Financial

management

The Science Of Money

Management
 Outline
Introduction of business
Finance
Financial management definition, objectives,
scopes, functions (decisions)
Sources of Finance
 BUSINESS
It is a commercial activity concerned
with manufacturing of goods and
rendering of services to satisfy the
needs of society with a motive of
earning profit.
(BATA SHOE EXAMPLE)
 7 Ms of Business
1. Men (Human Resource)
2. Material (Basic ingredients in management)
3. Machines (Basic Tool)
4. Money (Day to Day Fund Requirements)
5. Methods(the art of doing a thing)
6. Management (functions of management)
7. Moral values (the way business is conducted)
 FINANCE
The Science of Money
It is the process of conversion of
accumulated funds to a
productive use.
 Financial management
The science of money management
It is a managerial activity which is concerned
with planning and controlling of the firms financial
resources.
Definition by J.L Massie:
Financial management is defined as
the operational activity of a business that is
responsible for obtaining and effectively utilizing
the funds necessary for efficient business
operations.
 OBJECTIVES OF FINANCIAL
MANAGEMENT
Profit Maximization Approach
Maximizing the profits out of its available resources.
Profits represents higher rate of dividend and
efficiency of the firm.
Wealth Maximization Approach
Maximizing the value to the firms shareholders.
Value represents market price of the ordinary shares.
Wealth= Number of shares owned (X)
Price Per Share in the Market
 Other OBJECTIVES / (As of FM)
Anticipating financial needs
(array of documents)
Acquiring financial resources
(when, where and how)
Allocating funds in business(short & long term)
Administrating the allocation of funds
(watch performance of each rupee)
Analysing the performance of finance
(budgeting-compare actual with standards)
Accounting and reporting
(maintain up-to-date records of financial performance)
 ARGUMENTS FOR PROFIT
MAXIMIZATION
(i) Main aim is earning profit.
(ii) Profit is the parameter of the business operation.
(iii) Profit reduces risk of the business concern.
(iv) Profit is the main source of finance.
(v) Profitability meets the social needs also.
(vi) Is a barometer through which the performance is measured.
(vii) Attracts the investors to invest their savings in securities.
(viii) Indicates efficient use of funds for different requirements.
(ix) Leads in expansion and diversification.
(x) Ensures maximum welfare to the share-holders, employees
and prompt payment to the creditors
 ARGUMENTS AGAINST PROFIT
MAXMIZATION
(i) Profit maximization leads to exploiting workers and
consumers.
(ii) Profit maximization creates immoral practices such as
corrupt practice, unfair trade practice, etc.
(iii) Profit maximization objectives leads to inequalities
among the sake holders such as customers,
suppliers, public shareholders, etc.
(iv) Profit is not a clear word.
(v) Does not consider the impact of time value of money.
(vi) It attracts cut-throat competition.
(vii) Huge amount of profits attracts government
intervention.
 Scope of Financial
Management
(Activities involved)

The Traditional Approach

The Modern Approach
 Traditional Approach:
Corporate Finance
Only activity Procurement of funds by corporate
enterprise to meet their financing needs.

Limitations or weaknesses:
Internal decision making (i.e., insider-looking-out
approach) was completely ignored.
Focus was only on financing problem of corporate
enterprise.
Working capital management was not given
importance.
 Modern Approach:
Financial Management
Provides a conceptual and analytical framework for
financial decision making.
Covers Acquisition as well as Allocation of funds.
Functions of finance: (decisions related to FM)
1. The financing decision
2. The investment decision
3. The dividend policy decision
 INVESTMENT DECISION
ACTIVITY OF DECIDING
THE PATTERN OF INVESTMENT
Or
ALLOCATION OF CAPITAL
Covers-
a. Long term investment capital assets
b. Short term investment current assets.
It is concerned with the asset-mix or
composition of the assets of the firm.
 FINANCING DECISION
ACTIVITY OF DECIDING
THE FINANCING MIX
OR
CAPITAL STRUCTURE
Capital structure refers to the proportion of debt (fixed
interest sources of financing)and equity capital
(variable-dividend securities source of funds)
Two aspects:
1. Theory of capital structure shows relationship
between the debt and equity
2. Optimum capital structure determines an appropriate
capital structure
 DIVIDEND DECISION
Decision relating to dealing with the profits of the
firm.
Two alternatives available :
a. Distribute to shareholders in form of dividend
b. Retain in the business itself.
One of the main objective of business is to fulfill the
desires of equity shareholders.
So here it helps to decide about:
a. How much dividend must be paid?
b. How much profit must be flown back?
c. Maintenance of stable dividend rate over the period.
 Functions of Financial
Management
LONG &
1. INVESTMENT
SHORT TERM CAPITAL BUDGETING
DECISION
FUNDS WORKING CAPITAL
MANAGEMENT

2.FINANCING CAPITAL COST OF CAPITAL

DECISIONS FUNDS CAPITAL STRUCTURE
DECISION

3.DIVIDEND PROFIT
DECISONS ALLOCATION DIVIDEND POLICY
RETAINED EARNINGS