FINANCIAL MANAGEMENT

INTRODUCTION

BY: MR.ERNEST KAPUMPE

MBA-Finance, Bachelor of Finance and Investments

Analysis, Dip Banking and Finance, Dip Forex Mgt,
ZICA Tech, Cert Risk Mgt and Cert Investments adv.
Definition of Finance
Finance is the study of money
management, the acquiring of funds
(cash) and the directing of these funds
to meet particular objectives.
Definition of Financial Management
Financial management is the system
of Financial operations based on the
Financial objectives of an
organisation that aid businesses to
maximize returns while
simultaneously minimizing risks.
 Other Definition of Financial
Management
 According to Guthmann and Dougall,
“Financial Management or Business
finance can be broadly defined as the
activity concerned with the planning,
raising, controlling and administering the
funds used in business.”
 Financial Management refers to that part of
the management activity which is
concerned with the planning and controlling
of firm's financial resources. It deals with
finding out various sources for raising funds
for the firm. The sources must be suitable
and economical for the needs of the
business.
 NATURE OF FINANCIAL MANAGEMENT
 Financial management is an integral part of overall management
and not merely a staff function.

 It is not only confined to fund raising operations but extends

beyond it to cover utilization of funds and monitoring its uses.
These functions influence the operations of other crucial
functional areas of the firm such as production, marketing and
human resources.

 Hence, decisions in regard to financial matters must be taken

after giving thoughtful consideration to interests of various
business activities.

 Finance manager has to see things as a part of a whole and

make financial decisions within the framework of overall
corporate objectives and policies.
Decisions taken in Financial
Management
Three important decisions involved in this
are:

• Investment decision
• Financing decision
• Dividend decision
 The aim and Basic Function
 Financial management is concerned
with procurement and use of funds. Its
main aim is to use business funds in
such a way that the firm's
value/earning are maximized.

 Financial management provides a

framework for selecting a proper course
of action and deciding a viable
commercial strategy.
 Cont…

The main objective of a business is to

maximize the owner's economic welfare.

This objective can be achieved by:

1. Profit Maximization
2. Wealth Maximization
Profit Maximization
 Profit earning is the main aim of every
economic activity. A business being an
economic institution must earn profit to
cover its costs and provide funds for
growth. No business can survive
without earning profits. Profit is a
measure of efficiency of a business
enterprise. Profits serve as a
protection against risks which cannot
be ensured.
WEALTH MAXIMISATION
 Wealth maximization objective is a
widely recognized criterion with which
the performance a business enterprise
is evaluated. The word wealth refers
to the net present worth of the firm.
Therefore, wealth maximization is
also stated as net present worth.

.
 Cont…

 Net present worth is difference between

gross present worth and the amount of
capital investment required to achieve the
benefits. Gross present worth represents
the present value of expected cash benefits
discounted at a rate, which reflects their
certainty or uncertainty. Thus, wealth
maximization objective as decisional
criterion suggests that any financial action,
which creates wealth or which, has a net
present value above zero is desirable one
and should be accepted and that which
does not satisfy this test should be rejected
 FEATURES OF FINANCIAL
MANAGEMENT
 The financial management of a firm affect
its very survival because the survival of the
firm depends on strategic decisions made
in such important matters such as product
development, market development, entry in
new product line, retrenchment of a
product, expansion of the plant, change in
location, etc. In all these matters
assessment of financial implications is
inescapable.
 Another striking feature of financial
management is financial decision-making is
a continuous decision-making process,
which goes on throughout the corporate
life.
Features continued…
 Since a firm has to operate in an environment
that is dynamic, it has, therefore, to interact
constantly with various environmental forces in
addition to changing conditions of the firm and
adapt and adjust its objectives and strategies
including financial policies and strategies. A one-
time financial plan not subjected to periodic
review and modifications in the context of
changed conditions will be a fiasco because
conditions may change to such an extent that the
plan is no longer relevant and acts as a
hindrance rather than help. Financial planning
should, therefore, not be static. It has to be
continuously adapted to changing conditions.
 SCOPE OR CONTENT OF
FINANCIAL MANAGEMENT

1. Estimating Financial Requirements

2. Deciding Capital Structure
3. Selecting a source of Finance
4. Selecting a Pattern of Investment
5. Proper Cash Management
6. Implementing Financial Controls
7. Proper use of Surpluses
 Cont….

