Day 1 introduction
- 1. Financial Management: Introduction M S Narasimhan Indian Institute of Management Bangalore msn@iimb.ac.in
- 2. Issues at Macro Level • Savings and Investments determines economic growth • Savings and Investments take place in different segments of the economy • Market is required to connect these two segments of the economy • Markets for Capital consist of – Money Market : Short-term capital is raised – Capital Market : Long-term capital is raised • Financial Managers are interested with the developments of these markets as they are dealing with these markets constantly for capital.
- 3. Issues at Micro Level • Business Units need endless variety of real assets, which includes tangible and intangible assets • Money is required to buy real assets • Companies sell pieces of papers called financial assets, which include shares, bonds, bank loans, lease, etc. • Shares, Bonds, ..., are sold to large number of investors whereas loans, lease are negotiated with a few FIs • Financial Managers assess capital requirement for real assets and create financial products, price them and sells to investors and banks
- 4. Role of Finance Function Capital Corporate Market Investors Primary/Secondary Institutions Functional Finance Managers Function/ Investors Managers
- 5. Key Issues in Finance Function • Acquiring capital at the least cost • Assessing financial viability of investments • Managing Cash Flow • Design suitable long-term dividend policy • Balancing Finance and Business Risk • Giving feedback periodically on investments in various current assets Finance Manager is a goal-keeper
- 6. Finance Function - Organisational Structure Chief Financial Officer Financial Policy Corporate Planning Treasurer Controller Cash Mgt., Capital Accounting Raising, Banking Taxation
- 7. Forms of Business Organizations • Corporation – Legal Entity – Limited Liability – Separation of shareholders (ownership) & Management (control) • Sole Proprietorship • Partnership, Limited Partnership and Limited Liability Partnership • Co-operative Societies/Societies • Trusts • Under an Act of Parliament
- 8. Agency Relationship Managers Agency Cost Equity holders Debt holders
- 9. Agency cost and Finance Function • Conflict of interest between the three affects maximisation objective of finance function • Capital Budgeting – Managers want to diversify and take up less risky project; Equity holders prefer high risk project; Debt holders prefer no expansion or equity funded expansion • Capital Structure – Managers prefer less debt (pecking order); equity holders prefer high debt; • Dividend Policy – Managers/debt holder prefer low payout; SH high payout
- 10. Financial Managers & Agency Cost • Financial Managers can address agency problem – by improving disclosure standards – by designing suitable capital structure – by designing suitable dividend policy – by designing suitable ESOP/executive compensation plans like EVA®
- 11. Financial Goal • Maximizing Shareholders Wealth is a simple financial goal for the managers to pursue • What does it mean? – Look for investment opportunities that create value more than their cost, adjusted for risk • Other Financial Goals and their problems – Maximizing Sales or Profit