Learning outcome#1:

Evaluate the role and purpose of the financial management

function
The financial management function in the organization

Role and purpose of financial management

Financial management Definitions, Goals
& Scope
What is Finance?

WHAT IS FINANCE?
Finance is the science and art of how individuals and firms raise, allocate, and invest money.

Managerial finance Concerns the duties of the financial manager in a business

At the personal level, finance is concerned with individuals’ decisions about:

• How much of their earnings they spend?
• How much they save?
• How they invest their savings ?

In a business context, finance involves:

• How firms raise money from investors?
• How firms invest money in an attempt to earn a profit?
• How firms decide whether to reinvest profits in the business or distribute them back to investors?
 Principles of Financial Management

Where do we use finance?

There are three main areas of finance applications including:
1. For individuals: Personal finance is the area of finance that helps in financial management for individuals. These
include budgeting, investment decisions, tax saving and building financial corpus.

2. For public: Public finance covers this area where government strategies, manages and applies monetary policy
for the citizens of the country. Inflation rate, income tax, bank rates, etc. are some examples of public finance.

3. For business: This area includes business finance. All financial decisions that impact and enhance the finances of
an organisation form a part of corporate finance. Most organisations have a dedicated finance department and a
finance manager who is responsible for looking after the financial matters of the company.

Why use Finance?

Finance is a very important subject that ensures the stability of economies, banking systems, financial markets,
businesses and individuals. With finance, we are able to sustain, manage, invest and grow [Link] proper
financial planning, business would become inoperable since they can face the lack of capital for crucial business
operations. Without the knowledge of finance, investment will be non-existent and money will no longer be able to
 Financial management Definitions

Financial management Definitions :

Financial management refers to the application of management principles to financial resources to better manage

them.

It is a management skill to plan, organize, direct and control the financial activities of the enterprise.

According to the definition, one of the objectives of financial management is dealing with the procurement of funds

and the effective utilization in business.

According to Weston and Bringham, it is an area of financial decision making, harmonizing enterprise goals and

individual motives.

Businesses can have effective financial management with a proper set of tools, practices and strategies. Since

finances are always limited, it is important to properly manage them. Especially if you are running a business, it is a

crucial activity for the sustenance of every business. Without proper financial management, your business may soon

lack sufficient funds to carry out business operations. Through this management activity, businesses can ensure no
 Principles of Financial Management

Financial management Purpose :

In short, the Purpose of financial management is to create financial discipline and improve the financial well-being

of an organization.

These objectives guide financial managers in determining how much to invest and how much to retain, among

other functions. It includes various management decisions that address short-term and long-term needs, ensuring

availability of funds when needed and how funds should be distributed. organization.
Principles of Financial Management
 Principles of Financial Management

Financial management Objectives/Importance :

1. Financial Management Helps Businesses Succeed

Another problem that arises from not managing finance is bad planning and missing opportunities to improve

profits. One can say with certainty that a lack of management of money will undoubtedly lead to businesses failing.

Without experts in this subject, it is possible that business owners may overestimate revenues and plan for more

expenses. They will be caught by surprise and be at a loss to know what to do.

2. Follow Rules And Manage Taxes

Helping companies to maintain their books and mitigating tax burden are essential functions of financial

management. Maintaining proper accounts is very important for all firms. This will not only help to follow

regulations but also make tax calculations very easy. Finance departments also help to know what taxes to be paid.

They also help in finding legal ways to reduce a company’s tax burden.
 Principles of Financial Management

Financial management Objectives/Importance :

3. Get Better Access To Finance

All companies need money to run businesses and to expand them. They must look at various sources for this

valuable commodity. Finance managers help in finding suitable sources that will not be very expensive. They will

also be able to advise business people about what methods to raise funds are most appropriate for their

companies. These experts will also prepare business plans to convince lenders to finance that firm.

