Introduction to Financial
Management
MODULE 1
The slides provide summary points . Students are
expected to read the reference material, numerical
solved in class and class notes for detailed understanding
Finance is the art and science of managing money in all
walks of life – personal or corporate
Finance is a term for matters regarding the management,
creation, and study of money and investments
Accounts Vs. Finance
Accounting
Accounting is the complete process of identifying, recording,
classifying, summarizing, reporting, interpreting and
analysing the financial information.
It is an art of systematically recording the transactions, for
keeping a proper track of financial statements on the basis of
Accounting Standard (AS).
With the help of the financial statement of an entity, internal
audit, and tax audit is conducted at the end of the financial
year.
Finance
Finance is the science & arts of the acquisition and
allocation (i.e. Spending or investment) of funds
effectively.
It is a broader term, which studies about money and capital
market along with the arrangement and management of
funds by business.
The major aspect of finance is the “time value of money”
i.e. the value of money changes over time.
Key Differences Between
Accounting and Finance
1. Accounting is a methodical record keeping of transactions of
business while Finance is the study of the management of
funds in the best possible manner.
2. Accounting is a subset of Finance
3. The accounting information is helpful for the users of the
financial statement for understanding the financial position of
the business while Finance is useful in forecasting the
performance of the entity in the future.
Key Differences Between
Accounting and Finance
4. Accounting uses Income Statement, Balance Sheet, Cash
Flow Statement, etc. as its tools. On the other hand,
Leverage, Capital Budgeting, Ratio Analysis,
Risk Analysis, Working Capital Management, etc. are
financial tools.
5. There are four branches of accounting (FA, MA,
Auditing and Tax) while there are only three branches of
finance (Public/ Corporate/ Personal).
What is Financial Management?
Financial Management is concerned with the duties of the
financial managers in the business firm.
It is the managerial activity which is concerned with
planning and controlling of the firms financial resources
There exists an inseparable relationship between finance
and other functions of the business like production,
marketing, etc. as all of them include decision making
process which requires finance .
Objective of Financial
Management
Profit Maximisation
Vs
Wealth Maximization
Profit Maximization Wealth Maximization
Objective
Highest value for common
Larger Profits equity
Time frame
Short term Long term
Time Value of Money
Ignores time value of money Considers time value of money
Ignores timing of return Recognises timing of return
Risk and uncertainty
Ignores risk and uncertainty Recognises risk and uncertainty
Why not just Profit Maximization?
It is Vague – profits is not always a true indicator of the
business performance as it can be influenced by macro and
micro economic factors.
It Ignores Risk Factor (uncertainty factor)
It is a short-term objective whereas wealth management is a
long-term objective
It Ignores Time Value factor
So the focus is more on WEALTH MANAGEMENT through
EFFECTIVE DECISION MAKING.
First step that any firm has to make to define
the business that it wants to be in
Once that is done, the next Investment
step is to develop a plan to decisions(Capital
invest in buildings, budgeting and
machineries, fixed assets, working capital)
working capital etc.
The next step is decide from Finance
where to raise the funds decisions(Capital
for the above investments structure )
Distribution of profits and
retaining profits is another
critical matter to look into. Dividend policy
decisions
Decisions under Financial
Management
Investment Which investment/s should the
company accept and what are the
financial implications of
undertaking the same?
Financing How should the company finance
those investments? What should be
the mix of owners’ contribution
equity and borrowed funds, i.e., debt
at any given point in time?
Dividend How much of the income generated
from operations should be returned
to shareholders in the form of
dividends and how much is to be
retained for further investment?
Risk Vs Return
Financial Risk
Market Risk Credit Risk Liquidity Risk Operational Risk
Higher risk associate with higher return
Financial Management &
Management Disciplines
Marketing : to forecast the increase in revenues resulting
from an advertising campaign
Accounting : to estimate the tax savings from a
restructuring
Economics: to determine the increase in demand from
lowering the price of a product
Organizational Behaviour: to estimate the productivity
gains from a change in management structure
Strategy: to predict a competitor’s response to a price
increase
Operations: to estimate the cost savings from a plant
modernization
Goal of Financial
Management ?
Survive.
Avoid financial distress and bankruptcy.
Beat the competition.
Maximize sales or market share.
Minimize costs.
Maximize profits.
Maintain steady earnings growth.
FINANCIAL MANAGEMENT
MAXIMISATION OF SHAREHOLDERS VALUE
FINANCIAL DECISION
Investment Liquidity Financing Dividend
decision decision decision Decision
Return Risk