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INTRODUCTION TO FINANCIAL MANAGEMENT

Objectives
 To define and understand the concept of financial management.
 To appreciate the functions of a Financial manager.
 To appreciate the major financial management decisions.
 To assess the tax environment.
 To appreciate the basic tools of financial analysis and planning.
FINANCIAL MANAGEMENT DEFINED
 This is the business management function that is concerned with managing a
business’ finances.
 It refers to the application of financial management tools and techniques to
coordinate all the financial functions in the business.
Functions of a Financial Manager
 Spearheading the process of capital budgeting
 Managing the liquidity of the firm.
 Sourcing and utilization of funds
 Financial analysis and planning.
 Taking custody of company’s valuable documents
 Paying suppliers
 Monitoring the banking operations
 Budgeting and forecasting
 Proper earnings management
Importance of Proper Financial Management
Importance of FM Contd…
 Maximize use of financial resources
FM allows you to identify and plan for the use of your financial resources.
It provides information for financial decision making.
Importance of FM Contd…
 Evaluate new business opportunities
FM provides the key information and answer questions of whether to exploit such
opportunities or not.

That is, entrepreneurs can effectively analyze a business opportunity and


determine whether it is worthwhile or not.

Importance of FM Contd…
 Measuring business performance
FM helps the investor to monitor the progress of their business towards achieving
business goals and to take corrective action where necessary.

Importance of FM Contd…
 Making sound business decisions
The financial information systems provides a wide range of information that can
be used to make better decisions.
This is done using financial ratios, break even analysis etc.
MAJOR FINANCIAL MANAGEMNET DECISIONS
 Investment decision
 Working capital decision
 Financing decision
 Earnings management decision
1. Investment decision

Importance of Capital Budgeting:


 It determines the asset mix and hence the business risk.
 It involves heavy initial outlays of the business resources.
 Benefits accrue in future which future is associated with risk and uncertainty.
Practical Financial Management Problem.
 Investment appraisal using NPV, IRR, Pay back period.
 Cost of capital

2. Working capital decision


This is the decision concerned with the short term assets/resources an organization
uses to meet its day to day obligations.
Such assets include:
 Cash reserves of the organisation
 Funds collected from debtors of the organization.
 Inventories

3. Financing decision
 This is the decision concerned with the sourcing of funds that are utilized under
the investment decision.
 Much management time and effort is devoted to trying to ensure the adequacy of
the company's profit flow.
 However, it is just as important that a company has an adequate flow of funds if it
is to remain in business and very much less management time and effort is devoted to this
need.
Financing decision Contd…
 As companies expand, they require growing amounts of cash to finance
acquisitions of fixed assets. They also require growing amounts of cash to finance their
growing working capital (net current assets) requirements.
Some of this funding requirement will come from INTERNAL sources, whilst some will
need to come from EXTERNAL sources.
4. Earnings management decision
The Financial Manager has to decide on what to do with the earnings once they
have been realised. There are three options,
 To declare and pay all dividends to shareholders
 To retain all the earnings and hence declare and pay no dividends
 To decide on what proportion to be paid and what to be retained.
Considerations in dividends payment
 Internal restrictions that do not favour dividend payment
 Legal considerations.
 Level of the firm’s leverage position.
 Ease of raising additional capital.
 Will payment of dividends disadvantage the shareholders or investors?
 The preferences of the majority shareholders.
 Existence of profitable investment portfolio.
 The levels of control desired by the shareholders

THANK YOU FOR YOUR ATTENTION

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