FINANCIAL MANAGEMENT 1

1. What is finance

Finance is defined as the management of money and includes activities such as investing,

borrowing, lending, budgeting, saving, and forecasting.

2. Why study financial management

 Helps organizations in financial planning and acquisition of funds;

 Aids organizations to effectively utilize and allocate the funds received or acquired;

 Supports organizations in making critical financial decisions;

 Helps in improving the profitability of organizations;

 Increases the overall value of organizations;

 Provides economic stability.

3. What makes financial management distinct from other field of finance

4. Why is financial management important to people even in other functional areas of a firm

Financial Management is vital for businesses and organizations as it lays the right pathway to
achieve business goals and objectives.

 Helps in Financial Planning

 Assists in acquiring and managing funds
 Helps in funds allocation
 Provides insights to make critical financial decisions
 Cuts down financial costs
 Improves profitability and value of the organization
 Makes employees aware of financial savings and investments
 Helps in planning the future growth of the organization
 Helps in achieving economic stability
 5. How do you exactly describe the relationship between finance, economics and
accounting

Economics:

Economics is the science that studies human behavior between unlimited wants and scarce
resources. There are two types of economics, microeconomics and macroeconomic.
Microeconomics studies the economics at the individual level and macroeconomics as the
economy as a whole.

Finance is related to managing money for the companies, while economics is related to the
framing of monetary policies and exchange rates. Finance deals with accountancy, management,
and business.

Economics is the study of choice (i.e. what you do). Finance is the study of financial allocation
(i.e. where you put your money and why). Accounting is the study of financial reporting and
analysis (i.e. what you did with your money and what you have now). Here’s how they relate in a
business:

Economics helps a business understand its environment and helps it answer questions like:
what’s the demand for my product

Finance helps a business allocate all of its money. It answers questions like: which products
should I invest in, how much should I borrow, etc. Many of the factors determined by economic
principles, such as interest rate, are used in finance.

Accounting helps a business understand what’s going on. It helps it answer questions like: how
much money did we make last year, what’s our profit margin this year, etc. Accounting measures
and analyzes all of the financial decisions.
 6. Compare and contrast financial analysis and financial forecasting

7. How do financial markets help setting the price of a financial assets like bond

8. What is profit maximization

The profit maximization refers to finding the most profitable way to produce goods or provide
any services. It simply means to maximize the profits of the company.

Profit Maximization is the capability of the firm in producing maximum output with the limited
input, or it uses minimum input for producing stated output. It is termed as the foremost
objective of the company.

In financial management terms, profit maximization refers to the process or approach that will
result in increasing the profit of the business or more specifically increases the earnings per share
(EPS) of the business.
9. What is the basic limitation of profit maximization

10. What is the difference between profit maximization and wealth maximization? Under
what condition might profit maximization lead to wealth maximization?

Key Differences between Profit Maximization and Wealth Maximization

The essential difference between the maximization of profits and the maximization of wealth is
that the profits focus is on short-term earnings, while the wealth focus is on increasing the
overall value of the business entity over time.

 The process through which the company is capable of increasing earning capacity known
as Profit Maximization. On the other hand, the ability of the company in increasing the
value of its stock in the market is known as wealth maximization.

 Profit maximization is a short term objective of the firm while the long-term objective is
Wealth Maximization.
 Profit Maximization ignores risk and uncertainty. Unlike Wealth Maximization, which
considers both

 Profit Maximization avoids time value of money, but Wealth Maximization recognizes it.

 Profit Maximization is necessary for the survival and growth of the enterprise.
Conversely, Wealth Maximization accelerates the growth rate of the enterprise and aims
at attaining the maximum market share of the economy.
 Operation research
1. List the five stages of quantitative approach to problem solving

5-steps to Problem Solving

 Define the problem.

 Gather information.

 Generate possible solutions.

 Evaluate ideas and then choose one.

 Evaluate.

2. Give some examples of operations research techniques

3. Discuss the role of OR/MS for decision making in business

Operational Research & Management Science has been defined as the field that provides
analytical methodologies to make better decisions. It offers an ample set of tools to facilitate the
analysis of complex Organisational issues and enlighten decision-making.

