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Chapter 1

AN OVERVIEW OF FINANCIAL MANAGEMENT

Chapter 1 An Overview of Financial Management

LEARNING OBJECTIVES
List out 7 Ms of management. Give the meaning and definition of financial management. Trace the evolution of financial management. Explain the scope of financial management. Give the interface of financial management with other disciplines. Explain the different financial decisions. Extract the inter-relationship among financial decisions. Bring out Aims of Finance Function. Elucidate the objectives of financial management. Debate on organisation of finance function.
Financial Management: Principles and Practice By G. Sudarsana Reddy

Himalaya Publishing House

Chapter 1 An Overview of Financial Management

Seven Ms of Management
Men Money Machines Materials Methods Minutes and Management

Himalaya Publishing House

Financial Management: Principles and Practice By G. Sudarsana Reddy

Chapter 1 An Overview of Financial Management

Financial Management
Financial Management is concerned with the acquisition, financing and management of assets to achieve organizational goal

Himalaya Publishing House

Financial Management: Principles and Practice By G. Sudarsana Reddy

Chapter 1 An Overview of Financial Management

Evolution of Financial Management


The Traditional phase, The Transitional phase and Modern phase

Himalaya Publishing House

Financial Management: Principles and Practice By G. Sudarsana Reddy

Chapter 1 An Overview of Financial Management

Scope of Financial Management


I. Traditional approach Criticism
- Ignore day-to-day problems - Outsider-looking-in approach - Ignores working capital financing - Ignores allocation of capital

II. Modern approach

Himalaya Publishing House

Financial Management: Principles and Practice By G. Sudarsana Reddy

Chapter 1 An Overview of Financial Management

Interface of Financial Management with other Disciplines:


Economics Accounting HR Production Marketing

Himalaya Publishing House

Financial Management: Principles and Practice By G. Sudarsana Reddy

Financial Decisions

Chapter 1 An Overview of Financial Management

1. Investment Decision: Decision which is related to the selection of assets 2. Financing Decision: Determination of proportion of debt and equity in capital structure 3. Dividend Decision: It involves determination of portion of EPS to be declared as dividend per share.
Financial Decisions

Investment Decision

Financing Decision

Dividend Decision

Himalaya Publishing House

Financial Management: Principles and Practice By G. Sudarsana Reddy

Chapter 1 An Overview of Financial Management

Inter-relation among Financial Decisions


Investment and Financing decision Financing and Dividend decision Dividend and Investment decision

Himalaya Publishing House

Financial Management: Principles and Practice By G. Sudarsana Reddy

Chapter 1 An Overview of Financial Management

Aim of Finance Function


Anticipation of funds needed Acquisition of funds estimated Allocation of funds raised Increase profitability Maximising Firms value

Himalaya Publishing House

Financial Management: Principles and Practice By G. Sudarsana Reddy

Chapter 1 An Overview of Financial Management

Goals of Financial Management


1. Profit Maximisation
Limitations: (a) Vague (b) Ignores time value of money (c) Ignores quality of benefits

2. Wealth Maximisation

Himalaya Publishing House

Financial Management: Principles and Practice By G. Sudarsana Reddy

Goals of FM Conted.

Chapter 1 An Overview of Financial Management

CIF1 CIF2 CIF3 CIFn W = ----------- + ----------- + ----------- + - - - - + -------- -ICo (1+r)1 (1+r)2 (1+r)3 (1+r)n

where W = Net present worth


CIF1, CIF2, CIF3 . CIFn represent the stream of cash inflows (benefits) expected to occur from a course of action that is adopted. IC0 = Initial cash outflow to buy the asset. r = Expected rate of return or appropriate rate of discount.
Financial Management: Principles and Practice By G. Sudarsana Reddy

Himalaya Publishing House

Goals of FM Conted.
3. Alternative goals Maximisation of ROE Maximisation of EPS Management of reserves for growth and expansion

Chapter 1 An Overview of Financial Management

Himalaya Publishing House

Financial Management: Principles and Practice By G. Sudarsana Reddy

Organisation of Finance Function


Vice-President Operations

Board of Directors

Managing Director

Chapter 1 An Overview of Financial Management

Vice-President Finance

Vice-President Sales

Treasurer

Controller

Capital Budgeting

Cash Management

Cost Accounting Manager

Data Processing Manager

Commercial Banking and Investment Banking

Credit Management

Financial Accounting Manager

Tax Manager

Portfolio Manager Inventory Manager

Fund raising Manager

Internal Audit

Financial Statements Preparation Preparing Financial Budgets

Himalaya Publishing House

Management: Principles and Practice By G. Sudarsana Reddy

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