Presentation by

Rifa Jasmin. T
Afreen
Salwa Saeed NK
Fathima
Risana
Arjun

MES Kalladi College

Financial Management- An
Overview
● Finance:- the art and science of managing mone
● Major areas of finance:-

1. Financial services
2. Financial management
 Financial Service :-
Concerned with the design and delivery of the
advice and products to individuals Government
and business

Financial management :-
Concerned with a duties of financial managers in
business firm
Financial managers

● Actively manage the financial affairs of any type of business,

namely, financial and non financial, private and public ,large and
small, profit seeking or not-for-profit

● The changing regulatory and economic environments coupleed with

the globalization in business activities has increased the complexity
as well as the importance of financial managers. Does financial
management function has become more demanding and complex
Financial managers perform:

● Budgeting
● ​Financial forecasting
● Cash management
● ​credit administration
● ​Investment analysis
● ​Funds management and so on
Finance and related disciplines

● Financial management is not isolated but

closely linked with economics, accounting,
marketing, production, and quantitative
methods.
● Financial management draws significantly
from economics, which is divided into
macroeconomics and microeconomics.
The relevance of economics to financial
management can be described in the light of
two areas:-
1. Macro economics
2. Micro economics
Macroeconomics:-

❏ Concerns the overall economic environment and

institutional framework.
❏ Focuses on the banking system, capital markets,
financial intermediaries, and monetary and fiscal
policies.
❏ Financial managers need to understand how these
macroeconomic factors affect fund availability and
costs and impact overall economic activity.
Since business firms operate in the macroeconomic
environment, it is important for financial managers to
understand the broad economic environment. They
should:-
(1) Recognise and understand how monetary policy affects
the cost and the availability of funds
(2) Be versed in fiscal policy and its effects on the economy
(3) Be ware of the various financial institutions
(4) Understand the consequences of various levels of
economic activity and changes in economic policy for their
decision environment
❏ Deals with economic decisions at the individual and
organizational level.
❏ Aims to determine optimal operational strategies for
businesses.
❏ concerned with defining actions that will permit the
firms to achieve success.
❏ It is important that financial managers must be
familiar to microeconomics
Their concepts are related to:-

(1) supply and demand relationships and profit

maximisation strategies
(2) issues related to the mix of productive factors,
‘optimal’ sales level and product pricing strategies
(3) measurement of utility preference, risk and the
determination of value
(4) the rationale of depreciating assets.
 Marginal analysis

● The primary principle that applies in

financial management is marginal analysis.
● It suggests that financial decisions should
be made on the basis of comparison of
marginal revenue and marginal cost.
 Finance and Accounting

● Accounting and finance are functionally closely related

● ​The relationship between accounting and finance are:-
​(i) They are closely related to the extent that accounting
is an important input in financial decision making
(ii) There are key differences in viewpoints between
them.
 Accounting
● Accounting function is a necessary input into the finance function.
● ​Accounting is a subfunction of finance.
● ​Accounting generates information/data relating to
operations/activities of the firm.
● ​The end-product of accounting constitutes financial statements.
The information contained in these statements and reports assists
financial managers in assessing the past performance and future
directions of the firm and in meeting legal obligations, such as
payment of taxes and so on.
The finance (treasurer) and
accounting (controller)
activities are typically within
the control of the vice-
president/chief financial
officer (CFO)
There are two key differences between finance
and accounting:-

(i) treatment of funds

(ii) decision making

● Finance begins where accounting ends.

 Treatment of funds
(i) accural method (ii)Cash flow method

● Accrual method recognises revenue ● Cashflow method recognises revenues

and expenses only with respect to actual
at the point of sale and expenses
inflows and outflows of cash.
when they are incurred. ● ​The viewpoint of finance relating to the
● ​The measurement of funds in treatment of funds is based on cashflows.
accounting is based on the accural ● ​The revenues are recognised only when
system actually received in cash (cash inflow)
● ​Revenue is recognised at the point ● ​Expenses are recognised on actual
of sale and not when collected. payment (cash outflow).
● ​Expenses are recognised when they ● ​Cashflow-based returns help financial
managers avoid insolvency and achieve
are incurred rather than when
the desired financial goals.
actually paid.
Decision making

The primary focus of the functions of accountants

is on collection and presentation of data while the
financial manager’s major responsibility relates to
financial planning, controlling and decision
making.
 Scope of financial management
● Financial Management is viewed as integral of overall
management
● Financial management, in the modern sense of the term,
can be broken down into three major decisions as
functions of finance:-
(i) The investment decision
(ii) The financing decision
(iii) The dividend policy decision.
Investment Decision

● Investment decision relates to the selection of assets.

