This document provides an overview of financial management. It discusses the definition of finance and financial management, the evolution of financial management into a distinct field of study, key financial decisions made by firms, and the goal of maximizing shareholder wealth. It also covers the relationship between finance, economics, and accounting. The three key areas of financial decision making are capital budgeting, capital structure, and working capital management. Financial management aims to maximize shareholder value by ensuring the present value of future cash flows from business proposals exceeds initial cash outlays.
This document provides an overview of financial management. It discusses the definition of finance and financial management, the evolution of financial management into a distinct field of study, key financial decisions made by firms, and the goal of maximizing shareholder wealth. It also covers the relationship between finance, economics, and accounting. The three key areas of financial decision making are capital budgeting, capital structure, and working capital management. Financial management aims to maximize shareholder value by ensuring the present value of future cash flows from business proposals exceeds initial cash outlays.
This document provides an overview of financial management. It discusses the definition of finance and financial management, the evolution of financial management into a distinct field of study, key financial decisions made by firms, and the goal of maximizing shareholder wealth. It also covers the relationship between finance, economics, and accounting. The three key areas of financial decision making are capital budgeting, capital structure, and working capital management. Financial management aims to maximize shareholder value by ensuring the present value of future cash flows from business proposals exceeds initial cash outlays.
This document provides an overview of financial management. It discusses the definition of finance and financial management, the evolution of financial management into a distinct field of study, key financial decisions made by firms, and the goal of maximizing shareholder wealth. It also covers the relationship between finance, economics, and accounting. The three key areas of financial decision making are capital budgeting, capital structure, and working capital management. Financial management aims to maximize shareholder value by ensuring the present value of future cash flows from business proposals exceeds initial cash outlays.
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Chapter 1
FINANCIAL MANAGEMENT : AN OVERVIEW
Definition Finance is the art and science of managing money. Financial services is concerned with the design and delivery of advice and financial products to individuals, businesses and governments. Financial Management is concerned with the duties of the financial mangers in the business firm
EVOLUTION OF FINANCIAL MANAGEMENT
Financial management emerged as a distinct field of study at the turn of the 20th century. Its evolution may be divided into three broad phases - the traditional phase, the transitional phase, and the modern phase. The modern phase began in mid-1950s and has been marked by infusion of ideas from economic theory and application of quantitative methods The distinctive features of the modern phase are:
FINANCIAL DECISIONS IN A FIRM
Capital Budgeting
Capital Structure
Dividend Decisions
Working Capital Management
GOAL OF FINANCIAL MANAGEMENT
FINANCE THEORY RESTS ON THE PREMISE THAT MANAGERS SHOULD MANAGE THEIR FIRMs RESOURCES WITH THE OBJECTIVE OF ENHANCING THE FIRMs MARKET VALUE.
The quest for value drives scarce
resources to their most productive uses and their most efficient users. The more effectively resources are deployed, the more robust will be the economic growth and the rate of improvement in our standard of
SHAREHOLDER ORIENTATION IN INDIA
In the wake of liberalization, globalization, and institutionalization of the capital market, there is a greater incentive to focus on creating value for shareholders. The following observations are clear indications. Dhirubai Ambani : In everything that we do, we have only one supreme goal, that is to maximize your wealth as India's largest investor family. Anand Mahindra : All of us are beginning to look at companies as owned by shareholders. The key is to raise shareholder returns
ALTERNATIVE GOALS Maximization of Profit This goal is not as inclusive a goal as maximization of shareholders wealth. Its limitations are: Profit in absolute terms is not a proper guide to decision making. It should be expressed either on a per share basis or in relation to investment. It leaves considerations of timing and duration undefined. It glosses over the factor of risk Maximizations of EPS or ROE While these goals do not suffer from the first
THE FUNDAMENTAL PRINCIPLE OF FINANCE
A business proposal-regardless of whether it is a new investment or acquisition of another company or a restructuring initiative raises the value of the firm only if the present value of the future stream of net cash benefits expected from the proposal is greater than the initial cash outlay required to implement the proposal. CASH ALONE MATTERS Investors
Investors provide the initial cash required
The business proposal
Shareholders Lenders
to finance the business proposal
DECISIONS, RETURN, RISK,
AND MARKET VALUE
ORGANISATION OF FINANCE FUNCTION
FINANCIAL ASSETS Financial assets are intangible assets that represent claims to future cash flows. The terms financial asset, instrument, or security are used interchangeably Examples : A 10-year bond issued by the GOI carrying an interest rate of 7 percent.
Equity shares issued by TCS to the general
investing public through an initial public offering. Call options granted by WIPRO to its employees.
RELATIONSHIP OF FINANCE TO ECONOMICS Macroeconomic environment defines the setting within
which the firm operates. GDP growth
rate, savings rate, fiscal deficit, interest rates, inflation rate, exchange rates, tax rates, and so on have an impact on the firm
Microeconomic theory provides the conceptual underpinnings for the tools of financial decision making.
RELATIONSHIP OF FINANCE TO ACCOUNTING
Accounting is concerned with
score keeping, whereas finance is aimed at value maximizing. The accountant prepares the accounting reports based on the accrual method. The focus of the financial manager is on cash flows. Accounting deals primarily with the past. Finance is concerned mainly with the future.
SUMMING UP There are three broad areas of financial decision making, viz., capital budgeting, capital structure, and working capital management. Finance theory, in general, rests on the premise that the goal of financial management should be to maximize the wealth of shareholders. A business proposal raises the value of the firm only if the present value of the future stream of net cash benefits expected from the proposal is greater than the initial cash outlay required to implement the proposal. A confluence of forces appears now to be prodding Indian companies to
The treasurer is responsible mainly for
financing and investment activities and the controller is concerned primarily with accounting and control.
Financial management has a close
relationship to economics on the one hand and accounting on the other. Thanks to the changes in the complexion of the economic and financial environment in India from early 1990s, the job of the financial manager in India has become more important complex, and demanding.