4. Control Business Costs

Every company spends money on its regular operations. Companies must meet certain essential fixed costs. Sound

financial management will help to cut costs. Budgeting is one of their responsibilities, and this helps to plan and

reduce expenses. By spending within available funds, it is possible to minimize unnecessary bank charges.

Reasonable control of costs will provide for surpluses that can be invested wisely to earn more.
 Principles of Financial Management

Financial management Objectives/Importance :

5. Measure Your Success

Money is the benchmark used for a company’s success. When they earn more money, they are said to be more

successful. But one would need strict financial management to improve earnings. Organizations also need these

professionals to work out how much profits they have made and compare it with previous years. Financial experts

also see how a company has performed vis-a-vis its competitors. Such information motivates everyone in a firm

and makes them work harder.

6. Improve Weak Areas

Finance heads use analytics to know which areas in a business are bringing profits. They can give reports about

how various departments in an organization are performing financially. It is also a function of financial management

to assess what products are giving better profits. They can process this information for every activity of a business.

Such analysis will help in improving weak areas and support profitable activities to perform better.
 Principles of Financial Management

Financial management Objectives/Importance :

7. Optimizing Marketing Activities

Marketing is a vital activity for any firm because it helps bring in revenue. But it is also a department that spends a

considerable amount of money. So, one must necessarily know what returns each campaign brings. If any

advertising program is not earning much, it must be optimized or temporarily stopped. Finance managers provide

accurate information about returns from marketing campaigns.

8. Focus On Growth Areas

All companies must expand their activities to grow. But there must be concrete information about where it is most

beneficial to invest to improve earnings. Finance departments can help identify such areas where spending money

can bring in excellent returns. It may be possible that investing in new machinery will help to increase production

and satisfy new market demands. This is a significant role of financial management in business.
 Principles of Financial Management

Financial management Objectives/Importance :

9. Enhancing Staff Strength

Despite rapid automation of various processes in organizations, there is no way machines can replace humans.

Devices also require people to program and operate them. This is why the human workforce is very crucial for any

firm. But employing more people will need additional expenses. Financial management helps in finding out which

positions are most profitable to fill. It will also enable companies to increase salaries to deserving employees.

10. Predict Risks And Avoid Them

The role of finance departments includes forecasting future events using analytics. It helps to know risks that can

occur in the coming period. Comparing actual results with forecasted figures will also help to know if there is any

area that needs to be taken care of. Companies can be aware of downturns in their financial position and take care

to act against that. Finance managers also continue to study markets to know factors that are likely to affect a

company’s position.
 Principles of Financial Management

Is the profit maximization the same of wealth ,maximization?

 Principles of Financial Management

Point to difference Profit Maximization Wealth Maximization

Definition According to this approach action that This approach is known as value
increases profit should be undertaken and maximization or net present value
those decreases of profit are to be avoided. maximization of wealth.

Quality of benefits Profit maximization cannot consider the Wealth maximization considers both the
quality and quantity dimensions of benefits. quality and quantity dimensions of
benefits.
Time value of Profit maximization cannot considered the Wealth maximization considered the time
money time value of money value of money
Acceptance Profit maximization approach is not Wealth maximization approach is
universally accepted. universally accepted
Ambiguity The profit maximization is based on profit It can avoids it can any ambiguity in
accounting the profit.
Time Profit maximization is a short term process Wealth maximization is a long term
process
Cash flow concept Profit maximization ignores the cash flow Wealth maximization is not ignores cash
concept flow concept
 GOAL OF THE FIRM: MAXIMIZE SHAREHOLDER WEALTH

Decision rule for managers: only take actions that are expected to increase the share price.

