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CAPITAL…….?

FINANCE……?
(Some terms in finance) NPV…..? SHARES……? DEBENTURES…….? BONDS……? CAPITAL APPRECIATION…….? WEALTH MAXIMIZATION……?

APPROACHES TO F.M.
TRADITIONAL VIEW  Concerned with acquisition, financing, and management of assets of business in order to maximize the wealth of the firm for its owners.  Success needs qualitative financial decisions.

OBJECTIVES OF F.M.
a)

b)

Procurement of funds. Effective utilization of funds. Responsibilities are linked to ensure liquidity and profitability.

Mobilization of funds (through financial instruments) Orientation of finance and accounting functions. Compliance of legal provisions related to procurement use and distribution of funds. .TRADITIONAL FINANCIAL FUNCTIONS a) b) c) d) Arrangement of funds from financial institutions.

Finance managers job extended and now one has to keep into view objectives of firm and expectations of providers of funds .

takeovers. etc. (Mergers.MODERN VIEW  LPG aims at diversified. integration of national economy into world economy. quality improvement. efficient and competitive financial system.) .

Finance and Dividend) . Pattern of financing assets.  Finance manager is expected to analyze firm and determine. Total funds requirement of firm. General 3 types of decisions. Assets to be required.MODERN FUNCTIONS a) i. ii. (Investment. iii.

• It requires supportive investment in form of working capital. • May be internal or external. Ascertainment of total volume of funds. • Expected to earn greater than “Hurdle Rate” • Finance managers has to cover: i. Appraisal and selection of capital investment proposals. ii.INVESTMENT DECISIONS • How scarce resources (in terms of funds) are available in and committed to projects. .

iv) Prioritizing of investment decisions. vi) Determination of fixed assets to be acquired or replaced. viii) Buy or lease decisions. ix) Securities analysis and portfolio management. . v) Funds allocation and its rationing. iii) Measurement of risk and uncertainty in proposals.Cont…. vii) Determination of investment in current assets and its management.

C.  .FINANCE DECISIONS Acquiring the optimum finance to meet financial objectives and seeing that W.  Optimal debt-equity ratio mix to minimize hurdle rate and maximize the value of investments.  Important principle considered is long term assets is acquired using long term funds. is effectively managed.

High proportion increases financial risk. Interest is tax deductible so cost of it is less than equity. Dividends can be paid only from distributable profits. It dilutes controlling if new issues made. Interest is paid irrespective of profits.DEBT V/s EQUITY     Interest payments are made to risk attached. .      Attracts flotation costs. Most expensive way of funding. Returnable only at the time of liquidation.

Changes in debt level and its impact. Maintenance of balance between owner’s fund and outside capital. Raising funds through issue of financial instruments and other sources. . Setting budgets and review of performance for control actions.        Determination of both kinds of financing pattern.Decisions Involved Are…. Portfolio management. Consideration of interest burden of firm.

 Regular payment and growth in dividend is significant factor of profit  . Amount to be paid and its influence on market price of shares.DIVIDEND DECISIONS Determine quantum of profits for owners and frequency of such payments. Amount of profit to be retained for internal or re-investment.  It affects in two ways: 1. 2.

Its impact on market value of share and future earnings of the firm.  .  Consideration for diversification and expansion of proposals.IT INVOLVES THE FOLLOWING… Determination of dividend & retention policies of the firm.  Reconsideration of policies in boom and recession period  Impact of legal and cash flow constraints on dividend policies.

capital mix and profit allocation..  3 important objectives of finance at corporate: 1. Distribution of funds.HENCE…. 2. 3. Allocation of funds. managerial decisionmaking on asset mix. Generation of funds.  . It is nothing but.

The subject will be based on: Owners are interested in firm’s success and growth. . b. 2. Firms capital structure and dividend decisions are irrelevant as they are dependent on management control and efficiency of capital market. c. Existence of efficient capital market. Firm will spend on capital investment projects till it generates positive NPV. The wealth maximization objective of firm. Shareholders wealth is determinant of current share price. d.Guiding Factors For Such Decisions 1.  a.

D.  . 2. Firm should select the project with positive NPV. 2.INTER-RELATIONSHIP OF F.  In case of investment decisions: 1. DECISIONS All this aims at maximizing share holders wealth. Rate of return should exceed (marginal) cost of capital.  In case of financing decisions: 1.I. Lower cost of capital and minimum risk will generate profit for firm and wealth for owners. Cost of finance available in different forms and risk attached to it.

3.Cont… In case of dividend decisions: 1. Optimal dividend policy will lead to shareholders wealth maximization.  . Conservative dividend policies affect the market value of shares. Firms wealth is affected by dividend and retention policies. 2.

reduce its liabilities and cover up any operating losses.LIQUIDITY & PROFITABILITY Ezra Solomon.”  It ensures the ability of firm to honour its short term commitments. “Liquidity measures a company’s ability to meet expected as well as unexpected requirements of cash to expand its assets.  It reflects firms ability to convert its assets into cash or cash equivalents or the other most liquid assets.  .

