Amity Business School

Amity Business School

MBA Class of 2013, Semester II
FINANCIAL MANAGEMENT
Module I

BHAVNA RANJAN
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COURSE OBJECTIVE
To develop an understanding of short-term and long-term
financial decisions of a firm and various financial tools used in
taking these decisions.
To develop the understanding of the financial environment in
which a company operates and how it copes with it.
Credit Units 04
Syllabus
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Evaluation Plan
Components %age Marks
External Evaluation 70
Attendance 05
Mid Sem Test 10
Term paper 10
Class test 05 (2.5+2.5)
Total 100
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FINANCE - CONCEPT
Finance may be defined as the art and science of
managing money.

Financial Management is that managerial activity which is
concerned with the planning and controlling of the firms
financial resources.
It encompasses the procurement of the funds in the most
economic and prudent manner and employment of these
funds in the most optimum way to maximize the return to the
owner.
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FINANCIAL MANAGEMENT

According to Van Horne and Wachowicz

Financial Management is concerned with the acquisition,
financing and management of assets with some overall goal in
mind
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EVOLUTION OF FINANCIAL MANAGEMENT
Modern phase
Transitional phase
Traditional phase
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OVERVIEW OF FINANCIAL
MANAGEMENT
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FINANCIAL DECISION MAKING / FUNCTIONS OF
FINANCIAL MANAGEMENT
Financial
Decisions
Investment
Decision
Financing
Decision
Dividend
Decision
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a) Investment Decision
The investment decision relates to the selection of assets in
which funds will be invested by a firm.
The assets which can be acquired fall into two broad groups:

(a) Long-term assets (Capital Budgeting)
(b) Short-term or current assets (Working Capital
Management)

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Investment Decision
Selection of assets in which funds will be invested by a firm
Fixed Assets

Current Assets
Capital Budgeting
Decisions

Working Capital
Management
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b) Financing Decision
The concern of the financing decision is with the financing-mix
or capital structure or leverage. There are two aspects of the
financing decision.

a) Capital Structure decisions
b) Cost of capital
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Financing Decision
Decisions relating to the debt-equity mix of the firm.
Borrowed Funds

Debentures
Long term Loans

Shareholders Funds

Equity share Capital
Preference share Capital
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c) Dividend Policy Decision
The dividend decision should be analyzed in relation to the
financing decision of a firm. Two alternatives are available in
dealing with the profits of a firm:

(i) they can be distributed to the shareholders in the form of
dividends or

(ii) they can be retained in the business itself.
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Dividend Decision
Decisions relating to the payout and reinvestment
of the Profit After Tax(PAT)
Deciding the Dividend
Payout
Ratio

Deciding the proportion of
profits to be retained
in the business
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KEY ACTIVITIES OF FINANCIAL MANAGEMENT
Financial Analysis, Planning and Control
Management of
firms financial
structure
Balance Sheet
Management of
firm s asset
structure
Long Term
Financing
Long Term assets
Short Term
Financing
Short Term assets
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OBJECTIVES OF FINANCIAL MANAGEMENT
Objectives of
financial
management
Profit
Maximization
Approach
Wealth
Maximization
Approach
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a) Profit Maximization Approach
The term Profit in the Profit maximization concept can be used
in two senses

- Owner oriented concept
- Operational concept

Technical Flaws of the concept
- Ambiguity
- Timing of benefits
- It ignores risk
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( ) ( ) ( )
)
`

+
+
+
+
+
n
n
k
A
k
A
k
A
1
___
1 1
2
2
1
1

W = V C
Where W = Value of the firm/ Net Present Worth

V = Gross Present worth
C = Investment


V =
b) Wealth Maximization Approach
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ORGANISATION OF FINANCE FUNCTION
In small firms, the finance functions are generally performed by
the accounting departments.


In large firms, there is a separate department of finance headed
by a specialist known by different designations such as vice-
president, director of finance, chief finance officer and so on.

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ORGANISATION OF FINANCE FUNCTION
Board of Directors
Managing Director/Chairman
Vice-President/Director (Finance)/Chief Finance Officer (CFO)
Treasurer
Controller
Financial
planning and
fund-raising
manager
Cash
Manager
Credit
Manager
Foreign
exchange
manager
Tax
manager
Cost
accounting
manager
Capital
expenditure
manager
Pension
fund
manager
Corporate
accounting
manager
Financial
accounting
manager
Organisation of Financial Management Function
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Role of The Financial Manager
Financial
manager
Firm's
operations
Financial
markets
(1) Cash raised from investors
(1)
(2) Cash invested in firm
(2)
(3) Cash generated by operations
(3)
(4a) Cash reinvested
(4a)
(4b) Cash returned to investors
(4b)
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1. Investment analysis
2. Working capital management
3. Sources and cost of funds
4. Determination of capital structure
5. Dividend policy
6. Analysis of risks and returns
Primary Disciplines
Accounting
Macroeconomics
Microeconomics
Other Related Disciplines
Marketing
Production
Quantitative methods
Shareholder wealth maximization
Financial Decision Areas
Support
Support
Resulting in
Figure 1: Impact of Other Disciplines on Financial Management
FINANCE AND RELATED DISCIPLINES
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EMERGING ROLE OF FINANCE MANAGERS
IN INDIA
Reflecting the emerging economic and financial environment
in the post-liberalization era since the early nineties, the
role/job of finance managers in India has become more
important, complex and demanding. The key challenges are in
the areas of
(1) financial structure,
(2) foreign exchange management,
(3) treasury operations,
(4) investor communication,
(5) management control and
(6) investment planning. 23
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AGENCY PROBLEM

There is a Principal Agent relationship between managers and
shareholders.

In theory, Managers should act in the best interests of
shareholders.

In practice, managers may maximise their own wealth (in the
form of high salaries and perks) at the cost of shareholders.

This conflict is known as Agency problem and it results into
Agency costs.


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