FINANCIAL MANAGEMENT

Topic: Introduction to Financial Management

Dr Archana HN
Associate Professor
Dept of Studies And Research in
Business Administration
VSK University, Ballari
 Contents
 Introduction to Financial Management
 Meaning & Definition
 Objectives & Scope
 Decisions of Financial Management
 Concept of Time Value of Money, Simple Interest &
Compound Interest
 Present Value & Future Value of cash flows and its application
 Concept of Annuity
 Present Value & Future Value of Annuity – Illustrations

Dr Archana HN, Dept of Business

Administration, VSK University, Ballari
 Introduction to FM
 Finance : It is the activity concerned with the
planning, raising, controlling and administering the
funds used in the business.
Thus, Financial management can be viewed as a
managerial activity which is concerned with the
planning and controlling of the firm’s financial
resources.

Definition: Financial Management is concerned with

the acquisition, financing, and management of assets
with an objective in mind.
Dr Archana HN, Dept of Business
Administration, VSK University, Ballari
 Definition of FM
According to Howard and Uptron “Financial
management is an application of general managerial
principles to the area of financial decision-making”.
Weston and Brighem define “Financial management as
an area of financial decision making, harmonizing
individual motives and enterprise goal”.

Dr Archana HN, Dept of Business

Administration, VSK University, Ballari
 Objectives
 Profit Maximisation
 Wealth Maximisation
Earlier, firms and people believed in profit
maximisation. It is replaced today with the objective of
wealth maximisation.
Today, the very objective of Financial
Management is to maximize the wealth of the
shareholders by maximizing the value of the firm. This
prime objective of Financial Management is reflected
in the EPS (Earning per Share) and the market price of
its shares.
Dr Archana HN, Dept of Business
Administration, VSK University, Ballari
 Objectives
Drawbacks of Profit Maximisation
It is a Vague term
Does not consider time value of money
Profits are for Shareholders

Wealth maximization overcomes the drawbacks of

profit maximization. Thus the objective of
Financial Management is to trade off between risk
and return, apart from making efficient use of
economic resources mainly capital.
Dr Archana HN, Dept of Business
Administration, VSK University, Ballari
 SCOPE OF FINANCIAL MANAGEMENT
 Financial Management today covers the entire gamut of activities and functions
given below.

a. Estimating the total requirements of funds for a given period.

b. Raising funds through various sources, both national and international, keeping in
mind the cost effectiveness;
c. Investing the funds in both long term as well as short term capital needs;
d. Funding day-to-day working capital requirements of business;
e. Collecting on time from debtors and paying to creditors on time;
f. Managing funds and treasury operations;
g. Ensuring a satisfactory return to all the stake holders;
h. Paying interest on borrowings;
i. Repaying lenders on due dates;
j. Maximizing the wealth of the shareholders over the long term;
k. Interfacing with the capital markets;
l. Awareness to all the latest developments in the financial markets;
m. Increasing the firm’s competitive financial strength in the market; and
n. Adhering to the requirements of corporate governance.
Dr Archana HN, Dept of Business Administration, VSK University, Ballari
 Functions/Decisions of Financial Management

The functions of Financial Management involves acquiring funds for meeting short
term and long term requirements of the firm, deployment of funds, control over the
use of funds and to trade-off between risk and return.

FINANCIAL MANAGEMENT

INVESTMENT
FINANCING DECISION DIVIDEND DECISION
DECISION

Capital Working
Sources of Capital Cost of
Budgeting Capital Leverages
Finance Structure Capital
Management
Dr Archana HN, Dept of Business
Administration, VSK University, Ballari
Functions of Finance Manager
- Mobilisation of Funds
- Deployment of Funds
- Control over use of Funds
- Risk Return Trade off

Dr Archana HN, Dept of Business

Administration, VSK University, Ballari
 Time Value of Money
 Example: Let us assume, we are given an option to either receive Rs1000 today
or after a year. We would choose to have it today. But we might agree to
receive it in future if we are promised to pay Rs. 1100 at the end of the first
year. This “additional Compensation” required for parting Rs. 1000 today, is
called “interest” or “the time value of money”.
Money has time value??
Reasons-
 (a) Money can be employed productively to generate real returns;
 (b) In an inflationary period, a rupee today has higher purchasing power than a
rupee in the future;
 (c) Due to uncertainties in the future, current consumption is preferred to future
 consumption.
 (d) The three determinants combined together can be expressed to determine
the rate of interest as follows :
Nominal or market interest rate = return for waiting period (+) Risk premiums to
compensate for uncertainty (+) Expected rate of inflation
Dr Archana HN, Dept of Business Administration, VSK University, Ballari
 Methods of Time Value of Money
 Present Value (PV) – The value of money at 0th time/at
present or now.
Future Value (FV) – The value of money that is to be
received after nth time/in future.
Compounding : The process of finding the Future
Values (FV) of all the cash flows, when Present Value
(PV) is known at the end of the time period at a given
rate of interest.
Discounting : The process of finding the Present
Values (PV), when Future Value (FV) is known as
discounting.
Dr Archana HN, Dept of Business
Administration, VSK University, Ballari
 Annuity: It refers to a constant sum or a series of periodic
cash inflows or outflows.