 1. Estimating Financial Requirements:

The first task of a financial manager is to estimate
short-term and long term financial requirements of his
business. For this purpose, he will prepare a financial
plan for present as well as for future. The amount
required for purchasing fixed asset as well as needs of
funds for working capital will have to be ascertained.
The estimations should be based on sound financial
principles so that neither there are inadequate nor
excess funds with the concern.

 2. Deciding Capital Structure:

The capital structure refers to the kind and proportion of
different securities for raising funds. It may be wise to
finance fixed assets through long-term debts. A decision
about various sources of funds should be linked to cost
of raising funds. If cost of raising funds is very high then
such sources may not be useful for long.
 Cont….

 3. Selecting a source of Finance:

After preparing capital structure, an appropriate
source of finance is selected. Various sources from
which finance may be raised include: share capital,
debentures, financial institutions, commercial banks,
public deposits etc. If finances are needed for short
periods then banks, public deposits and financial
institutions may be appropriate, on the other hand if
long term finances are required then share capital
and debentures may be useful.

• 4. Selecting a Pattern of Investment:

When funds have been procured then a decision
about investment pattern is to be taken. A decision
will have to be taken as to which assets are to be
purchased? The funds will have to be spent first on
fixed asset and then an appropriate portion will be
retained for working capital.
 Cont…
 5. Proper Cash Management:

Cash management means to assess various

cash needs at different times and then make
arrangements for arranging cash.

Cash may be required to purchase raw

material, make payment to creditors, meet
wage bills, meet day to day expenses etc. The
usual sources of cash may be cash sales,
collection of debts and short term
arrangements with bank etc. The cash
management should be such that neither there
is a shortage of it and nor it is idle.
6. Implementing Financial
Controls
An efficient system of financial management
necessitates the use of various control devices
generally used are :

 Return on Investment
 Budgetary Control
 Break Even Analysis
 Cost Control Ratio Analysis
 Cost and Internal Audit

Return on investment is the best control device to

evaluate the performance of various financial
policies.
 Cont…
 7. Proper use of Surpluses:

A judicious use of surpluses is essential for

expansion and diversification plans and also in
protecting the interests of shareholders.

The ploughing back of profits is the best policy

of further financing but it clashes with the
interest of the shareholders. A balance should
be struck in using funds for paying dividend and
retaining earnings for financing expansion plans
etc. The market value of the shares will also be
influenced by the declaration of dividend and
expected profitability in future.
 CHALLENGES IN FINANCIAL MANAGEMENT
 Treasury Operations:
Short-term fund management must be more sophisticated.
Finance managers could make speculative gains by anticipating
interest rate movements.

 Foreign Exchange:
Finance Managers(CFO, Fin.Dir, Fin.Mgr)will have to weigh the
costs and benefits of transacting in foreign exchange particularly
now that the Zambian economy is going global and the future
value of the Kwacha has became difficult to predict.

 Financial Structuring:
An optimum mix between debt and equity will be essential. Firms
will have to tailor financial instruments to suit their investors‟
needs. Pricing of new issues is also an important task for the
Finance Manager‟s portfolio now.
 Cont…
 Maintaining Share Prices:
In the premium equity era, firms must ensure that share
prices stay healthy. Finance managers will have to devise
appropriate dividend and bonus policies.
 Ensuring Management Control:
Equity issues at premium mean management may lose
control if it is unable to take up its share entitlements.
Strategies to prevent this and also initiate other steps to
prevent dilution of management control are vital.
 Corporate governance:
Issues relating to Management of stakeholders interests
(Conflict of interests).
 Political pressure:
Change of financial management policies by the
government.
 THE END

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