chapter 1 – financial management

11Chapt

er

Chapt

erFinancial Management

Khursheed Ahmad Bhat (Ass i s tant Professor)Head of Finance DepartmentBakhtar Univers i ty Kabul

2Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU

Chapter 1 – The Investment Setting.

Chapter outlines

What is Finance?

Scope of Corporate Finance?

Importance of corporate finance.

Profit maximisation V/S wealth maximisation objectives.

Role of finance manager.

Sources of Finance.

• Financial Management- Introduction Need, Meaning and Definitions• Scope, profit maximisation v/s wealth maximisation• Role and Functions of Financial Manager• Importance of Financial Management• Sources of Finance• Sources of Finance• Financial Statement Analysis• Cash Flow Statement• Cash Flow Statement-Methods• Exercise and Solution• Exercise and Solution• Capital Structure Concepts• Capital Structure Concepts- Optimum Capital Structure• Capital Structure Theories-Traditional Approach• capital structure Theories-Modern Approach (Net Income and Net Operating Approach)• capital structure Theories-Modern Approach (M&M)• Practical Based on Capital structure theories• Practical Based on Capital structure theories• Capital Budgeting- meaning, need and process• Methods of capital budgeting of evaluation• Traditional Method: pay back and ARR• Modern methods: NPV, IRR, PI• Practical on Modern methods of capital budgeting• working capital Management: concepts and types• Need of working capital, Factors determining working capital requirements• Computation or estimation of working capital• Dividend Decisions• Dividend Decisions

Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU3

What is Finance?

In our present day economy, finance is defined as the provision of money at the

time when it is required.

Every enterprise (big or small) needs finance to carry on its operations and to

achieve its targets

Finance is indispensible and therefore rightly called as Lifeblood of an enterprise.

The subject of finance is classified into two classes:


• Finance

• Public Finance

• Private Finance

• GOVERNMENT INSTITUTIONS• STATE GOVERNMENTS• LOCAL SELF-GOVERNMENTS• CENTRAL GOVERNMENT

• PERSONAL FINANCE• BUSINESS FINANCE• FINANCE OF NPO’s

Meaning Of Finance

Literally speaking, business finance connotes finance of business activities. It is composed of two words (i) Business and (ii) Finance.

• The word business literally means “a state of being busy”• All creative human activities relating to the production and distribution of goods &

services for satisfying human wants are known as business.• Finance refers to the management of flows of money through an organisation.• It concerns with the manipulation, use and control of money, There are three approaches to finance

1. Provision of funds to the business on most suitable basis. It confines finance to the raising of funds and to the study of institutions and instruments from where funds are raised.

2. Provision and management of cash.

3. Raising of funds and their effective utilisation.


Business Finance

Business finance can further be subdivided into three categories, viz

I. Sole-propritory finance

II. Partnership firm finance

III. Corporate or company finance


• Business finance

• Sole-propritory

finance

• Partnership firm finance

• Corporate or company finance

Definition of Business Finance

• “That business activity which is concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall objectives of a business enterprise.” Wheeler

• Business finance can be broadly defined as the activity concerned with the planning, raising, controlling and administering the funds used in the business.” Guthmannn

• Business finance deals primarily with raising, administering and disbursing funds by privately owned business units operating in non-financial fields of industry” Prather


Scope of Business Finance

• Estimating financial requirements.• Deciding the capital structure.

• Selecting a source of finance.

• Selecting a pattern of investment.

• Proper cash management.

• Implementing proper financial controls.

• Proper use of surpluses.


Importance of Business Finance

• Finance is the lifeblood and nerve centre of a business.• Universal lubricant which keeps the enterprise dynamic.• The importance of corporate finance (a constituent of business

finance) has arisen because of the fact that present day business activities are predominantly carried on company or corporate form of organisation.

• The advent of corporate enterprises has resulted into:

1. The increase in size and influence of business enterprises.

2. Wide distribution of corporate ownership and

3. Separation of ownership and management.


Financial management is indispensable to any organisation as it helps in: • Financial planning & successful promotion of an enterprise.

• Acquisition of funds at minimum possible cost.

• Proper use and allocation of funds.

• Taking sound financial decisions.

• Improving profitability through financial controls

• Increasing wealth of investors and the nation.

• Promoting and mobilising individual and corporate savings.


Relationship of finance with other business functions.

• Business Functions of a Manufacturing Concern

• Purchase

Function

• Production

Function

• Distribution

Function

• Accounting

Function

• Personnel

Function

• R & D Function


Relationship of finance with other business functions.


• Financial Accounting

• Financial Accounting

• Cost• Accounting

• Management Accounting

• Process and analysis of Data Received

• Financial Management

• DECISIONS

• FINANCING

• INVESTING

• DIVIDENDS

Objective of Financial Management

Profit Maximisation:• Profit earning is the main aim of every economic activity. • A business as an economic institution must earn profit to cover its cost a d provide

funds for growth. • No business can survive without profit earning. So profit is a measure of efficiency

and serves as a protection against risk which cant be ensured, as the accumulated profit enables a business to face risk, competition and adverse government policies.

Wealth Maximisation:• wealth maximisation is the appropriate objective of an enterprise.• Financial theory asserts that wealth maximisation is the single substitute for a

stockholder’s utility.• When the firm maximises stockholder’s wealth, the individual stockholder can use

this wealth to maximise his individual utility.


Inter-relation of Financial Decisions


INVESTMENTDECISION

DIVIDEND DECISION

FINANCINGDECISION

• INTER-RELATION OF FINANCIAL DECISION

Inter-relation of Financial Decisions


• Financial Management

FINANCING DECISIONS INVESTING DECISIONS DIVIDEND DECISIONS

RISK AND RETURN RELATIONSHIP(TRADE OFF)

TO ACHIEVE THE GOAL OF WEALTH MAXIMISTION

Is concerned with

ANALYSES

Financial Management Process


FINANCIAL PLANNING AND CONTROL

FINANCIAL DECISIONS1. INVESTMENT DECISION2. FINANCING DECISION3. DIVIDEND DECISION

RISK AND RETURN CHARACTERISTICS OF THE FIRM

MARKET PRICE OF THE SHARE

Po

SHAREHOLDER WEALTHWo=NPo

FEED BACK

Functions of Finance Manager

1. Financial Forecasting And Planning

2. Acquisition Of Funds.

3. Investment Of Funds

4. Helping In Valuation Decisions

5. Maintain Proper Liquidity.


Organisation of The Finance Function


Board Of Directors

Managing Director

Vice President Finance

Vice President SalesVice President Production

Financial Controller Treasurers

Accounting And Payroll

Profit AnalysisBudgeting

Annual Reports

Planning & Control

Relation with Banks & Financial

Institutions

Protect Funds &

Securities

Audit Cash Management

Additional Funds

Thank You


chapter 1 – financial management

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