financial management - unit one.ppt

7/30/2019 FINANCIAL MANAGEMENT - unit one.ppt

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FINANCIAL MANAGEMENT


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Meaning of Financial Management

Financial deals with all resources in terms of

money

Management deals with using people to get

things done to achieve organizational goals

Financial Management is a system which

provides information to ensure effective

decision making regarding the raising and

investing of funds or money


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Decisional Areas of Financial

Management

Financing decisions

Investment decisions

Dividend policy

Working Capital Management


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Importance of FM

Provides knowledge about various sources offinance

their related or associated costs

interest rates

alternative investment opportunities

government fiscal policies

tax laws and obligations

determination of business and environmental

risks

overall assessment of returns


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Application of Financial Management

Financial management is applied

in all types of activities that

involves the use of money orfunds


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Purpose of Financial Management

To help management determine and assign coststo various sources of funds

To determine the overall returns on variousinvestment opportunities

To determine risk associated with an investment

To provide info. for management planning andexpansion

Helps management in evaluation Provide info. for management decision

Assess and select the best investmentopportunities

To minimize operational risk


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Relationship with other Subjects

Financial Accounting

Management Accounting

Economics

Law

Taxation

Quantitative Techniques


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Management Objectives and Role

of Financial Managers


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Management Objectives 4 major

objectives

Growth (Profit maximization)

Risk reduction

Efficiency

Personal aspirations (Prestige)


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Functions of Financial Managers

Evaluate and control of capital projects and risk of thefirm

Planning and allocation of funds

Evaluation of financing alternatives available to the

firm Strategy for acquisition and mergers

Raises funds at the right time

Ensure that funds are secured with the lowest cost

possible Funds are used in the most efficient and effective

manner


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Economic Environment


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Objectives of Macroeconomic policy

Infrastructure

Living standards

Full employment

Maintain price stability and avoid pricehikes

Promote development (GDP, GNP)

Ensure BOP equilibrium Ensure equitable distribution of national

income and wealth


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Problems of macroeconomic Policy

This is as a result of conflict

between the objectives

Conflict between full employment

and price stability

Rapid economic growth(persistence increase in level of

import) and balance of payment


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Macroeconomic Policy, implication

to business


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Macroeconomic Policy, implication to

business

Macroeconomic policies affect

businesses in two ways:

Level of aggregate demand

Cost of business operations


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Aggregate Demand

It is the total demand of goods

and services within the

economy. It is used in the

determination of:

Unemployment

Rate of inflation


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Cost of Business

Changes in exchange rate (have direct relation

to price of imported goods)

Fiscal policy on the use of tax (fiscal policy is

the manipulation of the govt. budget in order

to influence the level of activity in the

economy)

Monetary policy on changes in interest rate

Cost of servicing debts


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Factors influencing business financing

decisions

Availability of funds

Cost of finance (share price falls

as interest rate increases)

Level of consumer demand

Level of inflation

Level of exchange rates


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Financial Intermediation and

Credit Creation


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Financial Intermediation

Process of bringing

borrowers and investorsof funds together


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Examples of Intermediaries

Savings banks

Investment banks or merchant bank that are

designed for special purpose (advice, provide

finance, foreign trade)

Clearing banks provides immediate clear

mechanism

Pension funds provides pension on retirement

Insurance companies


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Continued

Investment trust and unit trust (Data

bank)

Building society

HFC Finance companies

finance house

leasing house

factoring companies


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Credit Creation

The process for creating

credit in a modern banking

system


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Sources of finance


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Sources of finance open to business

Equity (Ordinary) orPreference Shares

Debt

It can also be in the long orshort term


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Raising equity finance

There are three main sources of

equity finance

Internally generated

Fresh issues of shares ( methods

used in issuing shares, place, offerfor sale etc.)

Right issue


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Debt

Debenture

Leasing contract between a lessor

and a lessee for the hire of aparticular asset

Bank overdraft Debtor finance

Trade credit


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Comparing debt and equity

Cheapness (it is generally less risky)

Flexibility (it can be borrowed, repaid

and re-borrowed)

Retention of control (it creates rights

and obligation on both sides)

financial management - unit one.ppt

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