Operational Research:-the application of scientific and mathematical techniques to the study and
analysis of problems is called operational research which provide us the data to take the decision

Operations research provides the data to analyst to take the decision and means to apply
scientific, systematic, technical and mathematical methods for taking the appropriate decision
and solve the problem. OR does not provide decisions it only present quantitative data to the
managers. The managers use this quantitative data for taking the decisions and find out the better
decision. Hence, it is used to solve complex problems. OR helps to take decisions about
operation and production
 An operation research (OR) is an analytical, logical and systematic method of problem-
solving and decision-making that is helpful in the management of organizations

Role of Operations Research in decision making

Operations research plays an important role in almost all areas of decision making. Some
areas where operational research (OR) techniques can be used as listed below:

Project analysis and evaluation

1. Explain the major phases of capital budgeting

It is a process of deciding on what action will be taken relative to business expansion. It involves
determination of the possible cost to be incurred and benefit to be derived from known
investment opportunities. The capital budgeting process includes the following significant
phases:

1. Determination of Investment Opportunities (Planning Phase)

The capital budgeting process starts with the brainstorming and determination of all possible
investment opportunities. Capital Expenditure proposals are gathered in this process. Since
capital expenditures requires long term commitment of resources, it is really necessary to have a
careful analysis of each and every investment portfolios.

To effectively evaluate investment proposal, we must have to collect relevant information about
investment opportunity. This way, we can determine the required outlay if we decide to pursue
with the planned expansion.

2. Analysis of Cash Flows (Financial Analysis Phase)

After evaluating the investment and determining the amount needed to implement it, we now go
to the financial analysis of cash flows attached to the proposal. In this process, we will determine
the acceptable discounted cost of capital that we will use if we opt to use the discounted capital
budgeting technique which we have discussed in the other post. In this phase, we can already
determine the net effect in the cash flow of the business once the development is implemented.
This is the basis of our decision making process.

3. Decision Making Process (Decision Phase)

Once technical and financial analysis is done, we can now decide whether or not to go with the
scheme. Many factors will affect our decision. Quantitative and qualitative factors must be given
consideration before making the final decision. We will consider not only the financial capability
of the company to implement the proposal but also the technical capabilities of the company’s
personnel to perform additional functions as may be required by the blueprint.

4. Project Implementation (Implementation Phase)

After making the final decision, a more detailed plan will be developed to make the plot
operational. This is where the technical capacity of the business manpower will be tested. Top
management will assign someone good enough to make a detained plan to be used in the
implementation of the investment proposal.

2. Discuss where we get project idea

3. Explain the risk management process

The Risk Management Process is a clearly defined method of understanding what risks and
opportunities are present, how they could affect a project or organization, and how to respond to
them.

Project risk management includes the processes of conducting risk management planning,
identification, analysis, response planning, and monitoring and control on a project. The
objectives of Project Risk Management are to increase the probability and impact of positive
events, and decrease the probability and impact of events adverse to the project. There are seven
steps to be followed in Risk management they are shown in following Diagram:-

1. Risk Planning: Risk planning is the first step and begins a firm commitment to the entire
risk management approach from all project stakeholders. The resource may include time,
people, and technology for plan properly and for mange the various risk of the IT
projects. Stakeholder also must be committed to the process of identifying, analyzing and
responding to threats and opportunities. Risk planning also focus on preparation

2. Risk Identification: the next step in Risk Management Planning is to identifying the
various risks in project. Both threats and opportunities must be identified. When
identifying threats to a project, they must be identified clearly so that the true problem,
not just a symptom, is addressed. The causes and effects of each risk must be understood
 so that effective strategies and response can be made. It is important to keep in mind that
project risks are rarely isolated. Risks tend to be interrelated and affect the project and its
stakeholders differently.

3. Risks Assessment: once the project risk has been identified and their causes and effects
understood, the next step is requires that is analyze risks. To basic question to be ask,
what is the likelihood of a particular risk occurring? And what is the impact on the
project if it does occur? Risk assessment provides a basic understanding hoe t deal with
project risks. To answer these, qualitative and quantitative approaches can be used.
Assessing this risk helps the project manager and other stakeholders prioritize and
formulate response to those risks that provides the greatest threat or opportunity to the
project.

4. Risk Strategies: the next step in risk planning processes is to determine how to deal with
various project risks. In addition to resources constraints, an appropriate strategy will be
determined by the project stakeholders. A project risk strategy will focus on one of the
following negative risks

 Accept or ignore the risk.

 Avoid the risk completely.

 Reduce the likelihood or impact of the risk.

 Transfer the risk to someone else.

Approaches for positive:

 Exploitation

 Sharing ownership

 Enhancement of the probability of the impact

 Accept and take advantage.

 5. Risk Monitoring and control: once the salient project have been identified and
appropriate responses formulated, the next step entails scanning the project environment
so that both identified and unidentified threats and opportunities can be followed, much
like a radar screen follows ships.

6. Risk Response: Risk monitoring and control provide a mechanism for scanning the
project environment for risks, but the risk owner must commit resources and take action
once a risk threat is made known.

7. Risk Evaluation: Responses to risks and the experience gained provide keys to learning.
A formal and documented evaluation of a risk provides the basis for lessons learned and
lays the foundation for identifying best practices.

