1FM INTRO

8/7/2019 1FM INTRO

http://slidepdf.com/reader/full/1fm-intro 1/21

8/7/2019 1FM INTRO


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.

8/7/2019 1FM INTRO


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.

8/7/2019 1FM INTRO


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.

8/7/2019 1FM INTRO


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.

8/7/2019 1FM INTRO


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

8/7/2019 1FM INTRO


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.

8/7/2019 1FM INTRO


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.

8/7/2019 1FM INTRO


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.

8/7/2019 1FM INTRO


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.

8/7/2019 1FM INTRO


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:

8/7/2019 1FM INTRO


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.

8/7/2019 1FM INTRO


Finance & Accounting.

2. Decision making.

Accounting is concerned with collection andpresentation of financial data.

Financial Manager, uses such data for

financial decision making

8/7/2019 1FM INTRO


Accounting & Other disciplines.

Financial Managers draw support from

Marketing, Production and Quantitativemethods.

8/7/2019 1FM INTRO


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

8/7/2019 1FM INTRO


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.

8/7/2019 1FM INTRO


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.

8/7/2019 1FM INTRO


Profit MaximizationVS Share Holder wealth Maximization

Profit Maximization

Short term Manipulative

Wealth Maximization

Share price as an indicator EPS as a tool

8/7/2019 1FM INTRO


Corporate Social Responsibility

CSR

Corporate Governance

8/7/2019 1FM INTRO


Agency Problem

Ownership and Management

Professional Managers and their responsibility Compensation to Professional Managers

8/7/2019 1FM INTRO


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

Documents

1FM INTRO