Financial

Management: An
Introduction
 Objectives
• Explain the nature of financial management.
• Explain the purposes of financial management (raising finance, allocation of
financial resources, maintaining control over resources).
• Distinguish between financial management and financial and management
accounting and explain the relationship between them.
• Define and distinguish between financial strategy and financial objectives.
• Describe the relationship between corporate strategy, corporate objectives, and
financial objectives.
 Objectives
• Explain the features of the financial objective of shareholder wealth
maximization.
• Distinguish between shareholder wealth maximization and
satisfaction in a scenario.
• Explain the financial management in a not-for-profit organization.
• Explain the agency problems and describe the methods of how to
reduce such problems
Financial Management and Financial Objectives
Framework
Financial M angement
and
Financial Objectives

N ature Fin. M gt., Fin. Objectives Not-for-profit Agency

and M gt. Accounting and Organisations P roblems
P urpose and Org. Strategy
Fin. Accounting

Shareholders Different Value for M ethods to

W ealth Financial M oney Reduce
M aximisation Objectives
What is Finance?
• The art and science of managing money or management of money.
• It is the study of value.
• It is the study of how to make good decision that involve money.
What assets to buy?
How to pay for the assets you buy?
What is Financial Management?
• can be defined as the management of the finances of an
organization to achieve the financial objectives of the
organization. The usual assumption in financial management
for the private sector is that the objective of the company is to
maximize shareholders’ wealth.
• Acquisition of fund at optimum cost and its utilization with
minimum financial risk.
 Role of the Financial Manager

• financial manager makes decisions relating to investment, financing, and

dividends.
Nature and Scope of Financial Management

• Financial Management and Economics

• Financial Management and Accounting
• Financial Management or Mathematics
• Financial Management and Production Management
• Financial Management and Marketing
• Financial Management and Human Resource
 Financial Management and Economics
• The fields of finance and economics are intertwined. Financial management
is concerned with the management of funds in order to meet a company's
goals or objectives. Commodity creation, use, and transfer are the focus of
economics.
• Financial economics is important in making investment decisions,
identifying risks, and valuing securities and assets.
 Financial Management and Accounting
• Accounting is measuring, processing, and recording of financial transactions of an organization.
The process is to summarize, analyze, and record such information to be reported to
management, creditors, shareholders, investors, and the oversight officials or tax officials.
• The primary objective is reporting the financial information or transactions using Generally Accepted
Accounting Principles (GAAP).
• Accounting can be divided into several fields like Financial Accounting, management accounting, 
tax accounting, and cost accounting. The two main types are:
• Financial Accounting: Reporting financial information to external users like creditors, suppliers,
government agencies, analysts, etc. is financial accounting
• Management accounting: Reporting financial information to internal users like management and
employees is called management accounting.
 Financial Management and Accounting
The basis for Comparison Accounting Financial Management

Art of recording and reporting past financial Manages assets and liabilities of the firm to
Basic Definition
transactions plan for future growth

It helps to decide on future projects and

Why is it important? It gives the financial position of the business.
manage the assets.

Management, shareholders, regulators, Majorly management of the company and the

Who are the end-users?
analysts, creditors shareholders

•Create wealth
•Generate cash
Key objectives Reporting financial management
•Earn good returns
•Effective use of assets

There are no such types, but the process

It has two major types: involves three key elements:
Types and key elements •Financial Accounting •Financial planning
•Management Accounting •Financial control
•Financial decision making
 Financial Management or Mathematics

• Financial mathematics describes the application of mathematics and

mathematical modeling to solve financial problems. It is sometimes
referred to as quantitative finance, financial engineering, and
computational finance. The discipline combines tools from statistics,
probability, and stochastic processes and combines it with economic
theory.
 Financial Management and Production
Management
• Production management of any firm is concerned with the production
cycle, skilled and unskilled labor, storage of finished goods, capacity
utilization, etc. and the cost of production assumes a substantial portion of
the total cost.

• Production management is the operational part of the business concern,

which helps to multiply the money into profit. Profit of the concern
depends upon the production performance. Production performance needs
finance, because production department requires raw material, machinery,
wages, and operating expenses.
 Financial Management and Marketing

• The marketing department is concerned with the selling of goods and

services to the customers. It is entrusted with framing marketing,
selling, advertising and other related policies to achieve the sales
target. It is also required to frame policies to maintain and increase the
market share, to create a brand name.
 Financial Management and Human Resource

• The HR department is entrusted with the responsibility of

recruitment, training and placement of the staff. This
department is also concerned with the welfare of the
employees and their families. This department works with
finance manager to evaluate employees’ welfare, revision
of their pay scale, incentive schemes, etc.
 Significance of Financial Function for the
Organization’s Success
• Assessing the Requirement of the Capital
• Deciding the Composition of Capital
• Selection of Financial Resources
• Allocation and investment of Funds
• Distribution of Surplus
• Administration of Cash and Financial Control
• Utilization of Funds
 1. Assessing the Requirement of the Capital

