Professional Documents
Culture Documents
B. Business activities C. Finance function D. Finance managers role E. Financial goals F. Risk return trade- off G. Managers vs. Shareholders goals H. Financial Goals And Firms Mission And Objectives I. Organisation of the finance functions J. Status and duties of finance executives
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INTRODUCTION TO FM
Financial management deals with procurement of funds and their effective utilization in the business. Financial management comprises the forecasting, planning, organizing, directing, coordinating and controlling of all activities relating to acquisition and application of the financial resources of an undertaking in keeping with its financial objective. by Raymond Chambers organization
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Business Activities
Production Marketing Finance
Finance Functions
Investment or Long Term Asset Mix Decision (Capital Budgeting) Financing or Capital Mix Decision
(Source of finance and cost of Capital)
Financial Goals
Profit maximization (profit after tax) Maximizing Earnings per Share Shareholders Wealth Maximization (SWM)
Profit Maximization
Maximizing the Rupee Income of Firm
Resources are efficiently utilized Appropriate measure of firm performance Serves interest of society also
Maximizing EPS
Ignores timing and risk of the expected benefit Market value is not a function of EPS. Hence maximizing EPS will not result in highest price for company's shares Maximizing EPS implies that the firm should make no dividend payment so long as funds can be invested at positive rate of return such a policy may not always work
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Financing Decisions
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 risk-return 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.
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Risk and expected return move in tandem; the greater the risk, the greater the expected return.
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The manager, acting as the agent for the share holders, is supposed to make decisions that will maximize shareholders wealth. However, manager may prioritize his personal objective (Liberty, prestige and wealth)
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This conflict is known as Agency problem. This may be minimised by providing incentives in the form of stock options, cash bonus and other long term benefits
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Goals or objectives are missions or basic purposes of a firms existence Wealth maximization is more appropriately a decision criterion, rather than an objective or a goal. The wealth maximization criterion would simply indicate whether an action is economically viable or not
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Vision
Vision:
describes a desirable state that a company or individual wishes to attain at some time in the future
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Mission
The mission statement reflects every facet of your business: the range and nature of the products you offer, pricing, quality, service, marketplace position, growth potential, use of technology, and relationships with your customers, employees, suppliers, competitors and the community. Therefore a mission statement is something which tells you what to do in the present in order to achieve the future..
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VISION
MISSION
(ULTIMATE GOAL)
MISSION
MISSION
MISSION
MISSION
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Changing Scenario
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Assignment
Question : What do you mean by financial management ? Question : Explain the scope of financial management ? Question : What are the functions of a Finance Manager ? Question : What are the various methods and tools used for financial management ? Hint:
Financial leverage or trading on equity capital budgeting techniques as payback, internal rate of return, net present value, profitability index, average rate of return cash management may be centralised or de-centralised ratio analysis Funds flow and cash flow statements and projected financial statements
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Assignment
Question : Discuss the role of a finance manager ? Question : Draw a typical organisation chart highlighting the finance function of a company ? Question : Discuss some of the instances indicating the changing scenario of financial management in India ?
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Assignment
Collect the latestannual reports of L &T and BHEL. Read directors report and chairmans statement and comment on both firms objective and financial goals. What difference do you notice. What could be the reasons for the difference
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