INTRODUCTION TO

FINANCIAL
MANAGEMENT
 Finance is the life blood of business.
 It is required for the survival, stability and growth of a company.
 It is required for expansion and diversification of a business.
 So, a company cannot survive without finance.
 It requires promotional finance to start the company.
 It requires long-term finance to purchase fixed assets.
 It requires development finance for growth, expansion and
diversification of business.
 Corporate finance is the study of sources of finance and how to use
the money raise to add maximum value to the shareholders' wealth.
DEFINITION OF FINANCIAL
MANAGEMENT
• "Financial management is concerned with raising financial resources
and their effective utilization towards achieving the organizational
goals."
• "Financial management is the process of putting the available funds to
the best advantage from the long term point of view of business
objectives."
NATURE OF FINANCIAL
MANAGEMENT
Financial Activity
Raising the Finance
Investing the Finance
Objective Oriented
Types of Finance
Relationship with other Departments
 Requires Proper Planning and Control
Managing Finance is an Art and Science
Legal Requirements
Important Part of Business Management
SCOPE OF FINANCIAL MANAGEMENT
The finance manager had to be in charge of both raising of funds and
allocation of funds.
The finance manager takes three major decisions:
i. Investment decision.
• ii. Financing decision.
iii.Dividend decision.
Investment decision relates to both long-term investment decision and short-
term investment decision.
The finance manager must decide when, where and how to acquire funds to
meet funds of the firm
The finance manager has to decide whether to retain the profits or distribute
profits to shareholders.
Under this approach the finance manager is responsible for raising of
funds. The finance manager:
 Manager the institutional arrangement of funds.
 Decides on the instrumental through which funds can be raised.
 Maintain the legal and according relationships between a firm and the
sources funds.
This approach thought that the firm requires funds only during
episodic events like mergers , acquisition etc. The major emphasis is
on long term. It does not consider short term financing and working
capital management. This approach dominated itself till early 1950’s
OBJECTIVE OR GOALS OF
FINANCIAL MANAGEMENT
• Profit Maximization
• Wealth Maximization
 PROFIT MAXIMIZATION
i m i z i n g
e a n s max o f i t
a t io n m r m. P r
a x i m i z f a f i e ry
Pr of i t m m e o o f e v
S ! !! l e e i n co
n a i m c a n
G E a r u p m a i s s
N T A Surv i v the i s t he o b u sine t is
V A ic rd e r n i n g i t y . N . P r o f i
AD Econo g Profi t Stand Welfa ea omic activ rning profit usiness
m t a r
 arnin emen nomic econ w i t h o u t ea
c y o f a b
a
E u r c o sur v i v e eff i c i e n ve a s
 e as nd E r e o f o s e r s a
 M ocial a m e a s u f i t a ls e n a b l e
S ” a
s e . P ro w h i c h c e s,
 fit
t e r p r i t r i s k n p r i
“ Pro en n a g a i ns i k e fa l li rse
e p t e y r o t e c t i o r i s k l , a d v e
! ! ! o nc M o n p
s t o f a ce e r u n it s ofit
O N e c f s i n e s o t h p r
A T I of th lue o bu t i o n f ro m s o the a i n
I T s V a p e t i e t c . h e m
s
LIM Hazine s Time Risk com p o l i c e s e r e d a st
re e g o v t . i s c o n sid

