Chapter -1

Nature of Financial Management

FINANCIAL MANAGEMENT FUNDAMENTALS A. Introduction To Financial Management

B. Business activities C. Finance function D. Finance managers role E. Financial goals F. Risk return trade- off G. Managers vs. Shareholders goals H. Financial Goals And Firms Mission And Objectives I. Organisation of the finance functions J. Status and duties of finance executives
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INTRODUCTION TO FM
Financial management deals with procurement of funds and their effective utilization in the business. Financial management comprises the forecasting, planning, organizing, directing, coordinating and controlling of all activities relating to acquisition and application of the financial resources of an undertaking in keeping with its financial objective. by Raymond Chambers organization
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Business Activities
Production Marketing Finance

Finance Functions
Investment or Long Term Asset Mix Decision (Capital Budgeting) Financing or Capital Mix Decision
(Source of finance and cost of Capital)

Dividend or Profit Allocation Decision

(Capital Structure)

Liquidity or Short Term Asset Mix Decision

(Working capital decision)

Finance Managers Role

Determination of size of the enterprise and determination of rate of growth Raising of Funds Allocation of Funds Profit Planning Understanding Capital Markets

Financial Goals
Profit maximization (profit after tax) Maximizing Earnings per Share Shareholders Wealth Maximization (SWM)

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 Risk Assumes Perfect Competition In new business environment profit
maximization is regarded as
Unrealistic Difficult Inappropriate Immoral
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Maximizing EPS
Ignores timing and risk of the expected benefit Market value is not a function of EPS. Hence maximizing EPS will not result in highest price for company's shares Maximizing EPS implies that the firm should make no dividend payment so long as funds can be invested at positive rate of return such a policy may not always work
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Shareholders Wealth Maximization

Maximizes the net present value of a course of action to shareholders. Accounts for the timing and risk of the expected benefits. Benefits are measured in terms of cash flows. Fundamental objectivemaximize the market value of the firms shares.
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Comparison of profit maximisation and wealth maximisation

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Comparison of profit maximisation and wealth maximisation

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Functions & Objectives of FM

Financial Management Maximization of share value Financial Decision

Investment Decision Return

Liquidity Management Trade off

Financing Decisions

Dividend Decisions Risk

Risk-return Trade-off
Risk and expected return move in tandem; the greater the risk, the greater the expected return. Financial decisions of the firm are guided by the risk-return trade-off. The return and risk relationship: Return = Risk-free rate + Risk premium Risk-free rate is a compensation for time and risk premium for risk.
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Risk Return Trade-off

Risk and expected return move in tandem; the greater the risk, the greater the expected return.
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Agency Problems: Managers Versus Shareholders Goals

The manager, acting as the agent for the share holders, is supposed to make decisions that will maximize shareholders wealth. However, manager may prioritize his personal objective (Liberty, prestige and wealth)

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Agency Problems: Managers Versus Shareholders Goals

This conflict is known as Agency problem. This may be minimised by providing incentives in the form of stock options, cash bonus and other long term benefits

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Financial Goals and Firms Mission and Objectives

Goals or objectives are missions or basic purposes of a firms existence Wealth maximization is more appropriately a decision criterion, rather than an objective or a goal. The wealth maximization criterion would simply indicate whether an action is economically viable or not
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Vision

Vision:

describes a desirable state that a company or individual wishes to attain at some time in the future
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Mission
The mission statement reflects every facet of your business: the range and nature of the products you offer, pricing, quality, service, marketplace position, growth potential, use of technology, and relationships with your customers, employees, suppliers, competitors and the community. Therefore a mission statement is something which tells you what to do in the present in order to achieve the future..
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VISION
MISSION

(ULTIMATE GOAL)

MISSION

MISSION

SHORT TERM GOALS AND TARGETS

MISSION

MISSION

Summary of mission & vision

Vision: what organization wants to become in future. Mission : what is the purpose of the existence of the organization.

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VISION- The best premium ice-cream player

Mission: we exist to thrill customers, define and lead multi branding, enrich stakeholders and build powerful brands

Organisation of the Finance Functions

Reason for placing the finance functions in the hands of top management
Financial decisions are crucial for the survival of the firm. The financial actions determine solvency of the firm Centralisation of the finance functions can result in a number of economies to the firm.
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Status and Duties of Finance Executives

The exact organisation structure for financial management will differ across firms. The financial officer may be known as the financial manager in some organisations, while in others as the vice-president of finance or the director of finance or the financial controller.
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Role of Treasurer and Controller

Two more officersthe treasurer and the controllermay be appointed under the direct supervision of CFO to assist him or her. The treasurers function is to raise and manage company funds while the controller oversees whether funds are correctly applied.
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Organization Of Finance Function

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Changing Scenario

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Assignment
Question : What do you mean by financial management ? Question : Explain the scope of financial management ? Question : What are the functions of a Finance Manager ? Question : What are the various methods and tools used for financial management ? Hint:
Financial leverage or trading on equity capital budgeting techniques as payback, internal rate of return, net present value, profitability index, average rate of return cash management may be centralised or de-centralised ratio analysis Funds flow and cash flow statements and projected financial statements

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Assignment
Question : Discuss the role of a finance manager ? Question : Draw a typical organisation chart highlighting the finance function of a company ? Question : Discuss some of the instances indicating the changing scenario of financial management in India ?
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Assignment
Collect the latestannual reports of L &T and BHEL. Read directors report and chairmans statement and comment on both firms objective and financial goals. What difference do you notice. What could be the reasons for the difference

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