nature of financial management by lucky yona management consultant- esami
TRANSCRIPT
Nature of Financial Management
By Lucky YonaManagement Consultant- ESAMI
CoverageIntroductionFinance FunctionsFinancial Manager’s RoleFinancial Goals of the FirmManagement ObjectivesReview Questions
IntroductionFinancial Management is a managerial
activity concerned with planning and controlling financial resources of an organization
A branch of Economics till 1890.Though it is a separate discipline it borrows
heavily on economics for its theoretical concepts.
Finance FunctionsMaking Investment DecisionsMaking Financing DecisionsDividend ( Profit Allocation Decisions)Liquidity Decisions
Investments DecisionsIt involves the decision of allocation of capital
or commitment of funds to long term assets that would yield benefits in the future.
Aspects of investment decisions The Evaluation of the prospective profitability of
new investments Measurement of a cut-off rate ( opportunity cost of
capital ) against the prospective return of new investments .
Investment DecisionsThe investment decision may also involve
The Identification of investment Opportunities Evaluating them Deciding on the optimum allocation of scarce
funds available between investments.Forms of Investment Decision
Undertaking New ProjectsTake-over Merger with another company.
Financing DecisionsIt involves making decision on when, where
and how to acquire funds to meet firm’s investment needs.
The central issue is to determine the proportion of equity and debt ( Capital Structure).
The issue here is to obtain the best financing mix or the optimum capital Structure.
However, many factors in deciding the capital structure need be considered such as control, flexibility, loan covenants and legal aspects.
Dividend DecisionsA third major financial Decision.Decision on whether the firm should
distribute all profits or retain them, or distribute a portion and retain the Balance.
Dividend decisions will determine the dividend policy in terms of impact to shareholders value.
Liquidity DecisionsCurrent Assets management for safeguarding
the firm against the dangers of illiquidity and insolvency.
Liquidity and profitability trade off must be reached to avoid these problems.
Financial Manager’s RolesTraditional Roles
Routine Finance Questions such as - Supervision of cash Receipts & Payments - Custodian of Assets - Record Keeping and Reporting
Modern Roles ( Managerial Functions Raising of Funds Allocation of Funds Profit Planning ( e.g Pricing, Costs, Volume etc) Understanding Capital Markets
Specific Functions- SummaryThe specific functions of the financial
manager are to ensure that funds are made available at the right time made available for the right length of time obtained at the lowest cost used in the most effective way.
Financial Goals of the FirmThere are main two financial Goals of the firm 1. Profit Maximization Goals- The main issue
here is to make profit. This objective has been recently criticized in recent years
Why ? It is vague it ignores the timings of returns- There is no distinction
between returns received in different time periods. It ignores risk Definition of term profit is ambiguous. Does it mean
Profit before tax or after tax? Does it mean short term profit-or long term profit? Total profits or profit per share?
Financial Goals of the Firm 2. Shareholder’s Wealth Maximization
The goal of the firm is to maximize the wealth of the owners for whom it is being operated.
The wealth is measured by share price of the stock.Therefore managers should accept only those
actions that are expected to increase share price.Any Financial decision which does not increase
share price should be rejected.However, it is considered important to take into
account to broaden the focus to include the interests of stakeholders as well as shareholders
Management ObjectivesGrowth Objective- Especially non- Profit
making Organizations such as services organizations , where the profit motive cannot operate.
Risk Reduction or Minimization
Most profitable companies carry a high risk of expensive projects such as prospecting oil or mining companies.
In case of a rich strike they make big profits however they can make huge losses in case exploration proves abortive.
In this case management objective can be to ensure survival by the avoidance of risk, profit becoming a secondary objective.
Social ObjectivesA social Purpose as a management ObjectiveConcerned about improvement of employees
working conditionsProvide a wholesome product for customersAvoid anti-social actions such as
environmental pollution or undesirable promotion practices.
EfficiencyFor organizations such as charities or public
services the fundamental objective might be to provide a required service which is not supplied in the market place.
