Presentation on theme: "CHAPTER NO. 1 Nature & Scope of Financial Management"— Presentation transcript:
1 CHAPTER NO. 1 Nature & Scope of Financial Management
2 INTRODUCTIONFinanceFinance is defined as the provision of money at the time when it is required. Every enterprise, whether big, medium , or small needs finance to carry on its operations and to achieve its targets. So, it is rightly said to be the lifeblood of an enterprise.Classification of FinanceFinance deals with the requirements, receipts and disbursements of funds in the public institutions as well as in the private institutions. On the basis of these finance is classified in to following two parts.Traditional classificationModern classification
3 Classification of Finance in Traditional way BUSINESS FINANCEPUBLIC FINANCE1. GOVERNMENT INSTITUTIONS2. STATE GOVERNMENTS3. LOCAL SELF GOVERNMENTS4. CENTRAL GOVERNMENTSPRIVATE FINANCE1. PERSONAL FINANCE2. BUSINESS FINANCE3. FINANCE OF NON PROFIT ORGANISATIONS
4 Classification of Finance in Modern way BUSINESS FINANCEPARTNERSHIP FINANCESOLE-PROPRITORY FINANCECOMPANY OR CORPORATION FINANCE
5 APPROACHES TO BUSINESS FINANCE Business finance connotes finance of business activities.It is composed of two words (I) business( state of being busy related with all creative human activities) (ii) finance (provision of money when it is required) so, business finance concerned with the application of skills in the use and control of money.Three main approaches to finance indicated in traditional and modern approaches.Providing of fundsFinance to cashraising of funds and effective utilization.
6 Financial Management and Definition Financial Management refers to :-Part of management activityPlanning and controlling financial resourcesFinding out various sources for raising fundsSuitable and economical sourcesProper use of fundsSo, Financial management is an area of financial decision making , harmonising individual motives & enterprise goals.Definition“The area of the business management devoted to a judicious use of capital and a careful selection of sources of capital in order to enable a spending unit to move in the direction of reaching its goals”J. F. Bradley
7 EVOLUTION OF FINANCIAL MANAGEMENT THREE STAGESINITIAL STAGE (1930)EMERGENCE as distinct field & FORMATION of large sized business undertakings1930 economic recession creates difficulties in raising finance & find out improved methods for sound financial structureIN EARLY 1950EMPHASIZED on reorganization of industries & selection of sound financial structureSHIFTING to profitability to liquidity , techniques of analyzing capital investment & widened the scope of financial managementMODERN PHASE AFTER 1960DISCIPLINE of financial management become more analytical & development of theory , methods, models like CAPM, OPTION PRICING THEORY.NEW sources of finance like PCD’s, FCD’s, PD’S etc.
8 IMPORTANCE OF FINANCIAL MANAGEMENT #FOR FINANCIAL PLANNING & SUCCESSFUL PROMOTIONACQUISITION OF FUNDS AT MINIMUM COSTSOUND FINANCIAL DECISIONIMPROVING PROFITABILITYPROPER USE AND ALLOCATION OF FUNDSINCREASING THE WEALTH OF INVESTORS & NATION
9 1. Acquiring sufficient funds 2. Proper utilization of funds AIMS OF FINANCE FUNCTIONSCOPE OF FINANCE FUNCTION1. Acquiring sufficient funds2. Proper utilization of funds3. Increasing profitability4. Maximizing firm value# Estimating financial requirements # Deciding capital structure # Selecting a source of finance # Selecting a pattern of investment # proper cash management #Implementing financial controls # proper use of surpluses
10 RELATIONSHIP OF FINANCE WITH OTHER BUSINESS FUNCTIONS DISTRIBUTION FUNCTIONACCOUNTIONG FUNCTIONPRODUCTION FUNCTIONPURCHASE FUNCTIONPRESONNEL FUNCTIONRESARCH AND DEVELOPMENT FUNCTION
