Introduction to Financial Management

Financial Management

Srinivas Methuku

Money itself is neither created nor destroyed, its simply transferred from one perception to

another.

What is finance??

What is Finance???

Finance is the art & science of managing 'MONEY'.

Finance is the life blood of Business (funds).

“Finance v/s Money”

FINANCE

Financial services Financial Mgt

Advisory services

Designing Financial products

Investments, real estate & insurance

Personal Financial planning

Mgt of finance dept in a firmFinancial/ non-financial/public/private/NGOBudgetingForecastingCash & credit mgtInvst analysis etc

Financial Management

• According to Ezra Solamn “Financial management is concerned with the

efficient use of an important economic resources viz capital funds”.

• Financial Management means planning, organizing, directing and

controlling the financial activities such as procurement and utilization of

funds of the enterprise.

Meaning: Financial Management

•Financial Management is an operational activity, which is accountable for the effective utilization of funds necessary for operations. One of the primary objectives of financial management is to maintain enough money to meet the necessary current and capital expenditure, apart from maximizing profits.

Nature of Financial Management Financial management is mainly concerned with the proper

management of funds.

The financial manager must see that the funds are procured in a manner that there is risk, cost and control considerations are

properly balanced in a given situation and there is optimum utilization of funds.

Financial Management Process

•Assess Current Financial Position

•Define and Prioritizing Goals

•Financial and Investment Plan

•Implementation of the Plan

•Monitor, Evaluate and Adjust Performance

Scope of Financial Management

Scope covers both acquisition & utilisation of funds – efficient and wise allocation of funds to various uses.

Financial mgt involves providing solutions for major financial operations of a firm

- Investment decisions - Financing decisions

- Dividend policy decisions

Investment decision/ function

Investment decisions relates to the selection of assets (fixed & current

assets) in which funds will be invested by a firm.

Invst in fixed & long term assets & projects is called capital budgeting –

volume of invst , risk & returns , cost of capital.

Invst & mgt of current assets is called working capital mgt –mgt of cash,

inventory & receivables, profitabilty & liquidity.

Financing Decision / Function

Financing decisions are concerned with the Capital structure decisions of a firm

( proportion of debt & equity).

Creating proper mix between debt & equity – optimum capital structure.

Tradeoff between risk & return.

Dividend policy decisions / functions

Deciding the Dividend payout ratio considering the benefit of shareholders & firm both.

Dividend decision should be analysed in relation to the financing decisions of the firm.

Duties / Roles / Responsibilities of a Financial manager

Performing Financial Analysis

Making Investment decisions

Making Financing decisions

Performing financial analysis & planning

Transforming financing data into form which can be used for decision making.

Determing need for additional (reducing) finance.

Making investment decisions

Determine the mix of current assets & fixed assets to be held by a firm.

Determine the type of asset in each category

Making Financing decisions

Determining mix of short term & long term financing.

Indepth analysis of available financing alternatives , their costs & long term implications.

Risk Return Trade-Off•Amount of Return = Amount of Risk

Undertaken

•Amt X of Loss is more Epochal than Amt X of Gain

•Risk Averse Instrument have High Demand Raising the Price and Lowering the Returns.

•Risk Premium is the Higher Return gained over Risk Free Returns.

Emerging / Changing role of Finance managers in India

Post liberalisation the role of finance manager has become more important,

complex & demanding.

Industrial licensing abolished and scope of private sector investment has

increased.

Abolition of MRTP

Abolition of Capital issues control act – freedom in designing and issuing

securities.

Market determined interest rate and exchange rate volatality.

Globalisation, FDI.

Investors have become more demanding and assertive.

Challenges for Financial Managers in a Changing Economic Environment•Regulations•Globalization•Technology•Risk•Transformation

•Stakeholders Management

•Strategy•Reporting•Talent and

Capability

Nature of Financial ManagementCompany (Revenue in billion)

Recent Investment Decision

Recent Financing Decision

Boeing ( $61) Began production of its 787 Dreamliner aircraft, at a forecasted cost of more than $10 billion.

The cash flow from Boeing’s operations allowed it to repay some of its debt and repurchase $2.8 billion of stock.

Toyota (¥ 26,289) In 2008 opened new engineering and safety testing facilities in Michigan.

Returned ¥431 billion to shareholders in the form of dividends.

Wal-Mart ($406) In 2008 announced plans to invest over a billion dollars in 90 new stores in Brazil.

