I.

Overview of Financial Management

LEARNING OBJECTIVES
1. Describe what Finance is
2. Explain the subfield of Finance
3. Explain the concept, objective and
significance of Financial Management
4. Describe the traditional and modern scope of
Financial Management
 What is Finance?
FINANCE is a body of facts, principles and theories
relating to raising and using money by individuals,
businesses, and governments.

This concerns both financial management of profit-

oriented business organizations particularly the
corporate form of business.

Finance involves the ways people and organizations

raise and allocate capital, use monetary resources,
and account for the risk involved.
 The Subfield of Finance include the
a. Study of corporate finance or financial
management
b. Study of investments
c. Study of financial institutions and markets.

Financial Management
Three major functions:
d. financial analysis and planning
e. utilization of funds, and
f. acquisition of funds from investors
 Financial Management involves
• how to organize the firm in a manner that will
attract capital
• how should capital be raised (i.e., debt or equity)
• which projects to fund
• how should the resources (long-term and short-
term) be allocated and managed
• how much capital to retain for ongoing
operations and new projects
• how to minimize taxations
• how to go about paying back capital providers
 Study of Investments
This involves methods and techniques for
making appropriate decisions about what
kind of securities to own (e.g., bonds or
equity), which firms securities to buy or how
to pay that investor back in the form that
the investor wishes (e.g., the amount, timing
and certainty of the promised cash flows)
 Financial Institutions and Markets
These institutions help facilitate the capital flows
between investors and companies. It involves
the firms initially acquiring capital and then
investors’ ongoing securities trading. It also
involves study of the functions of financial
institutions like banks, insurance companies,
investment houses, rates of interest; etc.
FINANCIAL MANAGEMENT
- 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 firms’ desired goals.

Investors and companies can help one another.

If investors lend or invest their capital to
companies, then companies can use this capital
to fund expansion projects.
 Objective of Financial Management
The goal of financial management is to make
money and add value for the owners.
The financial manager in a business enterprise
must make decision for the owners of the firm.
He must act in the owner’s or shareholders’ best
interest by making decisions that increase the
value of the firm or value of the equity share.

“The goal of financial management is to maximize the

current value of ownership in a business firm.”
 Significance of Financial Management
The importance of financial management is known for the
following aspects:

 Applicability – the principles of finance are applicable

wherever there is cash flow. The concept of cash flow is one
of the central elements of financial analysis, planning, control
and resource allocation decisions.
Cash flow is important because the financial health of the firm
depends on its ability to generate sufficient amounts of cash
to pay its employees, suppliers, creditors and owners.
Financial management is equally applicable to all forms
of business like sole proprietorship, partners hips and
corporations. It is also applicable to nonprofit organizations
like trust, societies, government org., public sectors etc..
 Significance of Financial Management
 Chances of Failure – a firm having latest technology,
sophisticated machinery, high caliber marketing and
technical experts and so forth may still fail unless its
finances are managed on sound principles of
financial management.
The strength of business lies in its financial
discipline.
Therefore, finance function is treated as primordial
which enables the other functions like production,
marketing, purchasing and personnel to be effective
in the achievement of organizational goal and
objectives.
 Significance of Financial Management
 Return on Investments
Anybody who invests his money will expect
to earn a reasonable return on his investment.
The owner of the business try to maximize their
wealth.
Financial management studies the risk-
return perception of the owners and the time
value of money.
 Scope of Financial Management
Traditionally, financial management is primarily
concern with acquisition, financing and
management of assets of the business concern
in order to maximize the wealth of th firm for its
owners.

The basic responsibility of the Finance Manager 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
Financial Management looks into the following:
Functions of 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.
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
In view of modern approach, the Finance Manager
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
 Summary:
Finance is a body of facts, principles and theories
relating to raising and using money by individuals,
businesses, and governments.

Subfield of Finance are the ff:

a. Study of corporate finance or financial
management
b. Study of investments
c. Study of financial institutions and markets.
Three Major Functions of Financial
Management
a. financial analysis and planning
b. utilization of funds, and
c. acquisition of funds from investors
Financial Management involves decisions on:
a. How to organize the firm, that will attract
capital
b. How should capital be raised
c. Which projects to fund
d. How should the resources be allocated
e. How much capital to retain for ongoing
operations
f. How to minimize taxation
g. How to go about paying back capital
providers
Objective of Financial Management:
“The goal of financial management is to maximize
the current value of ownership in a business firm.”

Significance of Financial Management ASPECTS:

1. Applicability
2. Chances of Failure
3. Return on Investment
Scope of Financial Management:
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.
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.
Finance Manager 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