Figure 1.2 Share Price Maximization Financial decisions and share price
Financial Management Goals

FINANCIAL GOALS

Primary Goal General Goals

Maximization of Shareholder [Link]

Wealth Shareholders’ wealth can
[Link] financial distress and bankruptcy
be measured as the Current value
per share of existing share [Link] the competition
[Link] sales or market share
[Link] costs
[Link] profits
[Link] steady earnings growth
Financial Management Goals

FINANCIAL GOALS

Medium term
Long term Goals Short term Goals
Goals
3-5 years Less than 1 year
1-3 years

1. Increase wealth of the 1. Monitoring of costs on a continuous basis

shareholder. 1. Annual revenue growth target through budgets
2. Achieve sustainable 2. Net income improvement and 2. Suitable cost reduction techniques
growth. market expansion. wherever the cost are high
3. Training targets or strengthening 3. Minimization of cost of borrowed capital
the executive management team from outside through financial discipline
 Principles of Financial Management

Financial management Approach

Traditional Modern
Approach Approach

[Link] Approach to Financial Management

Earlier financial management’s main focus was on procuring resources that are either short- or long-term,

from financial institutions like banks. The financial manager would then mobilise these funds through various

assets that can be traded, which include bonds and equity shares, among others. In the traditional approach,

the finance function aligns with accounting and complies with legal standards.
 Principles of Financial Management

[Link] Approach to Financial Management

The modern approach is necessary as globalisation started to transform the global economy. The financial industry

has seen many changes due to recent technological innovations in the recent years. These factors have contributed

to a larger and deeper finance environment that needs in-depth analysis. The old approach no longer works as it

cannot reach the range of decisions that financial management demands today.

The modern financial management approach focuses on efficiency. The financial manager of today needs to

evaluate a company’s asset requirements, funds and recognise alternative ways how to finance and utilise the

assets.
 Principles of Financial Management

The modern financial manager is responsible for making three types of decisions that are interrelated

to one another:

1. Investment Decisions: includes investment in fixed assets (called as capital budgeting). Investment in current

assets are also a part of investment decisions called as working capital decisions.

2. Financing Decisions: These refer to ensuring a firm’s working capital is optimum. Using the basic finance

principles on capital structure (debt and equity), depreciation, along with observing the stock market, s/he

makes a finance decision, be it, for raising or arranging funds.

3. Dividend Decisions: It is basically the pay-out to the shareholder from your business’s profits. Modern financial

managers determine the company’s dividend policies.

Financial Strategies
 Advantages & Disadvantages of Financial Management

Advantages of Financial Management Disadvantages of Financial Management

Better Decision Making Costly

Transparency Of Information Rigidity

Finance Control Determination Of Standards

Enhances Managerial Efficiency Difficulty In Applying Control Measures

Profit Maximization And Wealth Maximization Problems In Recognizing Deviation

Determines Adequate Capital

Avoids Debts
PRINCIPLES OF FINANCIAL MANAGEMENT
Principles of Financial Management

Financial management Principles :

The principles of financial management work as a guideline for managing financial activities. If you properly

understand and apply the core principles in your financial activities then you will never become financially

loser. To get the most benefit from a financial action, the person needs to be careful enough to handle and

trade-off the risk and return.

Principles of Financial Management

Risk ,Return
Trade-off

Individuals Market price

respond to reflect
incentives information

principles of
financial
management

Forecast Cash Diversification

Flows of both
Investment
“cash is a king” and Borrowing

Time Value of
Money
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Financial Management Principles
doc.#1
FINANCIAL SUSTAINABILITY
Financial sustainability

History of Finance /Sustainable Finance:

[Link]
What Does Sustainable Finance Mean?
[Link]
Financial sustainability
 Financial sustainability

“Sustainable development: is development that meets the needs of the present without compromising the

ability of future generations to meet their own needs,”

Financial sustainability is a tool used to help the organization or initiative - and more importantly, its goals -

thrive. And allow it to continue thriving over the long term.

Why is financial sustainability important?

Sustainable businesses deliver financial returns in the short and long term while generating positive value for

society and operating within environmental constraints. Organizations that fail to address environmental and social

risks will be less resilient to these challenges, and so put their own existence at risk.
 Financial sustainability

How do you maintain financial sustainability?

