An overview

Finance.
In general finance can be defined as the arts and

science of managing money. In other words finance can be defined as the provision of money at the time when it is required. The major area of finance are

(a) financial service and (b) financial management.

Introduction
Finance

Financial services

Financial management

Financial services
Concerned with the design and delivery of advice and

financial products to individuals, businesses and government within the area of banking and related institutions

Financial management
Concerned with the duties of the financial

managers. Activites concerned with planning, raising, allocating,controlling and administrating the funds used in the business.

Duties of financial manager

Budgeting
Credit administration Financial forecasting Investment analysis Cash management Funds management

An Overview
Relationship of finance and related disciplines.
Scope of financial management. Goal/ objectives. Agency problem. Emerging role of finance managers in India.

Finance and related disciplines

Finance and economics
Finance and accounting Finance and other related disciplines

Finance and economics

Macroeconomics

concerned with overall institutional environment in which the firm operates. Microeconomics concerned with economic decisions of individuals and organisations.

Macroeconomics- its concerned with overall institutional environment in which the firm operates.
Financial mangers should understand the economic

environment. 1. Recognise how the monetary policy affects the cost and variability. 2. Be versed in fiscal policy and its effect on the economy. 3. Beware of various financing institutions/financing outlets. 4. Understand the various levels of economic activity and changes in the economic policy for their decision and so on.

Microeconomics-deals with economic decisions of individuals

and organisations
1.

Financial mangers role in microeconmics are

Supply and demand reletionships and profit maximisation stratergies. 2. Issue related mix of the productive factors,optimal sales level and product pricing stratergies. 3. Measurement of utility preference, risk the determination of the value. 4. Marginal analysis.

Finance and accounting

Accounting important input in financial decision

making. 2 key differences in viewpoints b/wn them.

Accounting important input in financial decision making.

Is a sub function of finance.
The end products of accounting helps to asses the past

performance and future directions of the firm and meet the legal obligations, such as tax.

2 key differences
Treatment of funds 1.

a/cing relating to the funds of the firm is different from that of finance. a. Measurement of funds in a/cing is based on accrual principle/system. b. Accrual method recognises revenue at the point of sale & expenses when they are incurred. 2. Finance relating to the treatment of funds is based on cashflows.

a. The revenues are recognised only whenactuaaly received

in cash(i.e. cash inflow) and expenses are rrecognised on actual payment(i.e. cashoutflow).

Decision making differs in respect of their purposesa/cing is collection and presentation of financial datawhere fin mgrs use such data for decision making.

Finance and other relate disciplines

Marketing- new product development and promotion plan.
Production- changes in the production process may

necessitate capital expenditure. Quantitative method- tools of analysis developed in quantitative methods helpful in analysing complex financial mangement.

Impact of other disciplines on FM

Financial decision areas 1. 2. 3. 4. 5. 6. Investment analysis. Working capital management. Sources and cost of funds. Determination of capital structure. Dividend policy. Analysis of risk and returns.

Primary disciplines.
1. Accounting 2. Macroeconomics. 3. Microeconomics.

Other related disciplines 1. Marketing. 2. Production. 3. Other quantitative methods.

Shareholder wealth maximisation

Scope of FM
Investment decision
Financing decision Dividend policy decision

Investment decision
Long- term assets (capital budgeting)
Short- term assets (working capital management)

Capital budgeting
Long term assets and their composition
The business risk complexion of the firm The concept and measurement of the cost of capital.

Working capital management

An overview of working capital management as a

whole (profitability and risk trade-off). Efficient management of current assets

Financing decision
Capital structure theory (optimum capital structure).
Capital structure decision.

Dividend policy decision

Dividend payout ratio- proportion of net profit should

be paid out to the shareholders. Retention ratio- retained portion of profit. Optimum dividend policy- maximises the market value of firm`s share. Dividend stability, bonus shares and cash dividends.

Objectives of financial management

It provide a framework for optimum financial decision

making. In a narrow sense to achieve with its investment, financing and dividend policy decisions. Profit/EPS maximisation. Wealth maximisation.

Profit/EPS maximisation.
Profitability refers where output exceeds input.
When the firm concentrate only on the profit they are not

able to maintain long-term relationship.

Objections to profit maximisation.

It is Vague and ambiguous concept It Ignores the Timing of Returns It Ignores Risk- (quality of benefits) In new business environment profit maximization is regarded as Unrealistic Difficult Inappropriate Immoral.

Shareholder`s wealth maximisation.

Maximizes the net present value of a course of action to

shareholders. Accounts for the timing and risk of the expected benefits. Benefits are measured in terms of cash flows. Fundamental objectivemaximize the market value of the firms shares.

Risk return trade-off

Risk and expected return move in tandem; the greater the

risk, the greater the expected return. Financial decisions of the firm are guided by the riskreturn trade-off. The return and risk relationship: Return = Risk-free rate + Risk premium Risk-free rate is a compensation for time and risk premium for risk.

Agency problem
Shareholders as the owners of the enterprise aim to

maximise their wealth. Managers may pursue their own personal goals at the cost of shareholders, or may play safe and create satisfactory wealth for shareholders than the maximum. Resolving the agency problem 1. Market forces 2. Agency costs

Resolving agency problems.

1.
a) b) 2. a) b) c)

d)

Market forces Behaviour of security market participants Hostile takeovers. Agency costs Monitoring Bonding Opportuinty structuring

Organisation of finance function

Finance decision plays a crucial role so it may be handled

by the top management. i.e. BOD/MD/CE. Exact nature of fin management function differs from firm to firm based on nature of business, size of the firm & typr of financing operations.
Similarly designation also differs known as vice-

president/director(finance)/CFO.

Board of directors
Managing director/Chairman

Vice-president/director(finance)/CFO

treasurer

controller

Treasurer
Treasurer- with financing activities of the firm. 1. Capital expenditure mgr 2. Fin planning & fund raising mgr 3. Cash mgr 4. Credit mgr 5. Foreign exchange mgr 6. Pension fund mgr.

Controller
Controller- related mainly to accounting and control.

Financial a/cing 2. Internal audit 3. Taxation

1. 4. Management a/cing.

Emerging role of finance managers

Financial structure
Foregin exchange management Treasury operatios Investor communication Management control Investment planning.

 The traditional approach of financial management was all about

profit maximization.The main objective of companies was to make profits. The traditional approach of financial management had many limitations: 1.Business may have several other objectives other than profit maximization.Companies may have goals like: a larger market share, high sales,greater stability and so on.The traditional approach did not take into account so many of these other aspects. 2.Profit Maximization has to defined after taking into account many things like: a.Short term,mid term,and long term profits b.Profits over period of time The traditional approach ignored these important points.

 3.Social Responsibility is one of the most important objectives of many firms.Big corporates make an effort towards giving back something to the society.The big companies use a certain amount of the profits for social causes.It seems that the traditional approach did not consider this point. Modern Approach is about the idea of wealth maximization.This involves increasing the Earning per share of the shareholders and to maximize the net present worth. Wealth is equal to the the difference between gross present worth of some decision or course of action and the investment required to achieve the expected benefits. Gross present worth involves the capitalised value of the expected benefits.This value is discounted a some rate,this rate depends on the certainty or uncertainty factor of the expected benefits. The Wealth Maximization approach is concerned with the amount of cash flow generated by a course of action rather than the profits. Any course of action that has net present worth above zero or in other words,creates wealth should be selected.

Thank u..