2. Financial Management
Traditional Approach
(Outsider –Looking in Approach)
Financial management is a
subject which deals with the
procurement of the finance. It
basically deals with basically
three aspects:
1. Institutional arrangement
2. Finding financial instrument
3. Legal and accounting
relationship between a firm
and its source of finance
Modern Approach
Financial management is
concerned with the
acquisition, financing and
management of assets with
some overall foal of mind. It
basically deals with three
issues:
1. Investment Decision
2. Financing Decision
3. Dividend Decision
3. Scope of the Financial Management
Investment Decision
Long Term Investment
• Calculation of Cash
Flows
• Time Value of Money
• Capital Budgeting
Short Term Investment
• Working Capital
Management
• Cash Management
• Inventory Management
• Receivable Management
Financing Decision
• Find the alternative
Source of Finance
• Cost of Capital
• Capital Structure
Dividend Decision
• Dividend Policy
4. The Balance-Sheet Model
of the Firm
The Net Working Capital Investment Decisions
Net
Working
Capital
Shareholders’
Equity
Current
Liabilities
Current
Assets
Fixed Assets
1 Tangible
2 Intangible
Long-Term
Debt
Investment Decisions
“Capital
Budgeting”
Financing Decisions
“Capital Structure”
5. Objective of Financial Management
Profit Maximization
Maximization of Firm’s profit.
Problem in Approach
1. Ambiguity
2. Timing of Benefits
3. Quality of Benefits
Wealth Maximization
Maximization of the market
value of the share.
ABN AMRO: “We aim to maximize long-term shareholder value.”
Cadbury: “Cadbury Schweppes growing objective is growth in
shareowner value”.
Dow Chemical Co.: “Our ultimate objective remains what s has
always been to maximize long-term shareholder value”.
6. Finance – Interface with other areas
Economics
Accounting
Marketing
Production
Human Resource
Research & Development
Finance
7. Role of The Financial Manager
Primary Functions:
1. Performing Financial Analysis
and Planning
2. Investment Decision
3. Financing Decision
4. Dividend Decision
Emerging Roles:
1. Financial Engineering
2. Foreign Exchange Management
3. Treasury Operators
4. Investors Communication
5. Management Control
6. Investment Planning
7. Pension Fund Management
8. Credit Manager
9. Tax Management
10.Insurance Risk Management
8. Financial
managers
Firm's
operations
Financial
markets
(1) Cash raised from investors
(1)
(2) Cash invested in firm
(2)
(3) Cash generated by operations
(3)
(4a) Cash reinvested
(4a)
(4b) Cash returned to investors
(5) Taxes
(4b)
The Role of The Financial Manager
GovernmentGovernment
(5)
9. Agency Problem
Agency Conflicts I: Stock Holders versus Managers
Managerial Compensation
Direct Intervention by Shareholders
Threat of Firing
Threat of Takeovers
Agency Conflicts II: Stock Holders versus Creditors