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8/10/2019 48024802 Financial Management Ppt
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FINANCIAL MANAGEMENT
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FINANCE
PUBLIC FINANCE PRIVATE FINANCE
PERSONAL FINANCE
BUSINESS FINANCE
FINANCE OF NON-PROFIT
ORGANISATIONS
CENTRAL GOVT
STATE GOVT
LOCAL AUTHORITIES
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BUSINESS FINANCEDEFINITION: That business activity which is
concerned with the acquisition and conservation ofcapital funds in meeting the financial needs andoverall objectives of business enterprise. (Wheeler)
Accord ing toGuthamann & Dougal l, Businessfinance can be broadly defined as the activityconcerned with the planning, raising, controlling andadministering the funds used in the business
Meaning:Business finance is the process of raising,providing and administering of all money/funds to beused in a business enterprise
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FINANCIAL MANAGEMENT
Financial management refers to that part of
management activity which is concerned with the
planning and controlling of the firms financial
resources. It deals with finding out various sourcesof raising fundsfor the firm and also using such
funds in the most appropriate manner
J.F.Bradley, The area of the business management
devoted to a judicious use of capital and a carefulselection of sources of capital in order to enable a
spending unit to move in the direction of reaching its
goals.
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Importance of
Financial Management
FM helps in
Financial planning & successful promotion of an
enterprise
Acquisition of funds at minimum cost
Proper use & allocation of funds
Taking sound financial decisions
Improving profitability through financial control
Increasing the wealth of investors and the nation Promoting and mobilising individual and corporate
savings
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SCOPE OF FINANCIAL MANAGEMENT
Estimating financial requirements (sho rt term &long term )
Deciding capital structure
Selecting a source of finance Selecting a pattern of investment
Proper cash management
Implementing financial controls Proper use of surpluses
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FINANCE FUNCTION
Long-term asset mix or investment decision
Capital-mix or financing decision
Profit allocation or dividend decision Short-term asset mix or liquidity decision
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INVESTMENT DECISION
Also referred to as Capital Budgeting Decision,involves the decision of allocation of capital tolong term assetsthat would yield benefits in thefuture.
Important aspects-a) Evaluation of prospective profitabilityand
b) Measurement of cut-off rate or required rate ofreturn
Evaluation should be made in terms of both risk andreturn
Capital budgeting also involves replacement decisions
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FINANCING DECISION
Deciding- when, where from and how to acquire funds
to meet the investment needs.
Central issue- determining the optimum capital
structure(mix of debt & equity). Capital structure will
be optimum when the market value of shares is
maximised
Proper balancehas to be struck between risk & return
Also considers factors such as control, flexibility, loan
agreements, legal aspects etc
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DIVIDEND DECISION
Decide whetherthe firm should distribute all profits, orretain them, ordistribute a portion and retain the
balance.
The proportion of profits distributeddividend-payout
ratioThe proportion of profits retainedretention ratio
Optimum dividend policymaximises the market value
of shares
Dividendcan be paid either in cash orin shares.[Bonus shares]
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LIQUIDITY DECISION
Investment in current assetsor current assetmanagement or working capital management
Short term survivalis a pre requisite for long termsuccess
Lack of liquidityinsolvency( in extreme situations)
Profitability-liquidity trade-off
2 basic ingredients-
a) overview of working capital management as a whole
b) Efficient management of individual current assets
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FACTORS INFLUENCING FINANCIAL
DECISIONS
External Factors:
a) State of economy
b) Structure of capital & money markets
c) Requirements of investors
d) Government policy
e) Taxation policy
f) Lending policy of financial institutions
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Internal Factors:
Nature and size of business Expected return, cost and risk
Composition of assets
Structure of ownership Trend of earnings
Age of the firm
Liquidity Position Working capital requirements
Conditions of debt agreements
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Functional Areas of FM
Determining Financial needs Choosing the sources of funds
Financial Analysis & Interpretation
Cost-Volume Profit Analysis Capital Budgeting
Working Capital Management
Profit Planning and Control Dividend Policy
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ROLE OF A FINANCIAL MANAGER
Financial Forecasting & Planning
Acquisition of funds
Funds allocation
Helping in valuation decisions Maintain proper liquidity
Profit planning-operating decisions in theareas of pricing, costs, volume of output and
the firms selection of product lines. Understanding capital markets