11 OBJECTIVES OF FINANCIAL MANAGEMENT 1. OBJECTIVE PROFIT MAXIMISATIONArguments in favour# Profit maximization is the obvious objectives when profit s the main aim.# Profitability is a barometer for measuring efficiency & prosperity of a business# To survive In unfavorable situation# For the expansion and diversification# For fulfilling social goalsArguments in against$ Ambiguity$ Ignores time value of money$ Ignores risk factors$ Dividend policy
12 2.OBJECTIVE WEALTH MAXIMISATION Arguments in favour@ It serves the interest of all shareholders@ Owners economic welfare@ Long run survival and growth@ Consider risk factors and the time value of money@Increase the market value of the shares@Value maximization of equity shareholders by increasing price per shareArguments in against* Objective is not descriptive* Not socially desirable* Controversial point that it increases firm’s value or shareholder wealth* Wealth maximization is difficult when ownership and management are separated
13 MEASURING SHAREHOLDERS VALUE CREATION Economic value addedEVA is a measure of performance evaluation employed by Stewart & Co. It is now used to measure the surplus value created by an investment or a portfolio of investments.EVA = Net profit after tax – Cost of capital x Capital investedMarket value addedMVA is the sum total of all the present values of future economic value added. It can also defined asMVA = Current market value of the firm – Book value of capital employed
14 FINANCIAL DECISIONS & INTER RELATION OF FINANCIAL DECISIONS 1. Investment decision2. Financing decision3. Dividend decisionINTER RELATION OFFINANCIAL DECISION----INVESTMENT DECISIONDIVIDEND DECISIONFINANCING DECISIONFINANCIAL MANAGEMENT CONCERNED WITH1. FINANCING DECISION2. INVESTMENT DECISION3. DIVIDEND DECISIONANALYSISRISKRETURN RELATIONSHIPTO ACHIEVE THE GOALS OF WEALTH MAXIMISATION
15 FACTORS INFLUENCING FINANCIAL DECISION INTERNAL FACTORSEXTERNAL FACTORSNature and size of businessExpected return, cost, riskComposition of assetsStructure of ownershipTrend of earningsAge of the firmLiquidity positionWorking capital requirementsConditions of debt agreementsState of economyStructure of capital and money marketsRequirements of investorsGovernment policyTaxation policyLending policy of financial institutions
16 RISK RETURN TRADE OFF RISK MARKET VALUE OF THE FIRM RETURN INVESTMENT DECISION1. CAPITAL BUDGETING2. WORKING CAPITAL MANAGEMENTRISKFINANCING DECISION# CAPITAL STRUCTUREMARKET VALUE OF THE FIRMDIVIDEND DECISION* DIVIDEND POLICYRETURN
17 Financial forecasting and Planning Acquisition of funds FUNCTIONAL AREAS OF FMFUNCTIONS OF A FINANCE MANAGER∞ Determining financial needs ∞ Selecting the sources of funds ∞Financial analysis and interpretation ∞Cost-Volume-Profit analysis ∞Capital budgeting ∞Working capital management ∞Profit planning and control ∞Dividend policyFinancial forecasting and PlanningAcquisition of fundsInvestment of fundsHelping in valuation decisionsMaintain proper liquidity
18 FINANCIAL ENGINEERING Designing and developing new financial instruments# Formulating new processes$ Formulating creative solutions to financial problems.
19 ORGANISATION OF THE FINANCE FUNCTION Board of DirectorsManaging DirectorVice President ProductionVice President FinanceFinancial ControllerPlanning & ControlAnnual ReportsBudgetingAdditional FundsCash ManagementAuditProtect Funds & SecuritiesRelation with Banks & Financial InstitutionsProfit AnalysisAccounting PayrollTreasuresVice President Sales
20 The Financial Controller Vs. Treasurer 1Provision of capitalAccounting2Relation with banks and other financial institutionsPreparation of financial reports3Cash managementReporting and interpreting4Receivables managementPlanning and control5Protect funds and securitiesInternal audit6Investors relationsTax administration7auditReporting to government