Dr Archana HN, Dept of Business

Administration, VSK University, Ballari
 Future Value of a Single Flow
It is the process to determine the future value of a
lump sum amount invested at one point of time.
FVn = PV (1+i)n

Where,

 FVn = Future value of initial cash outflow after n years

 PV = Initial cash outflow
 i = Rate of Interest p.a.
 n = Life of the Investment
 and (1+i)n = Future Value of Interest Factor (FVIF)
Dr Archana HN, Dept of Business
Administration, VSK University, Ballari
 Illustration
Find the future value of Rs. 15,000 invested today after 3
years which pays 6% interest p.a.
Solution:
Given : PV = 15000/-, n = 3 Years, i = 6 % p.a

FVn = PV (1+i)n
= PV × FVIF (6,3)
= PV × FV Table @ 6% and 3 Yrs
= 15,000 (1.191)
= Rs. 17,865
Dr Archana HN, Dept of Business
Administration, VSK University, Ballari
 Present Value of a Single Flow
It is the process to determine the present value of a lump sum
amount that is to be received in future
PV = FVn/(1+i)n

Where,

 FVn = Future value of initial cash outflow after n years

 PV = Initial cash outflow
 i = Discount Rate
 n = Life of the Investment
 and (1+i)n = Future Value of Interest Factor (FVIF)
Dr Archana HN, Dept of Business
Administration, VSK University, Ballari
 Illustration
Find the present value of Rs. 1000 receivable after 3
years. It is also assumed that the discount rate is 10%
p.a

Solution:
PV = FVn/(1+i)n
= FVn × PVIF (10,3)
= FVn × PV Table @ 10% and 3 Years
= 1000 (0.751)
= Rs. 751

Dr Archana HN, Dept of Business

Administration, VSK University, Ballari
Annuity – Refers to a stream of constant cash
flows (Payment/Receipt) occurring at
regular intervals of time.
Ordinary Annuity or Deferred Annuity – If
Cash flows occurs at the end of each period.

Annuity Due - If Cash flows occurs at the

beginning of each period.

Dr Archana HN, Dept of Business

Administration, VSK University, Ballari
 Future Value of an Annuity

Dr Archana HN, Dept of Business

Administration, VSK University, Ballari
 Illustration

Calculate the maturity value of a recurring deposit of Rs.

500 p.a. for 10 Years @ 9% p.a.
Solution:

FVAn = A X Compound value of Annuity Table (10 Years

and 9%)
= 500 X 15.193
= Rs 7596.5/-

Simple Interest = Interest Received on Principal Amount

Compound Interest = Interest Received on Principal and
Interest accrued
Dr Archana HN, Dept of Business Administration, VSK University, Ballari
 Application

 To determine what’s in store for you (To know the

accumulated value or FV Annuity).
 To analyse how much to save annually to get a pre
determined sum of money in future. (A)
 To find out at what interest rate you should invest to
get a pre determined sum of money in future. (i)
 To examine the waiting period (n)

Dr Archana HN, Dept of Business

Administration, VSK University, Ballari
 Present Value of an Annuity
The present value of an annuity ‘A’ receivable at the
end of every year for a period of n years at the rate of
interest ‘i’

Dr Archana HN, Dept of Business

Administration, VSK University, Ballari
 Illustration
Calculate the present value of Rs. 1000 deposited
for 10 Years @ 12% p.a.

Solution:

PVAn = A X PV Annuity Table (10 Years and 12%)

= 1000 X 5.650
= Rs 565 /-

Dr Archana HN, Dept of Business Administration, VSK University, Ballari

 Application

 To determine how much to borrow.

 To find out the interest rate on your deposit. (i)
 To estimate the periodic withdrawal (A)

Dr Archana HN, Dept of Business

Administration, VSK University, Ballari
THANK YOU