In 2008 raised $2.5 billion by an issue of 5-year and 30-year bonds.

Union Pacific ($18) Acquired 315 new locomotives in 2007.

Largely financed its investment in locomotives by long-term leases.

Wells Fargo ($52) Acquired Wachovia Bank in 2008 for$15.1 billion.

Financed the acquisition by an exchangeof shares.

LVMH (€17) Acquired the Spanish winery Bodega Numanthia Termes.

Issued a six-year bond in 2007, raising 300 million Swiss francs.

Lenovo ($ 16) Expanded its chain of retail stores to cover over 2,000 cities.

Borrowed $400 million for 5 years from a group of banks.

Finance function

Finance function involves the task of procurement of funds needed by the enterprise and its effective utilization.

Organisation of Finance function

Board of Directors

Managing Director / Chairman

VP/ Director (Finance)/ Chief Finance officer (CFO)

Treasurer Controller

Cash Manager

Credit Manager

Foreign Exchange Manager

Financial planning & fund raising manager

Capital Budgeting manager Portfolio manager

Cost Accounting Manager

Tax Manager Financial accounting mgr Data processing mgr

Internal Auditor

Functions of a Treasurer

Treasurer is mainly responsible for financing & Investment activities.

The main functions of a treasurer are- Obtaining finance

- Investor relationship- short term financing

- cash & credit mgt - Investments & insurance

Functions of a Controller

Controller is concerned with Accounting & Control.The main functions of a Controller are

- Financial Accounting - Internal audit

- Taxation - Management accounting & control

- Budgeting & planning

Objectives of financial Management

a. Financial objectivesb. Non-Financial Objectives

Financial objectives or Financial Goals

Profit maximization (profit after tax) Maximizing EPS(earnings Per Share)

Wealth Maximization.

Profit Maximization

Maximizing the Rupee Income of Firm Resources are efficiently utilized

Appropriate measure of firm performance Serves interest of society also

Objections to Profit Maximization• It is Vague

• It Ignores the Timing of Returns• It Ignores Quality of benefits

Shareholders’ Wealth Maximization

• Maximizes the net present value.• Fundamental objective — maximize the market value of the

firm’s shares

Maximizing EPS• Ignores timing and risk of the expected benefit.

• Maximizing EPS will not result in highest price for company's shares.

Non financial Objectives General welfare of employees

General welfare of societyFulfillment of responsibilities towards customers, suppliers etc.

Leadership in R&D. Effective utilization of funds

Interface of Financial Mgt with other functional areas of Mgt

Finance and ProductionFinance and Marketing

Finance and Personnel ( Human resource)Finance and Research & Development

Finance and Production

Finance is the basis of production and is needed at every stage of production

• Planning & preparation of project report• Acquiring raw materails, plant & machinery, tools & spares,

technological know how etc.• Hold stocks of RM, WIP and FG .

Finance and Marketing

Finance is needed in all vital areas of marketing such as • Sales promotion & Advertising

• Introduction of new products, diversification of existing lines to satisfy customers changing needs.• Physical distribution of goods.

Finance and Personnel ( Human resource)

Finance in personnel is required for• Recruitment

• Selection• Training

• Promotion Schemes.

FINANCE AND RESEARCH & DEVELOPMENT

Finance in R& D is used for• Innovation

• Technological up gradation• To meet and cater the demands of changing needs &

preferences of customers• To stay competitive

Functional Areas of Finance

•Personal Finance

•Corporate Finance

•Public Finance

Functional Areas of Finance

•Personal Finance

▫Financial Position▫Adequate Protection▫Tax Planning▫Investment and Accumulation Goals▫Retirement Planning▫Estate Planning

Functional Areas of Finance

•Corporate Finance

▫Balancing Risk and Profitability▫Maximizing Entity’s Wealth and Stock

Value▫Managing the Working Capital▫Measure the Performance of Portfolio

Functional Areas of Finance

•Public Finance

▫Related to Sovereign States & its entities▫Identification of required expenditure▫Source of that entities revenue▫Debt Issuance for Public Works Projects

Agency problem•In corporate finance, the agency

problem usually refers to a conflict of interest between a company's management and the company's stockholders. The manager, acting as the agent for the shareholders, or principals, is supposed to make decisions that will maximize shareholder wealth

Thank YouReferences:

Principles of Corporate Finance (Brealy, Myers & Alen)

MIT OCW – Finance Theory 1

Financial Management – I M Pandey

Financial Management M Y Khan