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An Introduction
Contents
Introduction to FM Scope Objectives Functions Role of Financial Manager Assignment - Interface of Financial Management with other Functional Areas Key challenges faced by Modern FM Financial Environment
FINANCE
Finance is the life-blood of business. lifebusiness. Without finance neither any business can be started nor successfully run . Finance is needed to promote or establish business, acquire fixed assets, make necessary investigations, develop product keep man and machines at work, encourage management to make progress and create values. values.
FINANCIAL MANAGEMENT
Financial management is one the functional areas of management. It refer to that part of management. the management activity which is concerned with the planning and controlling of firms financial resources. resources.
DEFINITION
Financial management is the application of planning and control function of the finance function Howard and Upton
Financing decision
Financing decisions - How should the company pay for the investments it makes? This determines the right-hand side of the balance sheet. it is also rightsheet. known as capital structure decision. It involves the decision. choosing the best source of raising funds and deciding optimal mix of various source of finance. finance. A company can not depend upon only one source of finance, hence a varied financial structure is developed. developed. but before using any particular source of capital ,its relative cost of capital ,degree of risk and control etc should be thoroughly examined by the financial manager. manager. The major source of long-term capital are shares longand debentures. debentures.
DIVIDEND DECISION
Dividend decisions - What should be done with the profits of the business? The dividend decision is concerned with determining how much part of the earning should be distributed among the share holders by way of dividend and how much should be retained in the business for meeting the future needs of funds internally. internally.
All management decisions should help to accomplish the goal of the firm!
What should be the goal of the firm?
Maximization of profits
Profit earning is the main aim of every economic activity. Profit maximization activity. simply means maximizing the income of the firm . Economist are of the view that profits can be maximized when the difference of total revenue over total cost is maximum, or in other words total revenue is greater than the total cost. cost.
PROFIT PLUS POINTS Measures business performance Ensures timely payments to Shareholder, employees, Government, Creditors Ensures expansion and diversification Indicates efficient use of Funds
PROFIT MINUS POINTS Profit is not a clear term (Long / Short) Leads to employee and consumer exploitation Does not consider Risk factor and Time value of Money Leads to cut throat competition A/c Manipulation Estimating exact profits is impractical
Maximization of wealth
According to prof solomon ezra of stand ford university , the ultimate goal of financial management should be the maximization of the owners wealth. The value of corporate wealth may wealth. be interpreted in terms of the value of the companys total assets. The finance should assets. attempt to maximize the value of the enterprise to its shareholders. Value is represented by the shareholders. market price of the companys common stock. stock.
WEALTH PLUS POINTS Clear term as it considers present value of cash flows Considers time value of money Considers interest of External Parties Aims at Dividend and returns Considers impact of Risk
WEALTH MINUS POINTS It is not descriptive It differs from one entity to another
Other Objectives
Balanced Asset Structure Fixed and Current Asset balance Liquidity Cos capacity to meet short term and long term obligations Planning Funds Cost of Funds to be minimized Financial Discipline Scandals, misuse of Funds
More likely, when stockholders are dissatisfied they will simply sell their stock shares.
This action by stockholders will cause the market price of the companys stock to fall.
When stock price falls relative to the rest of the market (or relative to the rest of the industry) ...
Management is failing in their job to increase the welfare (or wealth) of the stockholders (the owners).
Conversely, when stock price is rising relative to the rest of the market (or industry), ...
Management is accomplishing their goal of increasing the welfare (or wealth) of the stockholders (the owners).
The goal of the firm should be to maximize the stock price! price!
This is equivalent to saying the goal is to maximize owners wealth. wealth. Note that the stock price is affected by managements decisions affecting both risk and profit. Stock price can be maintained or increased only when stockholders perceive that they are receiving profits that fully compensate them for bearing the risk they perceive.
Functions
Anticipating Financial needs Acquiring Financial Resources Allocating Funds in Business Administering Allocation of Funds Analyzing Financial Performance Accounting and reporting to management Maintaining Liquidity Ensuring Profit and Wealth maximization
Functions
Day to Day Cash Custody Bank Accounts Loan Collection Payment of Cash for transactions
Specific Functions Functional planning and Budgeting Investment Decisions Cost Accounting Profit Analysis Financial Accounting Internal Audit
More examples:
When new capital equipment is purchased, the entire cost is a cash outflow, but only the depreciation expense (a portion of the total cost) is an expense when computing accounting income. When dividends are paid, cash is paid out, though dividends are not included in the calculation of accounting income.
FINANCIAL MANAGEMENT
BEAS Co Ltd, plans for an IPO at Rs.10 per share with an objective Rs. to raise capital to establish itself and has plans to raise Rs. Rs. 500, 500,000 but managed to distribute only Rs. 300000 to the public Rs. through banks, finance companies and brokers, out of the capital limit of Rs. 10,00,000 as per the MOA. The response was Rs. 10,00, MOA. moderate and the total number of share applications received was Rs. 00,000. Rs. 1,00,000. In response to the first call of Rs 5 per share the total funds received was Rs.40,000. Rs.40,000. Questions: Questions: (1 mark each) 1. What is the price of one share? 2. What is the objective behind the IPO? What does IPO stand For? 3. What is the Value of the First call? 4. Whom did the company approach for the distribution of shares to the public? 5. Calculate Authorized capital . 6. Calculate Issued capital . 7. Calculate subscribed capital . 8. Calculate called up capital . 9. Calculate paid up capital . 10. Calculate the number of shares issued by the company .
1. 2.
3. 4. 5. 6. 7. 8. 9. 10.
What is the price of one share? Rs.10 per share What is the objective behind the IPO? What does IPO stand For? Initial Public offering - with an objective to raise capital to establish itself What is the Value of the First call? Rs 5 per share Whom did the company approach for the distribution of shares to the public? banks, finance companies& brokers Calculate Authorized capital . 10,00,000 Calculate Issued capital . Rs. 300000 Calculate subscribed capital . Rs. 1,00,000 Calculate called up capital . Rs 50,000 Calculate paid up capital. Rs.40,000 Calculate the number of shares issued by the company. Rs. 300000 / 10 per share = 30,000