Financial management scope, elements, functions and importance
- 2. Introduction Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.
- 3. Definition Finance – planning, obtaining, and managing the company’s funds in order to accomplish its objectives. Maximizing overall worth Meeting expenses Investing in assets Increasing profits to shareholders
- 4. Scope/Elements Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets are also a part of investment decisions called as working capital decisions.
- 5. Investment Decisions Most important of the three decisions.Most important of the three decisions. What is the optimal firm size? What specific assets should be acquired? What assets (if any) should be reduced or eliminated?
- 6. Scope/Elements Financial decisions They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby.
- 7. Financing Decisions Determine how the assets (LHS of balance sheet) willDetermine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet).be financed (RHS of balance sheet). What is the best type of financing? What is the best financing mix? What is the best dividend policy (e.g., dividend- payout ratio)? How will the funds be physically acquired?
- 8. Scope/Elements Dividend decision The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two: Dividend for shareholders- Dividend and the rate of it has to be decided.
- 9. Dividend decision Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.
- 10. Asset Management Decisions How do we manage existing assets efficiently? Financial Manager has varying degrees of operating responsibility over assets. Greater emphasis on current asset management than fixed asset management.
- 11. Objectives of Financial Management The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be- To ensure regular and adequate supply of funds to the concern.
- 12. Objectives of Financial Management To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders.
- 13. Objectives of Financial Management To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost . To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved.
- 14. Objectives of Financial Management To plan a sound capital structure- There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.
- 15. Functions of Financial Management Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern.
- 16. Cont’d… Estimations have to be made in an adequate manner which increases earning capacity of enterprise
- 17. Functions of Financial Management Determination of capital composition: Once the estimation have been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis.
- 18. Cont’d…. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.
- 19. Functions of Financial Management Choice of sources of funds: For additional funds to be procured, a company has many choices like- Issue of shares and debentures Loans to be taken from banks and financial institutions
- 20. Cont’d… Public deposits to be drawn like in form of bonds. Choice of factor will depend on relative merits and demerits of each source and period of financing.
- 21. Functions of Financial Management Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible.
- 22. Functions of Financial Management Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done in two ways: Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.
- 23. Cont’d… Retained profits – The volume has to be decided which will depend upon expansional, innovational, diversification plans of the company.
- 24. Functions of Financial Management Management of cash: Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintenance of enough stock, purchase of raw materials, etc.
- 25. Functions of Financial Management Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.
- 27. Definition of Financial Planning Financial Planning is the process of estimating the capital required and determining it’s competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise.
- 28. Objectives of Financial Planning Financial Planning has got many objectives to look forward to: Determining capital requirements- This will depend upon factors like cost of current and fixed assets, promotional expenses and long- range planning.
- 29. Cont’d… Capital requirements have to be looked with both aspects: short- term and long- term requirements.
- 30. Objectives of Financial Planning Determining capital structure- The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required in the business. This includes decisions of debt- equity ratio- both short-term and long- term.
- 31. Cont’d…. Framing financial policies with regards to cash control, lending, borrowings, etc. A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner at least cost in order to get maximum returns on investment.
- 32. Importance of Financial Planning Financial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of a concern. This ensures effective and adequate financial and investment policies.
- 33. Cont’d.. The importance can be outlined as- Adequate funds have to be ensured.
- 34. Importance of Financial Planning Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained. Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning
- 35. Importance of Financial Planning Financial Planning helps in making growth and expansion programmes which helps in long-run survival of the company. Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds.
- 36. Importance of Financial Planning Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the company. This helps in ensuring stability and profitability in concern.