gno res th uality i z a t i o n
 I
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g n
 I nore
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 WEALTH MAXIMIZATION
Wealth maximization is one of the modern o n
approaches. The term wealth means shareholder sed
wealth or the wealth of the persons those who are ! ! ! i s b a
te r
E S ation s h o r
involved in the business concern. Wealth G iz ofits ts a th
A axi t pr esen eal
m
maximization is also known as value maximization or N T m o p r w tim e
net present worth maximization. The goal of the VA ealth and n tion ed to t h e
D w
finance function is to maximize the wealth of theA Th flo im om
e w s iz a p ar
d e rs
x c n si n ctor
owners for whom the firm is being carried on. The  cash it ma as c o io
f w n ti o n
r it er y fa e.
wealth of corporate owners is measured by the Pro m vie zatio miza i n c int rat
o erta ing me
 r i
te xim ma ey x i a t
share prices of the stock. While taking decisions,
a n m iz unc unt th ti
only that action is expected to increase share price m alth mo axi and isco s bo the rsa.
W e
e of lth m risk the d lect nty, e-ve
should be taken. The market price of shares  valu wea the ing e ref ertai vic
(excluding impact of speculation) serves as the h e
d e rs ider rat unc and
T i s g r
standard to judge whether financial decisions have  cons e con untin er the ighe
been taken and implemented efficiently or not. h il isco igh is h
w e d . H ate
r
Therefore, maximization of the market value is Th risk ting
considered to be the proper objective and an d co u n
d is
universally accepted concept in the field of business.
PROFIT MAXIMIZATION VS
WEALTHFinancial
MAXIMIZATION
management is essential for any
organization that seeks to manage their finances
in an orderly manner. Wealth maximization and
profit maximization are two important goals of
financial management and are quite different to
each other. Profit maximization looks at the
shorter term and focuses on making larger profits
in the short term, which could be at the expense
of long term benefits. Wealth maximization, on
the other hand, focuses on the long term and
strives at long term value creation.
GANIZATIONAL
STRUCTURE
 ROLE OF FINANCE MANAGER
A financial manager is a person who takes care of all the important financial functions of
an organization. The person in charge should maintain a far sightedness in order to
ensure that the funds are utilized in the most efficient manner. His actions directly affect
the Profitability, growth and goodwill of the firm

Raising of Funds  International Financial Decision

Allocation of Funds  Risk Management
Profit Planning  Investment Decision
Understanding Capital Markets  Dividend Decision
 ALL MANAGERS ARE FINANCIAL MANAGERS

• The engineer, who proposes a new plant, shapes the

investment policy of the firm
• The marketing analyst provides inputs in the process of
forecasting and planning
• The purchase manager influences the level of investment
in inventories
• The sales manager has a say in the determination of the
receivables policy
• Departmental managers, in general, are important links
in the finance control system of the firm
 INTER-RELATIONAs an integral part of overall management, financial management
is not a totally independent area. It draws a heavy interest in
related disciplines namely Economics, Accounting, Marketing,
Production and Quantitative methods.
 Accounting is an important input in financial decision
making
 The measurement of fund in accounting is based on
accrual principle but finance is based on Cash flow.
 Accounting provides financial data on past, present and
future.
 Financial manager should consider the impact of product
development and plan promotion in marketing area since
their plan requires capital outlay.
 Changes in production process may require expenditure
Decisions under
Financial Management

• Investing Decision

• Financing Decision

• Dividend Decision
Investing Decision
• Investment in Short Term & Long Term Projects

• Short Term Projects

- Decisions relating to Working Capital Mgt.

-Inventory Management,

- Receivables Management, etc.

Long Term Decision
 Relates to Capital Budgeting Decisions
 Techniques:
(i) Traditional- Payback Period, Accounting
Rate of Return
(ii) Modern- Net Present value Method,
Internal Rate of Return, Profitability
Index, etc.
Financing Decision
• Decision relation to Funding of the Projects
• Sources
-Short Term (trade credit, bank overdraft,etc.)
-Long Term
(i) Owners Funds ( Equity/Preference Share
Capital, Retained Earnings)
(ii) External Funds( Debentures, Long Term
Loans, etc.)
 Dividend Decision
This decision relates to How much of the Earnings to be
DISTRIBUTED AS DIVIDENDS?
AND
HOW MUCH TO BE KEPT
AS RETAINED EARNINGS?
Case 1
In March 2017, Hindustan Zinc Limited (HZL), a subsidiary of multinational mining
company Vedanta Limited, announced a special one-time interim dividend of Rs.27.50 per
share with a face value of Rs.2 each share.

