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8/7/2019 1FM INTRO
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8/7/2019 1FM INTRO
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FINANCIAL MANAGEMENTINTRODUCTION
FINANCE: is the art and science of Managing
Money. The two major areas of Finance are:
a. Financial Services,
b.F
inancial Management.
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Financial Services
FS is concerned with the design and delivery of
advice and financial products to individuals,businesses and governments.
Advice and Financial products in the areas of
Banking and related institutions, personal
financial planning, investments, real estate,Insurance and so on.
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Financial Management
FM is concerned with the management of
Financial affairs of any type of business Financial or non financial, large or small,
private or Public Sector, Profit seeking or Non
profit seeking.
Tasks include, Budgeting, financial forecasting,
cash management, credit admin, investment
analysis, funds management and so on.
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Finance and Related disciplines
Finance and Economics.
Knowledge of Economics is necessary tounderstand both the financial environment and
the decision theories which underline
contemporary Financial Management.
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Finance & Economis contd..
Economics to be seen from two broad areas
viz., Macroeconomics and Microeconomics. Macroeconomics is concerned with overall
institutional infrastructure of the Banking
system, Money and capital markets, financial
intermediaries, monetary, credit and fiscalpolicies and their levels of activity in the
economy
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Macroeconomics contd..
Businesses operate in broad economic
environment and hence FM shouldunderstand how these broad economicenvironment affect
1. The monetary policies and their impact on the
cost of capital.2. Effect of Fiscal policies on Economy
3. Aware of various Financial institutions etc.
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Finance and Economics
Microeconomics is concerned with economic
decisions of individuals and businessorganisations.
It is concerned with optimal operating
strategies.
In other words, it is concerned with theories
that provide for effective operations of firms.
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Microeconomics contd..
The theories of Microeconomics relevant toF
M are:1. Supply & Demand relationships and Profit
Maximisation strategies.
2. Product mix, sales level and pricing strategies
3. Measurement of Utility preference, risk, anddetermination of value.
4. Rationale for depreciating assets.
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Microeconomics contd..
The primary principle that applies in FM is
Marginal analysis; it suggests that financialdecisions should be made on the basis of
comparison of marginal revenue and marginal
cost, which in turn lead to increase in profits.
It is therefore necessary that FinanceManagers are familiar with Microeconomics.
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Finance and Accounting.
The relationship between Finance and
Accounting has two dimensions:1. They are closely related and Accounting is an
important input in financial decisions.
2. The second dimension relates to the
differences between the two:There are two key differences between thetwo:
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Finance & Accounting
1. Treatment of Funds: In accounting,
measurement of funds ( Income & expense) isbased on Accrual principle.
In Finance, the treatment of funds is based
on cashflows. The revenues are recognised
only on actual receipt and Expenses on actualpayment.
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Finance & Accounting.
2. Decision making.
Accounting is concerned with collection andpresentation of financial data.
Financial Manager, uses such data for
financial decision making
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Accounting & Other disciplines.
Financial Managers draw support from
Marketing, Production and Quantitativemethods.
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Impact of Other Disciplines on FM
Financial decision
areas1. Investment analysis
2. Working capital mgt
3. Sources & Uses of funds
4. Determine of capital structure
5. Dividend policy
6. Analysis of risks and returns
Shareholder wealth maximisation
Primary disciplines
1. Accounting
2. Macroeconomics
3. microeconomics
Other related disciplinesa. Marketing
b. Production
c. Quantitative methods.
support
Resulting in
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Scope of Financial Management
Traditional approach
Refers to the subjectmatter. µCorporation
finance¶ is the term used
to describe Financial Mgt
Thus defined, the scope of
Finance function was
restricted to procurement
of funds.
Modern Approach
ViewsF
M in a broadsense and provides aconceptual frameworkfor financial decisionmaking.
Finance functions coversprocurement as well as
Allocation.
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Scope of FM contd..
Institutional arrangementin the form of FI¶s whichcomprise the capital Mkt
Financial instrumentsthru which funds areraised
The Legal & accountingrelationships betweenfirm and sources of funds
The Investment Decision
Financing Decision Dividend Policy
Decision.
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Profit MaximizationVS Share Holder wealth Maximization
Profit Maximization
Short term Manipulative
Wealth Maximization
Share price as an indicator EPS as a tool
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Corporate Social Responsibility
CSR
Corporate Governance
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Agency Problem
Ownership and Management
Professional Managers and their responsibility Compensation to Professional Managers
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Organisation of Finance Function
Board of Directors
Managing Director/Chairman
Vice president/Director (Finance)/Chief Finance Officer
Treasurer controller
Capex Mgr Cash Mgr
Fin Plg
& fund raising
mgr Tax Mgr Corporate
A/c Mgr
Cost A/c
Mgr
Fin a/c
Mgr Credit Mgr FX Mgr Pension
Fund
Mgr
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