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Financial Management - Introduction and Financial System[1]

The document outlines the significance of financial management in enhancing firm performance, covering key topics such as capital budgeting, sources of funds, and working capital management. It emphasizes the roles of financial managers in investment, financing, and dividend decisions, while also addressing the relationship between finance, economics, and accounting. Additionally, it discusses the structure of the financial system, the role of financial institutions and markets, and the importance of effective financial decision-making.

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2 views

Financial Management - Introduction and Financial System[1]

The document outlines the significance of financial management in enhancing firm performance, covering key topics such as capital budgeting, sources of funds, and working capital management. It emphasizes the roles of financial managers in investment, financing, and dividend decisions, while also addressing the relationship between finance, economics, and accounting. Additionally, it discusses the structure of the financial system, the role of financial institutions and markets, and the importance of effective financial decision-making.

Uploaded by

shahsakshi010206
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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FINANCIAL

MANAGEMENT
Learning outcomes

• Explain the significance of financial management to


firm performance.
• Apply time value of money related concepts in
personal finance choices.
• Apply relevant formulae to capital budgeting and
capital structure related choices.
• Explain sources of funds.
• Apply relevant formulae to working capital related
choices.
Topics covered

• Financial Management- An overview


• Sources of funds
• Time value of Money
• Capital Budgeting
• Capital Structure and cost of capital
• Working capital
• Cash Management
• Credit Management
Textbook

Chandra, P. (2023). Financial Management – Theory


and Practice, 11th edition, McGraw Hill Education
(India) Private Limited. New Delhi.
Introduction

• Financemay be defined as the art and science of


managing money.

• Finance is the life blood of Business.

• Financial Management is concerned with the duties


of the financial managers in the business firms.
Finance
• Financial Management is an operational activity, which is
accountable for the effective utilization of funds necessary for
operations.
• One of the primary objectives of financial management is to
maintain enough money to meet the necessary current and
capital expenditure, apart from maximizing profits.

• "Finance is the management of money and other valuables,


which can be easily converted into cash."
Forms of Business Organization

• Sole Proprietorship
• Partnership
• Cooperative society
• Company
• Public
• Private
Financial Decisions in a firm
• Investment Decision: Selection of
Capital appropriate investment proposals
Budgeting
• Financing Decision
Capital • Raising of funds
Structure • Capital allocation

• Dividend Decision
Capital • Allocation of Profits
Structure

Working Capital • Short-term financial management


Management
Investment Decision

• The investment decision which is known as capital budgeting


decision, is concerned with the selection of an investment
proposal and the investment of funds in the selected proposal
or proposals.

• The proposal with higher return than the require return is


selected.

• Decision of investment is need to be taken which can be long


term or short term.
Financing decision
• The financing decision is concern with the raising of funds
that finance the assets of firm.

• Funds should be adequate to procure the assets necessary


for operation, at the same time, if the funds are more than
required, the access would remain unutilized making no
contribution to output but adding to the financing cost,
thereby considerably eroding profitability.

• In other word, the financing decision should ensure optimum


capitalization.
Dividend Decision

• A part of the profit is distributed as dividend and the rest is


retained with in the firm for the purpose of investment.

• It is the dividend decision that helps to determine how much


of profit is to be distributed as dividend and how much is to
be retained with the firm.
Working Capital Decision

• The working capital decision takes into account the


management of current assets and current liabilities
• The management of current assets involves a couple of
issues.
• The first is on size of current assets, i.e. what the size of
cash holdings, short-term marketable securities, account
receivables and inventory.
• The second issue is related to the share of current liabilities
in total liabilities. Again the mix of long term and short term
capital is also important.
Goal of Financial Management

Profit Wealth
Maximisation Maximisation

Efficiency Improve the


of value of
business. shareholders.

Help to Time and risk


reduce the are two major
risk. concern.

Maximizing social values/wealth


The Fundamental Principle
Risk-Return Tradeoff
Impact of other disciplines on Financial
Management

Support Primary Disciplines:


1. Investment Analysis Accounting
2. Working capital Economics
management
3. Sources and cost of funds
4. Determination of capital
structure Support Other related Disciplines:
5. Dividend policy Production
6. Analysis of risk and return Marketing

Resulting in

Shareholder wealth maximisation


Relationship of Finance to
Economics and Accounting

• Relationship to Economics
• Relationship to Accounting
Emerging Role of Finance Manager

• Investment Planning
• Financial structure
• Mergers, acquisitions and restructuring
• Performance Management
• Risk Management
• Investors’ communication
Agency Problem

• Thereis a Principal-Agent relationship between


managers and shareholders.

• In theory, managers should act in the best interests


of shareholders.

• In practice, managers may maximize their own


wealth (in the form of high salaries and perks) at the
cost of shareholders.
• This conflict is known as Agency problem and it
results into Agency costs.
Organisation of Finance Functions

• It has to be sound and efficient.


• Under the direct control of the board of
directors.
• Why?
• For survival of firm
• Determine solvency of the firm
• Help to analyse and save additional cost
Indian financial System
Savings Investments
What is Financial System?

• The financial system deals with financial transactions


and the exchange of money between savers,
investors, lenders and borrowers.

• Subset of economic system.


• Broadly classified into the formal and informal
financial system.

• Formal financial system consist of four segments:


Financial institutions, Financial markets, Financial instruments,
and Financial services.
Functions of the Financial System
• Mobilize and allocate savings
• Pooling of Funds
• Payment system
• Risk management
• Policy implementation
• Information provider
• Liquidity
• Lower transaction costs
Financial System
Risk & Return Risk & Return
Financial
Institutions

Funds
Funds

Lenders Borrowers
Funds

Funds
Financial
Markets
Risk & Return
Risk & Return
Financial Institutions

• Mobilize savings and facilitate the allocation of funds


in an efficient manner.
• Banking Institutions
• Non-banking Institutions
• Mutual fund
• Insurance
• Housing finance companies

• Post reforms, most of financial institutions now resort


to financial markets for raising funds.
Rationale for Financial Intermediaries

• Diversification
• Lower transaction cost
• Economies of scale
• Confidentiality
• Signalling
Financial Markets
• Provide facility for demands and
requirements interact to set a price.

• Financial markets play a very pivotal role in


allocating resources in the economy by
performing three important functions as
they:
• Facilitate price discovery
• Provide liquidity
• Reduce the cost of transacting
Financial Instruments

• A financial instrument is a claim against a person or an


institution for payment, at a future data, sum of money
or periodic payment in the form of interest or dividend.

• Primary securities
• Secondary securities
Financial Services

• Help with borrowing and funding,


• lending and investing
• Buying and selling securities
• Payments and settlements
• Managing risk
Summing up

• The financial system – consisting of a variety of institutions,


markets, and instruments related in a systematic manner –
provides the principal means by which savings are
transformed into investments.

• The financial system provides a payment mechanism,


enables the pooling of funds, facilitates the management of
uncertainty, generates information for decentralized
decision making, and helps in dealing with informational
asymmetry.
Thank You!

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