• Capital is money you use to finance the purchase of equipment, supplies

and products. Working capital is money you use to cover the day-to-day
operating costs of your business. You must consider both when
determining your business’s fiscal needs.
• When planning capital needs for a start-up, simply calculate the costs of
setting up the business. To determine capital needs for an existing
business, calculate the costs of growth and expansion, but don’t include
items like salaries, utility costs, insurance, and other fixed business
expenses.
Deciding the Composition of Capital
Selection of Financial Sources
• A business concern has
many choices for getting
additional funds and has to
choose source out of which
are issue of shares and
debentures, loans from
banks and financial
institutions, public deposits
in the form of bonds.
Allocation and Investment of Funds

• It is the finance manager

who has to decide to
allocate funds into
profitable ventures based
on the possibility of safety
on investment and regular
returns.
Distribution of Surplus
 Administration of Cash and Financial Control

• Administration of available money and achieving control over money are

challenging tasks before finance manager. Taking decision regarding cash
management is a very important duty of finance manager. Ready money is
necessary for payment of wages and salaries, electricity bills and water
bills, interest payment, meeting existing liabilities, maintenance of enough
stock, purchase of raw materials, etc.
Utilization of Funds

 Funds should be invested in those ventures

which provide safety and adequate return
with least cost.
 Accumulating the desired amount of
funds and using them helps to maximize
wealth and increase savings. Thus the
utilization of funds helps with the long-term
growth of the company. If a firm is under-
utilizing its funds and the resources are
sitting idle. It prevents the firm from earning
to its maximum capacity.
 Investments
• Work with financial assets such as stocks and bonds
• Value of financial assets, risk versus return, and asset
allocation
• Job opportunities
• Stockbroker or financial advisor
• Portfolio manager
• Security analyst
 Financial Institutions

• Companies that specialize in financial matters

• Banks – commercial and investment, credit unions, savings and
loans
• Insurance companies
• Brokerage firms
• Job opportunities
 International Finance

• This is an area of specialization within each of the areas discussed so

far
• It may allow you to work in other countries or at least travel on a
regular basis
• Need to be familiar with exchange rates and political risk
• Need to understand the customs of other countries; speaking a
foreign language fluently is also helpful
 Why Study Finance?
• Marketing
• Budgets, marketing research, marketing financial products
• Accounting
• Dual accounting and finance function, preparation of financial statements
• Management
• Strategic thinking, job performance, profitability
• Personal finance
• Budgeting, retirement planning, college planning, day-to-day cash flow issues
 Business Finance

• Some important questions that are answered using

finance
• What long-term investments should the firm take on?
• Where will we get the long-term financing to pay for the
investments?
• How will we manage the everyday financial activities of
the firm?
 Financial Manager
• Financial managers try to answer some, or all, of
these questions
• The top financial manager within a firm is usually
the Chief Financial Officer (CFO)
• Treasurer – oversees cash management, credit
management, capital expenditures, and financial
planning
• Controller – oversees taxes, cost accounting, financial
accounting, and data processing
 Financial Management Decisions

• Capital budgeting
• What long-term investments or projects should the business take
on?
• Capital structure
• How should we pay for our assets?
• Should we use debt or equity?
• Working capital management
• How do we manage the day-to-day finances of the firm?
 Forms of Business Organization

• Three major forms:

• Sole proprietorship
• Partnership
• General
• Limited
• Corporation
• S-Corp
• Limited liability company
 Sole Proprietorship
• Advantages • Disadvantages
• Easiest to start • Limited to life of owner
• Least regulated • Equity capital limited to
• Single owner keeps all owner’s personal wealth
of the profits • Unlimited liability
• Taxed once as personal • Difficult to sell
income ownership interest
 Partnership
• Advantages • Disadvantages
• Two or more owners • Unlimited liability
• General partnership
• More capital available
• Limited partnership
• Relatively easy to start
• Partnership dissolves when one
• Income taxed once as partner dies or wishes to sell
personal income
• Difficult to transfer ownership
 Corporation

• Advantages • Disadvantages
• Limited liability
• Unlimited life
• Separation of ownership
and management
• Transfer of ownership is
easy
• Easier to raise capital
• Separation of ownership
and management (agency
problem)
• Double taxation (income
taxed at the corporate
rate and then dividends
taxed at personal rate,
while dividends paid are
not tax deductible)
 Goal of Financial Management
• What should be the goal of a corporation?
• Maximize profit?
• Minimize costs?
• Maximize market share?
• Maximize the current value of the company’s stock?
• Does this mean we should do anything and everything
to maximize owner wealth?
 Managing Managers

• Managerial compensation
• Incentives can be used to align management and stockholder
interests
• The incentives need to be structured carefully to make sure that
they achieve their goal
• Corporate control
• The threat of a takeover may result in better management
• Other stakeholders
Figure 1.2
 Quick Quiz
• What are the four basic areas of finance?
• What are the three types of financial management decisions,
and what questions are they designed to answer?
• What are the three major forms of business organization?
• What is the goal of financial management?
• What are agency problems, and why do they exist within a
corporation?