The 4 essential steps of the Risk Management Process are:

 Identify the risk.

 Assess the risk.

 Treat the risk.

 Monitor and Report on the risk.

4. The following data for a certain demand for product X in the last 8 years. Required
forecast demand

For the next 5 years and state the forecast linear equation

Year Actual demand

1 100
2 150
3 145
4 180
5 200
6 220
7 230
8 210
 Leadership assignment
1. Discuss the difference between leader and manager

LEADER MANAGER
Leaders have missions to accomplish Managers are goal-oriented
Managers maintain or try to achieve the
Leaders challenge the status quo
status quo
Leaders are unique Managers mimic their competitors
Leaders take risk Managers avoid taking risk
Leaders are willing to learn and grow personally Managers perfect existing, proven skills
Leaders build relationships Managers focus on goals and objectives
Managers direct people to achieve the
Leaders coach people to become a better version of themselves
company goal
Results of leadership are intangible Results of management is measurable
Leadership is qualitative Management is quantitative
Leaders have fans Managers have employees

Key Differences Between Leader and Manager

Here we have divided the differences between leader and manager into two categories, i.e. main
differences and additional differences. Come let us discuss them:

Main Differences:

1. A leader is someone who guides and leads other people. He/She gives a proper direction
and purpose, to their efforts by shaping and molding their behavior, to attain the desired
objective. On the other hand, a manager is someone who is responsible for the
management of the organization. He looks after the day-to-day operations, keeps updated
with the changes in the market, encourages people to work cooperatively, arranges all the
resources, etc.

2. A leader shapes employee’s behavior and defines direction by developing and

communicating organizational vision, and stimulating them to achieve it. On the contrary,
a manager tends to lay down the structure of the organization and delegate authority and
responsibility to the employees.
 3. While a leader performs just one function of management, i.e. providing direction, a
manager performs all the functions of the management, i.e. planning, organizing, staffing,
directing, and controlling.

4. When it comes to the origination of authority, a leader possesses informal authority by

virtue of his/her personal qualities – knowledge, skills, and abilities. As against, a
manager has formal authority, due to his designation or position in the organization.

5. Talking about approach, a leader has a proactive approach, as he can predict future events
and takes preventive actions in advance, whereas a manager has a reactive approach, and
so he/she waits for the right time to take the action.

6. A leader can be found in both formal and informal setup, i.e. in a business organization,
and an informal group i.e. a family, friend circle, batch, etc. In contrast, a manager can be
found in a formal setup only i.e. in a business organization only, irrespective of its size,
type, and nature.

7. To become a leader, one requires leadership qualities, whereas to become a manager one
needs to possess both leadership as well as managerial qualities.

8. Followers comply with the leader’s instructions because of their own will, whereas
employees comply with the instructions and orders of the manager, because of the role
authority of the manager.

2. Discuss the basic leadership style of the organization

1. Democratic Leadership

A democratic leadership style is where a leader makes decisions based on the input received
from team members. It is a collaborative and consultative leadership style where each team
member has an opportunity to contribute to the direction of ongoing projects. However, the
leader holds the final responsibility to make the decision.

Democratic leadership is one of the most popular and effective leadership styles because of its
ability to provide lower-level employees a voice making it equally important in the organization.
It is a style that resembles how decisions are made in company boardrooms. Democratic
leadership can culminate in a vote to make decisions.

Democratic leadership also involves delegation of authority to other people who determine work
assignments. It utilizes the skills and experiences of team members in carrying out tasks.
The democratic leadership style encourages creativity and engagement of team members, which
often leads to high job satisfaction and high productivity. However, establishing a consensus
among team members can be time-consuming and costly, especially in cases where decisions
need to be made swiftly.

2. Autocratic Leadership

Autocratic leadership is the direct opposite of democratic leadership. In this case, the leader
makes all decisions on behalf of the team without taking any input or suggestions from them.
The leader holds all authority and responsibility. They have absolute power and dictate all tasks
to be undertaken. There is no consultation with employees before a decision is made. After the
decision is made, everyone is expected to support the decision made by the leader. There is often
some level of fear of the leader by the team.

The autocratic type of leadership style can be very retrogressive as it fuels employee
disgruntlement since most decisions would not be in the employees’ interests. An example can
be a unilateral increase in working hours or a change in other working conditions unfavorable to
employees but made by leadership to increase production. Without employee consultation, the
manager may not be fully aware of why production is not increasing, thereby resorting to a
forced increase in working hours. It can lead to persistent absenteeism and high employee
turnover.

However, autocratic leadership can be an effective approach in cases where the leader is
experienced and knowledgeable about the circumstances surrounding the decision in question
and where the decision needs to be made swiftly. There are other instances where it is also ideal
such as when a decision does not require team input or an agreement to ensure a successful
outcome.

