FINANCIAL MANAGEMENT FOR

MANAGERS

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 Finance & Financial Management
Finance may be defined as the art and science of managing money.

Financial Management is concerned with the duties of the financial managers in the
business firms.

Financial managers actively manage the financial affairs of any type of business,
namely, financial and non-financial, private
and public, large and small, profit-seeking and not-for-profit.
 Financial Decision Areas Primary Disciplines:
• Accounting
1. Investment analysis • Macroeconomics
Support
2. Working capital management • Microeconomics
3. Sources and cost of funds
4. Determination of capital structure
Support Other Related Disciplines:
5. Dividend policy
• Marketing
6. Analysis of risks and returns
• Production
Resulting in
• Quantitative methods
Shareholder wealth maximisation

Figure 1: Impact of Other Disciplines on Financial Management

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 Scope of Financial Management
The scope of financial management can be broken down into three major decisions as functions of finance:

1. Investment Decisions
The investment decision relates to the selection of assets in which funds will be invested by a firm. The assets
which can be acquired fall into two broad groups:

(a) Long-term assets (Capital Budgeting)

(b) Short-term or current assets (Working Capital Management).

(a) Capital Budgeting: Capital budgeting is probably the most crucial financial decision of a firm. It relates to the
selection of an asset or investment proposal or course of action whose benefits are likely to be available in
future over the lifetime of the project.

(b) Working Capital Management: Working capital management is concerned with the management of current
assets. It is an important and integral part of financial management as short-term survival is a prerequisite for
long-term success.

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(2) Financing Decisions
The second major decision involved in financial management is the financing decision. The investment
decision is broadly concerned with the asset-mix or the composition of the assets of a firm. The concern of
the financing decision is with the financing-mix or capital structure or leverage. There are two aspects of the
financing decisions.
First, the theory of capital structure which shows the theoretical relationship between the employment of
debt and the return to the shareholders. The second aspect of the financing decision is the determination of
an appropriate capital structure, given the facts of a particular case. Thus, the financing decision covers two
interrelated aspects: (1) the capital structure theory, and (2) the capital structure decision.

(3) Dividend Policy Decision

The dividend decision should be analyzed in relation to the financing decision of a firm. Two alternatives are
available in dealing with the profits of a firm:
(i) they can be distributed to the shareholders in the form of dividends or
(ii) they can be retained in the business itself. The decision as to which course should be followed depends
largely on a significant element in the dividend decision, the dividend-pay out ratio, that is, what proportion
of net profits should be paid out to the shareholders.

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DECISIONS, RETURN, RISK AND MARKET VALUE

Capital Budgeting
Decisions

Return
Capital Structure
Decisions
Market Value of
the Firm
Dividend
Decisions
Risk

Working Capital
Decisions
 GOAL OF FINANCIAL MANAGEMENT
Finance theory rests on the premise that managers should manage their firm’s resources
with the objective of enhancing the firm’s market value.

“The quest for value drives scarce resources to their most productive uses and their
most efficient users. The more effectively resources are deployed, the more robust will
be the economic growth and the rate of improvement in our standard of living. Adam
Smith’s ‘invisible hand’ is at work when investors’ private gain is a public value.”

 Centre for Financial Management , Bangalore

 Objectives Of Financial Management
The goal of the financial manager is to maximize the owners/shareholders wealth as
reflected in share prices rather than profit/EPS maximization because the latter
ignores the timing of returns, does not directly consider cash flows and ignores risk. As
key determinants of share price, both return and risk must be assessed by the
financial manager when evaluating decision alternatives. The EVA is a popular
measure to determine whether an investment positively contributes to the owners
wealth.
However, the wealth maximizing action of the finance managers should be consistent
with the preservation of the wealth of stakeholders, that is, groups such as employees,
customers, suppliers, creditors, owners and others who have a direct link to the firm.
Corporate India paid scant attention to the goal of shareholders wealth maximization
till the end of eighties. In the post-liberalization era, it has emerged at the centre-stage
of corporate financial practices, the contributory factors being greater dependence on
capital market, growing importance of institutional investors and foreign exposure.

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 THE FUNDAMENTAL PRINCIPLE OF FINANCE
A business proposal-regardless of whether it is a new investment
or acquisition of another company or a restructuring initiative –
raises the value of the firm only if the present value of the future
stream of net cash benefits expected from the proposal is greater
than the initial cash outlay required to implement the proposal.
CASH ALONE MATTERS

Investors Investors provide the initial cash required The business proposal
• Shareholders to finance the business proposal
• Lenders

The proposal generates

cash returns to investors
 Key Activities of the Financial Manager
• Performing Financial Analysis and Planning
The concern of financial analysis and planning is with
(a) Transforming financial data into a form that can be used to monitor financial condition,
(b) Evaluating the need for increased (reduced) productive capacity and
(c) Determining the additional/reduced financing required.

• Making Investment Decisions

Investment decisions determine both the mix and the type of assets held by a firm. The mix refers
to the amount of current assets and fixed assets.

• Making Financing Decisions

Financing decisions involve two major areas: first, the most appropriate mix of short-term and
long-term financing; second, the best individual short-term or long-term sources of financing at a
given point of time.

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EMERGING ROLE OF THE FINANCIAL MANAGER IN INDIA
The job of the financial manager in India has become more important, complex and
demanding due to the following factors:
• Liberalisation
• Globalisation
• Technological developments
• Volatile financial prices
• Economic uncertainty
• Tax law changes
• Ethical concerns over financial dealings
• Shareholder activism
Emerging Role of Finance Managers in India
• Reflecting the emerging economic and financial environment in the
post-liberalisation era since the early nineties, the role/job of finance
managers in India has become more important, complex and
demanding. The key challenges are in the areas of:
(1) Financial Structure,
(2) Foreign exchange management,
(3) Treasury operations,
(4) Investors’ communication,
(5) Management control and
(6) Investment Planning.

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Thank You

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