financial management - unit one.ppt
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FINANCIAL MANAGEMENT
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Meaning of Financial Management
Financial deals with all resources in terms of
money
Management deals with using people to get
things done to achieve organizational goals
Financial Management is a system which
provides information to ensure effective
decision making regarding the raising and
investing of funds or money
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Decisional Areas of Financial
Management
Financing decisions
Investment decisions
Dividend policy
Working Capital Management
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Importance of FM
Provides knowledge about various sources offinance
their related or associated costs
interest rates
alternative investment opportunities
government fiscal policies
tax laws and obligations
determination of business and environmental
risks
overall assessment of returns
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Application of Financial Management
Financial management is applied
in all types of activities that
involves the use of money orfunds
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Purpose of Financial Management
To help management determine and assign coststo various sources of funds
To determine the overall returns on variousinvestment opportunities
To determine risk associated with an investment
To provide info. for management planning andexpansion
Helps management in evaluation Provide info. for management decision
Assess and select the best investmentopportunities
To minimize operational risk
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Relationship with other Subjects
Financial Accounting
Management Accounting
Economics
Law
Taxation
Quantitative Techniques
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Management Objectives and Role
of Financial Managers
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Management Objectives 4 major
objectives
Growth (Profit maximization)
Risk reduction
Efficiency
Personal aspirations (Prestige)
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Functions of Financial Managers
Evaluate and control of capital projects and risk of thefirm
Planning and allocation of funds
Evaluation of financing alternatives available to the
firm Strategy for acquisition and mergers
Raises funds at the right time
Ensure that funds are secured with the lowest cost
possible Funds are used in the most efficient and effective
manner
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Economic Environment
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Objectives of Macroeconomic policy
Infrastructure
Living standards
Full employment
Maintain price stability and avoid pricehikes
Promote development (GDP, GNP)
Ensure BOP equilibrium Ensure equitable distribution of national
income and wealth
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Problems of macroeconomic Policy
This is as a result of conflict
between the objectives
Conflict between full employment
and price stability
Rapid economic growth(persistence increase in level of
import) and balance of payment
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Macroeconomic Policy, implication
to business
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Macroeconomic Policy, implication to
business
Macroeconomic policies affect
businesses in two ways:
Level of aggregate demand
Cost of business operations
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Aggregate Demand
It is the total demand of goods
and services within the
economy. It is used in the
determination of:
Unemployment
Rate of inflation
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Cost of Business
Changes in exchange rate (have direct relation
to price of imported goods)
Fiscal policy on the use of tax (fiscal policy is
the manipulation of the govt. budget in order
to influence the level of activity in the
economy)
Monetary policy on changes in interest rate
Cost of servicing debts
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Factors influencing business financing
decisions
Availability of funds
Cost of finance (share price falls
as interest rate increases)
Level of consumer demand
Level of inflation
Level of exchange rates
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Financial Intermediation and
Credit Creation
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Financial Intermediation
Process of bringing
borrowers and investorsof funds together
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Examples of Intermediaries
Savings banks
Investment banks or merchant bank that are
designed for special purpose (advice, provide
finance, foreign trade)
Clearing banks provides immediate clear
mechanism
Pension funds provides pension on retirement
Insurance companies
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Continued
Investment trust and unit trust (Data
bank)
Building society
HFC Finance companies
finance house
leasing house
factoring companies
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Credit Creation
The process for creating
credit in a modern banking
system
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Sources of finance
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Sources of finance open to business
Equity (Ordinary) orPreference Shares
Debt
It can also be in the long orshort term
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Raising equity finance
There are three main sources of
equity finance
Internally generated
Fresh issues of shares ( methods
used in issuing shares, place, offerfor sale etc.)
Right issue
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Debt
Debenture
Leasing contract between a lessor
and a lessee for the hire of aparticular asset
Bank overdraft Debtor finance
Trade credit
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Comparing debt and equity
Cheapness (it is generally less risky)
Flexibility (it can be borrowed, repaid
and re-borrowed)
Retention of control (it creates rights
and obligation on both sides)
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