● The assets which can be acquired fall into two broad groups:
(i) long-term assets which yield a return over a period of time in
future ( capital budgeting)
(ii) short-term or current assets, defined as those assets which in
the normal course of business are convertible into cash without
diminution in value, usually within a year ( Working Capital
Management)
Capital Budgeting

● Capital budgeting relates to the selection of an asset

whose benefi ts would be available over the project's life.
● ​The main elements of capital budgeting decisions are:
​(i) the long-term assets and their composition
​(ii) the business risk complexion of the firm
​(iii) the concept and measurement of the cost of capital.
Working Capital Management

● Working capital management is concerned with the

management of current assets
● ​The management of working capital has two basic
ingredients:
​(1) an overview of working capital management as
a whole
(​ 2) efficient management of the individual current
assets such as cash, receivables and inventory.
Financing decision

● Financing decision relates to the choice of proportion of the debt

and equity of sources of financing
● ​The concern of the financing decision is with the capital structure
● ​The term capital structure refers to the proportion of debt and
equity capital.
● The financing decision covers two interrelated aspects:
(1) the capital structure theory
(2) the capital structure decision
Dividend Policy Decision

● The dividend decision should be analysed 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
(ii) they can be retained in the business itself.
● ​largely depend on dividend decision, the dividend-pay out ratio
● ​Dividend pay-out ratio - proportion of net profits that should be
paid out to the shareholders.
Key Activities of the Financial Manager
The primary activities of a financial manager are:
(i) performing financial analysis and planning
(ii) making investment decisions
(iii) making financing decisions.
Objectives of financial management

● The goal of the financial manager is to maximise the

owners/shareholders wealth as reflected in share prices
rather than profit/EPS maximisation because :-
(i)​EPS ignores the timing of returns
(ii) ​It does not directly consider cash flows and ignores
risk
Wealth maximization decision
criterion
● Two important issues are related to the share price-
maximisation :-
➔ ​economic value added (EVA)
● Economic value added is equal
➔ ​focus on stakeholders. to after tags operating profits of
the firm less the cost of funds
● Stakeholders include groups such as employees, used to finance investment
customers, suppliers, creditors, owners and ● ​The merits of EVA are :-
others who have a direct link to the firm. (a) its relative simplicity
● ​The stakeholders include employees, customers, (b) its strong link with the wealth
suppliers, creditors and owners and others who maximisation of the owners.
have a direct link to the firm.
● ​There is a broader focus in financial
management to include the interest of the
stakeholders as well as the shareholders.
Agency problem

● An agency problem results when managers as agents of

owners place personal goals ahead of corporate goals.
● ​The agency problem can be minimised by acts of:-
​(i) market forces
​(ii) agency costs.
​
● Market forces act to minimise agency problems in two
ways:
(1) behaviour of security market participants
(2) hostile takeovers.
● Hostile takeovers is acquisition of the firm by another
firm which is not supported by the management
● Agency cost
Cost borne by shareholders to minimise agency problem
as to contribute to maximize the owners wealth
The shareholders/owners have to incur four types of costs:
(i) monitoring
(ii) bonding
(iii) opportunity
Organisation of Finance function
 Treasurer Controller
● The main concern of the treasurer is
● The functions of the controller are
with the financing activities of the firm.
related mainly to accounting and
​Their functions are :- control.
(i) obtaining finance ● ​Their functions include:
(ii) banking relationship ​(i) financial accounting
(iii) investor relationship ​(ii) internal audit
(iv) short-term financing
​(iii) taxation
(v) cash management
(​ iv) management accounting and
(vi) credit administration
control
(vii) investments
​(v) budgeting, planning and control
(viii) insurance
​(vi) economic appraisal
Importance of financial management

● Depends on the size of the firm.

● ​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.