Introduction to Financial

Management
- NAISHA SUJAN
 What is Financial Management?

Finance is a broad term that describes activities

associated with banking, leverage or debt, credit,
capital markets, money, and investments.

Financial Management means planning,

organizing, directing and controlling
the financial activities such as procurement and
utilization of funds of the enterprise. It means
applying general management principles
to financial resources of the enterprise.
 Objective of the course

 To familiarise the learners with financial Markets

and instruments

 To develop working knowledge of fundamental

tools and apply them in investing and financing
decisions
 Scope of the course

1. Financial
Management
2. Raising long
Firms term sources of
funds
3.Cost of capital

1. Time value of
Individuals money
2. Risk & return
3. Valuation of
securities
 Reference Material

Recommended Text: Financial Management by Prasanna Chandra

Reference Books :
Financial Management by Van Horne
Financial Management by I. M Pandey
Financial Management by Khan & Jain
FM I book – On Quicforce

Reference websites:
Rbi.org
Nseindia.com
Bseindia.com
Moneycontrol.com, et al
 Pedagogy

Pre- session : Reading, videos, cases

Live session : Concepts, Numerical illustrations

Post –session : Reading, cases, forums, Quiz,

assignments
 Evaluation

Continuous Evaluations:
Assignments, Quizzes, Forums

Mid Term Evaluation

End Term Evaluation

 Essentials to Effective Learning

Ready stationery during the session

Pre –reading

Post session reading and practise

Keep abreast with financial news

Topic – 1 Introduction to FM
 What is Financial Management?

Finance is a broad term that describes activities

associated with banking, leverage or debt, credit,
capital markets, money, and investments.

Financial Management means planning,

organizing, directing and controlling
the financial activities such as procurement and
utilization of funds of the enterprise. It means
applying general management principles
to financial resources of the enterprise.
 Forms of Business Organisations

Sole Proprietorship
Partnership
HUF
Private Company
Public Limited Company (Joint Stock
Company)
 FM : Important Decision areas

Investment Decision : Where and how much to invest?

 Fixed Asset
 Current Asset

Impacts the ROI !

Financing Decision : How to source funds for investments?
 Own Funds
 Borrowed Funds

Impacts the Cost of Capital!

Dividend Distribution : How to distribute the profit?
 Dividend Pay-out
 Retention

Impacts the Investment & financing decision!

 Goal of Financial Management

Maximise Profit/EPS?
 Dependent on accounting policies
 Timing of cashflow is ignored
 Ignores risk

Maximise Growth?
 Ambiguous
 Dependent on accounting policies
 Ignores risk

Maximise Shareholder Wealth?

 Forward looking
 Calculated on cash flows
 Accounts for risk
 Accounts for timing of CF
 Agency Problem

http://photosait.blogspot.com/2006/12/di
lbert-agency-costs-and-silly-budget.html
Agency Problem
Shareholders (P) appoint Management (A) to run the
business and take decisions that will maximise P’s
wealth.

Management(A) has self interests which may not

coincide with the interest of the shareholders (P)
Eg: Enron, Satyam Case, PMC Scam

Main Reason : Asymmetrical Information!

 Agency Costs

Two categories:
Costs incurred when the agent (management team)
uses the company’s resources for his or her own
benefit.

Eg: Using Expensive Hotels while on business

assignments, manipulating accounts to hide
inefficiencies, etc
Costs incurred by the principals (shareholders) to
prevent the agent (management team) from
prioritizing him/herself over shareholder interests.
Eg: Audit fees
 Dealing with Agency Problem

Monitoring
 Financial Reports
 Audits

Incentives
 Performance based pay
 Stock options

Market for Corporate Control

 Hostile takeovers
 Damaging reputation
 Changing Role of Finance Manager

Case : Unilever