The total dividend of Rs.271,570.00 million paid during the year 2016-17 was the highest
dividend paid ever paid by an Indian company in a financial year. However, things started
changing after the announcement of the special interim dividend – the price of the
company’s shares started declining from March 2017.

According to an independent investment advisory organization, HZL was one of the top 73
BSE S&P 500 companies with a potential to pay a higher dividend than it had been paying
due to its strong fundamentals in terms of operating margins and financial position.
Despite all these positive factors, the declining trend in the share price remained a cause
for concern for the shareholders as well as for the company. The management of HZL
needed to look into the issue to understand the main reasons for the drop in share prices.
• On March 22, 2017, the management of Hindustan Zinc Limited (HZL) announced a special one-time
interim dividend of 1375% equivalent to Rs.27.50 on an equity share of face value Rs. 2. The
announcement of a special dividend resulted in a cash outflow of Rs. 139,850 million, including the
Dividend Distribution Tax (DDT).
The golden jubilee dividend paid in the month of April 2016 and the interim dividend paid in the
month of October 2016, took the total dividend paid by HZL during the year to Rs.271,570 million,
resulting in the single largest payment of dividend in a financial year by an Indian company, inclusive
of DDT .

Announcing the special one-time interim dividend, the chairman of Vedanta Group, Agnivesh Agarwal,
said, “We are pleased to reward our shareholders with a special dividend, which reflects the
Company’s confidence in its continued robust performance and demonstrates our commitment
towards delivering value for our shareholders. Since disinvestment by the Government in 2002, the
cumulative dividends paid by the Company, including the current special dividend, is Rs. 375,170
million including dividend distribution tax.”...
• HZL was incorporated as a Public Sector Undertaking under the Metal
Corporation of India Acquisition Act, 1966, with a majority of stake
held by the Government of India (GoI). It was involved in the business
of mining and the production of zinc, lead, silver, and cadmium. Until
the year 2002, the majority stake was in the hands of the GoI.
However, after the announcement of the disinvestment policy by the
GoI in the year 2002, the Sterlite Opportunities and Ventures Limited
(SOVL), a subsidiary of Vedanta Limited , acquired a stake of 26% and
management control from the GoI through an open offer and
acquired another 20% stake from the public as per the Securities
Exchange Board of India (SEBI) regulations 1997....
• The total revenue of HZL increased from Rs.129,481.40 million in the year 2011-12 to
Rs. 169,558.60 million crores in the year 2015-16. Also the net profit after tax
increased from Rs. 55260.40 million in the year 2011-12 to Rs.81665.80 million in
the year 2015-16. However, in the year 2015-16, a decline of 3.7% and 0.13% was
observed in the total revenues and net profit of the firm compared to the previous
year (Refer to Exhibit-III for Operating Performance of HZL). The total investments in
non-current assets increased from Rs. 98507.80 million in the year 2011-12 to
Rs.181,544.70 million in the year 2015-16, while investments in current assets
increased from Rs. 196342.10 million in the year 2011-12 to Rs. 370893.20 million in
the year 2015-16 (Refer to Exhibit-IV for Break-up of HZL’s Non-Current Investments).
The majority of investments in current assets included current investments held for
the purpose of trading activities on stock exchanges. The current investments were
made in the purchase and sale of bonds, debentures, and mutual funds.
• Amid strong future business forecasts, a favorable operating and financial
position, and regular payment of dividends, HZL was considered to be a
strong company with the potential to pay higher dividends than it had been
paying. According to an analysis done by an investors’ advisory services
organization, Institutional Investors Advisory Services (IiAS), HZL was
considered to be one of the top 73 S&P BSE index companies that had the
potential to pay higher dividends than it was paying. To conduct the analysis,
IiAS considered companies with a profitability of above Rs.500 million and a
positive cash flow from operations. The positive operational cash flows were
calculated by deducting 75% of the average of three years’ capital
expenditure and deducting the equity and preference dividends paid during
the fiscal year 2015.