finance manager also uses the other methods and
techniques like capital budgeting techniques, statistical and
mathematical model, and computer application in decision
making.
 RELATIONSHIP OF FINANCIAL
MANAGEMENT AND ACCOUNTING
Financial management is the key function and
many firms prefer to centralize the function to keep
constant control on the finance of the firm.
Any inefficiency in financial management will be
concluded with a disastrous situation.
 RELATIONSHIP OF FINANCIAL
MANAGEMENT AND ECONOMICS
The finance manager must be familiar with the
following:
1. Microeconomics
2. macroeconomics
 RELATIONSHIP OF FINANCIAL
MANAGEMENT AND ECONOMICS
Microeconomics
Deals with the economic decisions of individual
and firms. It focuses on the optimal operating
strategies based on the economic data of the
individuals and firms.
 RELATIONSHIP OF FINANCIAL
MANAGEMENT AND ECONOMICS
Microeconomics
The concept of microeconomics helps the finance
manager in decisions like
1. pricing,
2. taxation,
3. determination of capacity and operating levels,
4. break-even analysis,
 RELATIONSHIP OF FINANCIAL
MANAGEMENT AND ECONOMICS
Microeconomics
5. volume-cost-profit analysis,
6. capital structure decisions,
7. Dividend distribution decisions,
8. Profitable product-mix decisions,
9. Fixations of level of inventory,
 RELATIONSHIP OF FINANCIAL
MANAGEMENT AND ECONOMICS
Microeconomics
10.Setting the optimum cash balance,
11.Pricing of warrants and option,
12.Interest rate structure,
13.Present value of cash flows, among others
 RELATIONSHIP OF FINANCIAL
MANAGEMENT AND ECONOMICS
Macroeconomics
Looks at the economy as a whole in which a
particular business concern id operating.
It provides insight into policies by which economic
activity is controlled.
 RELATIONSHIP OF FINANCIAL
MANAGEMENT AND ECONOMICS
Macroeconomics
The success of the business firm influenced by
the overall performance of the economy and is
dependent upon the money and the capital
markets, since the invisible funds are to be
procured from the financial markets.
 RELATIONSHIP OF FINANCIAL
MANAGEMENT AND ECONOMICS
 Macroeconomics
 A firm is operating within the institutional framework,
which operates on the macroeconomics theories.
 The government’s fiscal and monetary policies will
influence the strategic financial planning of the
enterprise.
 RELATIONSHIP OF FINANCIAL
MANAGEMENT AND ECONOMICS
 Macroeconomics
 The finance manager should look into other
macroeconomics factors like rate of inflation, real
interest rates, level of economic activity, trade cycles,
market competition both from new and substitute,
international business conditions, foreign exchange
rates, etc.