Lecture 1 & 2.pptx
- 2. Content • Introduction to finance and its management • Scope of finance • Importance of Finance Function in an organization
- 3. LEARNING OBJECTIVES Explain the nature of finance and its interaction with other management functions Review the changing role of the finance manager and his/her position in the management hierarchy
- 4. Finance may be defined as the art and science of managing money. Financial Management is that managerial activity which is concerned with planning and controlling of the firm’s financial resources. Financial Management is concerned with duties of financial managers in business firms. Draws heavily on related disciplines. Financial Management
- 5. Important Activities of a Business Firm Production Marketing Finance
- 6. Real And Financial Assets Real Assets: Can be Tangible or Intangible • Tangible real assets are physical assets that include plant, machinery, office, factory, furniture and building. • Intangible real assets include technical know-how, technological collaborations, patents and copyrights. Financial Assets, also called securities, are financial papers or instruments such as shares and bonds or debentures.
- 7. Equity and Borrowed Funds Shares represent ownership rights of their holders. Shareholders are legal owners of the company. Shares can of two types: • Equity Shares • Preference Shares Loans, Bonds or Debts: represent liability of the firm towards outsiders. Lenders are not owners of the company. These provide interest tax shield.
- 8. Equity and Preference Shares Equity Shares are also known as ordinary shares. • Do not have fixed rate of dividend. • There is no legal obligation to pay dividends to equity shareholders. Preference Shares have preference for dividend payment over ordinary shareholders. • They get fixed rate of dividends. • They also have preference of repayment at the time of liquidation.
- 9. Finance and Management Functions All business activities involve acquisition and use of funds. Finance function makes money available to meet the costs of production and marketing operations. Financial policies are devised to fit production and marketing decisions of a firm in practice.
- 10. • Financial management mainly focuses on a) Efficient management of every business b) Arrangement of funds c) All elements of acquiring and using means of financial resources for financial activities
- 11. Finance Functions Finance functions or decisions can be divided as: Long-term financial decisions Long-term asset-mix, or investment decision, or capital budgeting decisions. Capital-mix or financing decision or capital structure and leverage decisions. Profit allocation or dividend decision o Short-term financial decisions oShort-term asset-mix or liquidity decision or working capital management.
- 13. Financial Procedures and Systems • For effective finance function some routine functions have to be performed. Some of these are: • Supervision of receipts and payments and safeguarding of cash balances • Custody and safeguarding of securities, insurance policies and other valuable papers • Taking care of the mechanical details of new outside financing • Record keeping and reporting
- 14. Poll Question • Finance Function comprises of a) Safe custody of funds only b) Expenditure of funds only c) Procurement of finance only d) Procurement & effective use of funds
- 15. Financial Manager’s Role • Raising of Funds (Traditional Approach) • Allocation of Funds • Profit Planning • Understanding Capital Markets
- 16. • Financial management process deals with a) Investments b) Financing decisions c) Both a and b d) None of the above
- 17. Goals of Financial Management • Profit maximization (profit after tax) • Maximizing earnings per share • Wealth maximization
- 18. Profit Maximization • Maximizing the rupee income of the firm So that resources are efficiently utilized It is an appropriate measure of the firm’s performance To include interest of the society as well
- 19. Objections to Profit Maximization • It is vague • It ignores the timing of returns • It ignores risk • In new business environment profit maximization is regarded as – Unrealistic – Difficult – Inappropriate – Immoral
- 20. Maximizing Profit after Taxes or EPS Maximizing PAT or EPS does not maximize the economic welfare of the owners. Ignores timing and risk of the expected benefit Market value is not a function of EPS. 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.
- 21. • Also known as value maximization/net present worth maximization • Maximizes the net present value of a course of action to shareholders. • Benefits are measured in terms of cash flows. • Accounts for the timing and risk of the expected benefits. • Fundamental objective—maximize the market value of the firm’s shares. Shareholders’ Wealth Maximization 21
- 22. • SWM requires a valuation model. • The financial manager must know, – How much should a particular share be worth? – Upon what factor or factors should its value depend? Need for a Valuation Approach 22
- 23. Poll Question • The objective of wealth maximization takes into account a) Amount of returns expected b) Timing of anticipated returns c) Risk associated with uncertainty of returns d) All of the above
- 24. • 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. Risk-return Trade-off 24
- 25. Risk Return Trade-off 25 Risk and expected return move in tandem; the greater the risk, the greater the expected return.
- 27. Poll Question • The only feasible purpose of financial management is a) Wealth Maximization b) Sales Maximization c) Profit Maximization d) Assets maximization
- 28. Organization of Finance Functions Reason for placing finance functions in the hands of top management • Financial decisions are crucial for the survival of the firm. • Financial actions determine solvency of the firm. • Centralization of the finance functions can result in a number of economies to the firm.
- 29. Organization of Finance Functions (Contd.) Financial organization of a large company Organization of finance functions in a multidivisional company
- 30. Status and Duties of Finance Executives • The exact organizational structure for financial management differs across firms. • The financial officer may be known as the financial manager in some organizations, while in others as the vice-president of finance or the director of finance or the financial controller.
- 31. Role of Treasurer and Controller • Two officers—the treasurer and the controller—may be appointed under the direct supervision of CFO to assist him or her. • The treasurer’s function is to raise and manage company funds while the controller oversees whether funds are applied correctly.
- 32. THANK YOU 11