.Cont…. To maintain liquidity means managing current and liquid assets to ensure its affectivity with a view to minimize cost.  Profitability considers utilisation of funds in a manner to ensure highest returns.  Profitability refers to a situation in terms of efficiency in utilization of resources to achieve profit  .  Profitability signifies operational efficiency of the organisation.

 Job of finance manager is to strike a balance between these two conflicting  . where it maintains its optimum liquidity for greater profitability.  Firm should maintain trade off situation.  Liquidity hampers smooth working which results in lower profitability.Cont…… This are inversely related to each other.

) and mathematical models to review decision making. for its accuracy and reliability proper control measures should . etc.FINANCIAL MANAGEMENT & ACCOUNTING      F.M. Finance manager use accounting records to analyze the business position. is more than art of accounting and bookkeeping. After analyzing it uses different tools and techniques (Capital budgeting. capital structuring. Decentralized accounting function speed-up the process of information but. For routine matters finance function could be decentralized with adoption of responsibility accounting concept.

 Micro economics helps in decisions like price fixation.  Micro economics focuses on optimal operating strategies based on the economic data of individuals and firms.  Macro economics provide insight in policies to control economic activities.FINANCIAL MANAGEMENT & ECONOMICS Financial manager must be familiar with micro and macro environmental aspects of business. etc. break even analysis.  .

 Govt’s. market competition from  . trade cycles. government’s foreign policy. banking system. fiscal and monetary policy influence strategic financial planning of enterprise.  macro economic factors: rate of inflation.Cont…… Here. overall performance is dependent upon money and capital markets (as they produce funds)  Institutional framework operates on macro economic theories.

M. portfolio management.? Neither pure science nor art. cost of capital.)  Art: Analytical skills are used for decision making.F. dividend policies..  . Science / Art…. etc.  Science: Various techniques are adopted based on situation of business and purpose of decision (statistical and mathematical models for optimal capital structure.

Significance Of Financial Management • Applicability and chances of failure • ROI Functions Of Financial Controller • • • • Provision of capital. • Banking and custody . • Forecasting profits and cash flows. Cost control and price setting. Credit & Collection. Investor relations.

SIGNIFICANCE OF F.  Advances should be supported by sound principles of management. Cash flow is central element of financial analysis.  Financial health of a firm depends upon its ability to generate cash (to pay resources)  Any organisation is viewed from angle of financial discipline. principles of finance is applicable with cash flows. planning.M.  . control and resource allocation decisions. Hence.

 Owners try to maximize their wealth. etc. studies basically risk-return perception and time value of money. sales.M.) to achieve organisational goals and objectives.Cont…… It is primary function (before marketing. production.  .  This depends upon the amount and timing of cash flows generation in accordance with risk attached to it.  F.

 Insurance and investment: to achieve fund requirement and establish policies (pension)  .  Investor relations: to establish and maintain adequate market for company’s securities.  Short term financing: to maintain adequate sources for current borrowings.FUNCTIONS OF FINANCIAL CONTROLLER Provision of capital: to establish and execute program.

 .  Managing funds and measuring returns.  Forecasting profits and cash-flows.Cont….  Planning for control: overall operations.  Cost control and price setting.  Tax administration and government reporting. Credit and collections: also include leasing plans.

 .  He should transform from functional head to strategic leader.FINANCE MANAGER AS FACILITATOR Earlier it was acquisition and utilization of funds to increase wealth.  He needs to provide information for strategic planning.  CFO (Chief Finance Officer) role changed from controller to facilitator as various financial problems needed to overcome through innovative means.

hedging foreign exchange risk. face external complexities.  In short. raising low cost funds.Cont…… He must be able to use networking systems. improve capital productivity to increase profitability.  . strategic financial planning with strategic objectives of group. he must be able to work in environment of self-managed teams rather than a controlled environment. etc.

MD / President. a) Financial Controller.  Management Accountant.  Manager Taxation. BOD.  Corporate Finance Or Funding Manager. 3. C) Treasurer  Cash Manager. 2.  Manager Credit. B) Internal Auditor.  Manager Of Accounts. Finance Director / CFO.  Foreign Exchange Manager .Organisational Chart Of Finance Function 1.

 Cash Flows : strict planning and control is needed to generate it and apply it. making availability of funds. Maintenance of liquidity for long term solvency is  . attaining target ROCE. financial goal setting. investment in capital projects. E.Reasons For Centralizing Finance Function Strategic Decisions : Finance manager is a part of top management and team involved in strategic decision making.g. etc.

E.g. External Orientation : External sources require proper coordination. demands centralization.. Hence.  . marketing.Cont…. operation. shareholders. etc.  Co-ordination : Requires efficiency of functions with availability of funds in time (production. banks. HR functions) Finance manager acts as a co-ordinator or facilitator of all other functions. SEBI.

 Information Flow : Finance function requires it quantitative as well as monetary on regular basis. Regular flow will reduce uncertainty in decision-making. It has direct impact on corporate success. Financial Discipline : It minimizes risk of misappropriation of funds. Centralized finance  .Cont…. This needs planned cash flows and necessary approvals of higher authorities..

.FINANCIAL OBJECTIVES OF BUSINESS FIRM  Objectives are generally in quantitative terms and framed within a time frame.