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Financial Management

Financial management is an application of planning and controlling function of firms financial resources

Scope of Financial Management


Estimating financial requirements Deciding capital structure Selecting sources of finance Selecting pattern of investment Cash management Meeting statutory requirements

Nature of Financial Management

It involves Four important decisions


Investment decision Financing decision Dividend decision Liquidity decision

Investment Decision

Capital budgeting decisions


It involves the decision of allocation of capital or commitment of funds to long term assets which would yield benefits in future.
Expansion of existing/new business Replacement Modernisation

Importance:
Growth Risk Funding Irreversibility

Financing Decision
Deals about capital projects to be financed (when, where and how) To determine the proportion of equity and debt To decide about sources of finance

Equity share capital Preference share capital Debentures

Equity/Ordinary/Common shares
Equity capital is also a ownership capital. Equity shareholders enjoys the profit of the firm on one hand and bears the risk on the other hand. Features: a. Claim on income b. Claim on assets c. Right to control d. Voting rights e. Pre emptive rights f. Limited liability

Preference share Capital

Generally the preference shares means shares which fulfills the following conditions: 1.During the continuance of the company it must have assured preferential dividend before any thing is paid to ordinary shareholders,. 2.On the winding up of the company it usually carry a preferential right to be paid, that is, the amount paid up on preference shares must be paid back before any thing is paid to the ordinary shareholders. 3.Generally such shares do not carry voting rights

Features
Prior claim on income/asset Fixed Dividend Cumulative dividend Redemption Participation feature Convertibility

III Debentures
Debentures / bond is a debt instrument indicating that a company has borrowed certain sum of money and promises to repay if future under clearly defined terms. Debenture holders are the long term creditors of the organization and are eligible to get stipulated amount of interest and re-payment on the maturity.

Features
Interest rate Maturity Redemption Security Yield

Dividend Decision
The Financial manager must decide dividend policy. Optimum dividend policy is the one which maximizes the market value of the firms shares.

Dividend Retained earnings

Liquidity Decision

Management of current assets


Need for current assets Amount to be invested Sources of funds
Trade credit Bank finance Discounting of bills

An overview of Financial Management


Financial Management Maximization of Share Value Financial Decisions
Investment Decisions Dividend Decisions

Financing Decisions

Retur n

Trade - Off

Risk

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