A suitable management objective will be the provision of such service at minimum cost
Personal AspirationManagement team are likely to be highly
motivated towards their own career objectives.
In this case the important objectives for the manager may be therefore the improvement of his salary, career prospects or security.
The consequences of this is a managers desire to get quick results which will stand to the immediate credit of the manager involved as against more solid but longer term profit making objectives.
Financial Objectives and Financial Management in GovernmentsFinancial management in government is
different from financial management in an industry or commercial company because:
Government departments do not operate to make profits, Government services are provided without the
commercial pressure of competition and ‘ the market’. There are no competitive reasons for controlling costs , being efficient or keeping prices down
The government departments have full time professionals Civil servants as their managers, but planning and control decisions are also taken by politicians,.
The government gets its money from
Strategies to achieve Financial GoalsA strategy may be defined as a course of
action , including the specification of resources required, to achieve a specific objective.
Strategy can be short term or long termStrategy depends on the objectives or
targets.The starting point for strategy formulation
is the identification and formulation of objectives.
Characteristic of Strategic Decisions.Strategic Decisions will be concerned with the
scope of the organization’s activitiesStrategy Involves the matching of an organization’s
activities to the environment in which it operates.Strategy involves the matching of an organization’s
activities to its resource capability.Strategic decisions therefore involve major
decisions about the allocation or-re-allocation of resources.
Strategic decisions will be affected by Environment Considerations Resources AvailabilityThe Values of Expectations of the people in power within
the organization
Characteristic of Strategic Decisions.Strategic decisions are likely to affect the
long –term direction that the organization takes
Strategic decisions have implications for change throughout the organization , and so are likely to be complex in nature.
Levels of StrategyCorporate Strategy - This is concerned with a broader issues
such as ‘ what business are we in? – Financial aspects of this level of strategic decision making – include the choice of method in entering a market or business.
Business Strategy or Competitive Strategy This covers the question of how strategic
business units compete in individual markets, and therefore of the resources which should be allocated to them.
Competitive Strategy examines the threat on the performance of the company of factors such as The potential Charges in the Industry in which
the firm operates, through entry of new competitors
The competition between existing firms in terms of costs, pricing and product quality
The development of substitute products that may affect the industry as a whole
The monopolistic power of individual companies in the input markets
The monopolistic power of companies in the various product markets
Operational Strategy This is to do with how different functions
within the business – including the finance function- contribute to the business strategies.
Discussion Questions1.Discuss the likely consequences of the
following errors in financial management (i) bad timing for capital raising (ii) inefficient capital raising (iii) Inefficient use of funds
2. How can a company achieve corporate social objectives in its day to day operations? Should the Government put some laws to ensure that Companies are contributing to social objectives in your country?
3. Define the scope of financial management. What role should the financial manager play in the modern enterprise?
Bad Timing of CapitalDelays in business activitiesPossibility of Bankruptcy and possible
liquidationHampers Cash FlowCost of Borrowing might be highBad Timing- World Recession- Political Turmoil ( Internal ) – especially
new business- Labour Unrest- Trade Policy- more restrictive
Inefficient capital raisingFirm not in position to provide the required
servicesInability to honor its obligationInability to achieve business objectiveInability to pay dividends?Inability to acquire assetsInability to penetrate the Markets.
Inefficient use of FundsInability to meet its obligation .Possibility of liquidationDenial of ServicesLoss of Confidence with investors Civil UnrestInability to CompeteLead to Misallocation of resources.Overspending
Presentation-1Bad Timing of Capital Raising
Inability to implement the project Losses due to inflation, exchange rate
fluctuationsLoss of staff due to funds delaysTime value of MoneyIncreased cost of funds ( e.gUntimely implementations of the projectLoss on anticipated profitsMisallocation of funds to other projectsLoss of control on investment decisions
Inefficient High Cost of raising the funds( High interest) Missing the targeted funds EPS is lower.Inability to implement projects
Innefficency- Failure to meet strategic goals- Problems with liquidity- Inability to meet social objectives- Impaired Growth-