3. Laissez-Faire Leadership

Laissez-faire leadership is accurately defined as a hands-off or passive approach to leadership.

Instead, leaders provide their team members with the necessary tools, information, and resources
to carry out their work tasks. The “let them be” style of leadership entails that a leader steps back
and lets team members work without supervision and free to plan, organize, make decisions,
tackle problems, and complete the assigned projects.
The laissez-faire leadership approach is empowering to employees who are creative, skilled, and
self-motivated. The level of trust and independence given to the team can prove to be uplifting
and productive and can lead to job satisfaction.

At the same time, it is important to keep such a type of leadership in check as chaos and
confusion can quickly ensue if the team is not organized. The team can end up doing completely
different things contrary to what the leader expects.

According to research, laissez-faire leadership is the least satisfying and least effective.

4. Transformational Leadership

Transformational leadership is all about transforming the business or groups by inspiring team
members to keep increasing their bar and achieve what they never thought they were capable of.
Transformational leaders expect the best out of their team and push them consistently until their
work, lives, and businesses go through a transformation or considerable improvement.

Transformational leadership is about cultivating change in organizations and people. The

transformation is done through motivating team members to go beyond their comfort zone and
achieve much more than their perceived capabilities. To be effective, transformational leaders
should possess high levels of integrity, emotional intelligence, a shared vision of the future,
empathy, and good communication skills.

Such a style of leadership is often associated with high growth-oriented organizations that push
boundaries in innovation and productivity. Practically, such leaders tend to give employees tasks
that grow in difficulty and deadlines that keep getting tighter as time progresses.

However, transformational leaders risk losing track of individual learning curves as some team
members may not receive appropriate coaching and guidance to get through challenging tasks.
At the same time, transformational leaders can lead to high productivity and engagement through
shared trust and vision between the leader and employees.
5. Transactional Leadership

Transactional leadership is more short-term and can best be described as a “give and take” kind
of transaction. Team members agree to follow their leader on job acceptance; therefore, it’s a
transaction involving payment for services rendered. Employees are rewarded for exactly the
work they would’ve performed. If you meet a certain target, you receive the bonus that you’ve
been promised. It is especially so in sales and marketing jobs.

Transactional leadership establishes roles and responsibilities for each team member and
encourages the work to be completed as scheduled. There are instances where incentive
programs can be employed over and above regular pay. In addition to incentives, there are
penalties imposed to regulate how work should be done.

Transactional leadership is a more direct way of leadership that eliminates confusion between
leader and subordinate, and tasks are clearly spelled out by the leader. However, due to its rigid
environment and direct expectations, it may curb creativity and innovation. It can also lead to
lower job satisfaction and high employee turnover.

6. Bureaucratic Leadership

Bureaucratic leadership is a “go by the book” type of leadership. Processes and regulations are
followed according to policy with no room for flexibility. Rules are set on how work should be
done, and bureaucratic leaders ensure that team members follow these procedures meticulously.
Input from employees is considered by the leader; however, it is rejected if it does not conform
to organizational policy. New ideas flow in a trickle, and a lot of red tape is present. Another
characteristic is a hierarchical authority structure implying that power flows from top to bottom
and is assigned to formal titles.

Bureaucratic leadership is often associated with large, “century-old” organizations where success
has come through the employment of traditional practices. Hence, proposing a new strategy at
these organizations is met with fierce resistance, especially if it is new and innovative. New ideas
are viewed as wasteful and ineffective, or even downright risky.
Although there is less control and more freedom than an autocratic leadership style, there is still
no motivation to be innovative or go the extra mile. It is, therefore, not suitable for young,
ambitious organizations on a growth path.

Bureaucratic leadership is suitable for jobs involving safety risks or managing valuable items
such as large amounts of money or gold. It is also ideal for managing employees who perform
routine work.

7. Servant Leadership

Servant leadership involves a leader being a servant to the team first before being a leader. A
servant leader strives to serve the needs of their team above their own. It is also a form of leading
by example. Servant leaders try to find ways to develop, elevate and inspire people following
their lead to achieve the best results.

Servant leadership requires leaders with high integrity and munificence. It creates a positive
organizational culture and high morale among team members. It also creates an ethical
environment characterized by strong values and ideals.

However, other scholars believe servant leadership may not be suitable for competitive situations
where other leaders compete with servant leaders. Servant leaders can easily fall behind more
ambitious leaders. The servant leadership style is also criticized for not being agile enough to
respond to tight deadlines and high-velocity organizations or situations.

3. List the basic requirement that to fulfill of a good leadership

4. List and discuss qualities of leadership of the organization