I WILL START DIGGING FROM THIS SIDE OF THE

MOUNTAIN. YOU START DIGGING FROM THE

OTHER SIDE . WHEN WE MEET IN THE MIDDLE ,
WE WILL HAVE MADE A TUNNEL . AND IF WE DO
NOT MEET , WE WILL HAVE MADE TWO
TUNNEL !

6/17/10 PROF. N.N.PANDEY 11

FINANCIAL DECISION RECTANGLE

INVESTMENT FINANCING
DECISION DECISION

DIVIDEND WORKING
DECISION CAP.DECIS
ION

6/17/10 PROF. N.N.PANDEY 22

DEFINITION ,NATURE AND SCOPE OF
FINANCIAL MANAGEMENT

Financial management is all about managing the financial

resources in the most optimal manner towards desired
organizational objectives .
Financial Management includes anticipating financial needs ,
acquiring financial resources and allocating funds in business
( three As of Financial Management )
The scope of Financial Management extends to four key decisions
areas :-
Investment decisions
Financing decisions
Dividend decisions
Working capital decisions

6/17/10 PROF. N.N.PANDEY 33

KEY ISSUES IN FINANCIAL DECISION
MAKING

INVESTMENT DECISION :
What business to be in ?
What growth rate is appropriate ?
What assets to acquire ?
FINANCING DECISION
What mix of debt and equity to be used ?
Can we change the value of the firm by changing the
capital mix ?
Is there an optimal debt-equity mix ?

6/17/10 PROF. N.N.PANDEY 44

KEY ISSUES IN FINANCIAL DECISION
MAKING

DIVEDEND DECISIONS :
How much of the profit should be retained in the business and how
much to be distributed as dividend ?
Can we change the value of the firm by changing the amount of
dividend ?
What should be the mode of dividend payment ?
WORKING CAPITAL DECISIONS :
What level of inventory of goods is ideal ?
What level of credit should be given to the customers ?
What level of cash should be maintained ?
How can the blockage of funds in the current assets be minimized
without compromising profits ?

6/17/10 PROF. N.N.PANDEY 55

 RELATIONSHIP BETWEEN FINANCIAL ACCOUNTING
MANAGEMENT ACCOUNTING AND FINANCIAL
MANAGEMENT

Recording and Financial

Reporting of Management
information
Relating to diff. Financial decisions
Finance functions Financialtodecisions
Analyzed facilitate
Performance Analyzed to facilitate
Future decision
Of the firm Future decision
making making
As per Information
Financial Tools and
statement Techniques Management
Financial To facilitate
accounting accounting
Financial decisions
6/17/10 PROF. N.N.PANDEY 66
 Organization chart of finance function
Finance director / CFO

FINANCIAL Internal Treasurer

CONTROLLER auditor

Manager Management Manager Manager Cash Corporate Foreign

Accounts Accountant Credit Taxation Manager Fund Exchange
Salaries manager Manager
Financial Cost Credit Assessment Banking
Accounting Assessment Of Arrangements Obtaining Buying
Accounts Funds Selling
Statutory Management Setting Duties/taxes Cash
Accounting Credit limits Payment Forecasting Interest Foreign
Accounts Rate Currency
Debtors Budgeting Monitoring Of taxes Monitoring
Credit Claiming & control exposure Currency
Ledger Management Exposure
Creditors Chasing Refunds Working
Overdue Tax Capital control Export Mangmt.
ledger Finance
accounts Planning Investing
Compliance Surplus Project
With tax funds finance
Laws

6/17/10 PROF. N.N.PANDEY 77

 OBJECTIVES OF A FIRM

PRIMARY SECONDARY

PROFIT SALES MAXIMISATION

MAXIMISATION GROWTH MAXIMISATION
WEALTH ROI MAXIMISATION
MAXIMISATION SOCIAL OBJECTIVES

VALUE MAXIMISATION

6/17/10 PROF. N.N.PANDEY 88

FIRMS CASH FLOW AND VALUE MAXIMISATION

Short term funds Long terms funds

Used to Used to

Acquire temporary
Working capital Acquire fixed
Assets &
Permanent W.C
Generate net cash
Inflows from operations

Service debt Dividend Retained earnings

obligation distribution Available for
reinvestment

Firms wealth maximization

Value maximization of equity

Shareholder through increase
In stock market price of share
6/17/10 PROF. N.N.PANDEY 99
INVESTMENT FINANC DIVIDEND
DECISIONS ING DECISIONS
DECISI
ONS

RETURN TRADE- RISK

OFF
MARKET VALUE OF FIRM

FIGURE SHOWING RISK

RETURN TRADE-OFF

6/17/10 PROF. N.N.PANDEY 1010

 FINANCIAL SYSTEM

FINANCIAL FINANCIAL FINANCIAL FINANCIAL

INSTITUTIONS MARKETS INSTRUMENTS SERVICES

MONEY MARKET SHARES MERCHANT

FINANCIAL DEBENTURES BANKING
INSTITUTIONS CAPITAL MARKET COMMERCIAL PROJECT
COMMERCIAL PAPERS CONSULTANCY
BANKS CERTIFICATE UNDERWRITING
INDUSTRIAL OF DEPOSITES
BANKS PUBLIC
PROVIDENT DEPOSITES
FUNDS MUTUAL FUND
MUTUAL FUNDS UNITS
NBFCs INSURANCE
INSURANCE POLICIES
COMPANIES GOVERNMENT
BONDS

6/17/10 PROF. N.N.PANDEY 1111

 FLOW OF FUNDS THROUGH THE FINANCIAL
SYSTEM
SAVERS / LENDERS SHARES/BONDS
HOUSE HOLDERS

BUSINESS FIRMS
DEPOSITS/POLICIES GOVERNMENT

FOREIGNERS

FUNDS SHARES/BONDS
FUNDS

FUNDS
FINANCIAL INSTITUTIONS FINANCIAL MARKETS
P.P
BANKS MODE MONEY MARKET

PROVIDENT FUNDS
SHARES/BONDS CAPITAL MARKET
INSURANCE COMPANIES

MUTUAL FUNDS FUNDS

NBFCs

LOANS INVESTORS/BORROWERS

HOUSE HOLDERS
FUNDS
BUSINESS FIRMS
GOVERNMENT

FOREIGNERS
FUNDS
SHARES/BONDS
6/17/10 PROF. N.N.PANDEY 1212
Abhinit