Introduction to Financial Management

Presented By: Jia Dhingra,

Assistant Professor,Baba Farid College of Management & Technology,

Bathinda.

The Agenda of today’s Lecture

•What is finance?

•What is financial management?

• What are the four financial decisions?

•What is the role of Financial Manager in modern times?

Finance

•It is a life blood of every business.•“It is a provision of Money at the time it is needed”

•This is an art and science of managing money.

Financial management

• It is a managerial activity which is concerned with the planning and controlling of firm’s financial resources.

• “acquisition of fund at optimum cost and its

utilization with minimum financial risk.”

• It was a branch of Economics till 1890s and emerged as a separate subject after that.

• It is important to study financial management for both Academicians and Practicing managers.

Financial Management

•It is related with the activities of the Financial managers in raising the funds and proper utilizing of these funds for meeting the needs and goals of a business firm.

•There are two approaches of Financial Management

1. Traditional Approach. 2. Modern Approach.

•Narrow term.•Related with the activity of procuring funds for the needs.

•Basically the analytical aspect was missing at that time.

Traditional approach.

•Emphasis is on both the aspects: Conceptual & analytical.

•The role of manger also changed.

•Emerged after mid 1950s.•As the business vital strategic role emerged at that time.

Modern Approach

Importance of Financial management• Business are concerned with three main activities that are:

1. Production.2. Marketing 3. Finance. Finance is the joint between these three

main activities of the business. Almost all the business activities directly or indirectly involve the acquisition of funds.

Four financial decisions

•The financial management revolves around the four major financial decisions. Inves

ting them

in asset

s Distributing

the return

s earned to the

shareholders

Raising of funds

Balancing the inflows and outflows

while performin

g these functions.

Four Financial decisionsFinancing decision.

Dividend decision.

Liquidity decision.

Investment decision

• Includes capital expenditure. •Related with the capital budgeting

decision.•Decision or allocation of capital or

commitment of funds to long term assets.

•Aspects of investment decision:1. Evaluation of prospective profitability

of new Investment or Replacement.2. Deciding the cut off.•Risk and return.

Financing decision

•When? •From where ?•From whom? are these funds to be acquired to meet

the firm’s investment needs!!•Control is a main issue: Debt + equity•Capital structure decision.•In absence of debt, the shareholders

returns = firm’s returns.

Dividend decision

•Whether to distribute all the profits or retain them.

•What is dividend?•Related with the Dividend payout ratio.•Related with the determination of

dividend policy.•Optimum dividend policy.•The ultimate role is maximization of

shareholders wealth.

Liquidity decision• Related with current assets (working capital)• Relationship between liquidity and profitability.• Liquidity?

• Trade off between liquidity and profitability.

• Lack of liquidity leads to firm’s insolvency. On the other hand idle resources will not fetch anything.

Financial Manager & His role

•Simply responsible for carrying out all the financial functions.

•The transition in the role took place between the shift of FM from the traditional to modern approach.

•Fund raising.•Funds allocation. •Profit planning.•Understanding capital markets.

Financial functions

Financial functions

Incidental Executive

Finance functions

•Executive finance function requires administrative skill in planning and execution of the financial decisions.

•Whereas the incidental finance function covers routine work mainly clerical that is necessary to carry out the financial decision at executive level.

Conclusion

Thanks