1. Review your current and future capital needs and determine how you will address your anticipated growth.

2. Analyse and work to balance your profitability.

3. Assess and improve your reporting and planning capabilities.

4. Evaluate and understand the purchasing processes of your customers and key prospects.

What are the 4 pillars of financial sustainability?

5. Diversification of revenue

6. Optimization of capital expenditures

7. Better management of fund

8. Sustainable socio-economic development

FINANCIAL MANAGEMENT FUNCTIONS
Financial Management functions

FINANCIAL MANAGEMENT FUNCTIONS

Financial Planning,
forecasting, controlling Allocation Cash Flow Capital Risk
& &Utilization of Managemen Managemen Managemen
Financial Resources t t t
Making Decisions

Sources of Investment Disposal of

funds of funds surplus

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Financial Management Function
doc.#3
 Advantages & Disadvantages of Financial Management Functions

Advantages & Disadvantages of Financial Management Functions #1: Financial planning, controlling &forecasting

Financial planning Advantages Financial planning Disadvantages

Have significant financial control Time-consuming process

Be prepared for unforeseen circumstances Predictions and actuality might not be in line

Define a purpose You must keep track of it constantly

Stay away from stress and anxiety about future

finances
Reap the benefits of your hard work in your old
age

Get tax benefits

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Financial management function #1 Planning, controlling &
 Advantages & Disadvantages of Financial Management Functions

Advantages & Disadvantages of Financial Management Functions #1: Financial planning, controlling &forecasting

Advantages of Financial Control Disadvantages of Financial Control

Guide for Future Activities Setting of Standards

Controlling Finance Rigidity

Increases Managerial Efficiency Difficulty in Implementation of Control Measures:

Ascertaining Adequate Capital Difficulty in Identification of Deviation

Maintenance of Financial Stability: High Costs

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Financial management function #1 Planning, controlling &
 Advantages & Disadvantages of Financial Management Functions

Advantages & Disadvantages of Financial Management Functions #1: Financial planning, controlling &forecasting

Advantages of Forecasting Disadvantages of Forecasting

Easier financial planning Inaccurate information

Reduced spending Time-consuming

Learning opportunities Difficult for new businesses

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Financial management function #1 Planning, controlling &
 Advantages & Disadvantages of Financial Management Functions

Advantages & Disadvantages of Financial Management Functions #2: Allocation and Utilization of fund- A: Source of finance

Source of finance Advantages of Source of fund Disadvantages of source of fund

Owners capital quick and convenient the owner might not have enough savings or may
doesn’t require borrowing money need the cash for personal use once the money is
no interest payments to make gone, it’s gone.
Retained profits quick and convenient once the money is gone, it is not available for any
easy access to the money future unforeseen problems the business might
no interest payments to make face
Bank loan easy and quick to access have to pay interest
can get a significant amount of money at difficult for a new business to access
one time
Share issue can gain lots of money quickly give away part of the business
no interest payable leaves a business open to takeovers
shareholders receive dividends
Advantages & Disadvantages of Financial Management Functions

Advantages & Disadvantages of Financial Management Functions #2: Allocation and Utilization of fund- B: investment

Advantages of investment Disadvantages of Investment

Advanced Portfolio Management Time Consuming

Dividend Reinvestment Management Abuses

Risk Reduction (Safety) Tax Inefficiency

Convenience and Fair Pricing Poor Trade Execution

Odds of Good Returns in Short Time Volatile Investments

Minority Ownership Brokerage Commissions Kill Profit Margin

Advantages & Disadvantages of Financial Management Functions

Advantages & Disadvantages of Financial Management Functions #2: Allocation and Utilization of fund- c: Disposal of surplus

Advantages of Disposal surplus Disadvantages of Disposal surplus

Advantages & Disadvantages of Financial Management Functions

Advantages & Disadvantages of Financial Management Functions #3: cash management

Advantages of Cash Management Disadvantages of Cash Management

Cash management allows estimating the cash profits and Cash management ignores the accrual concept of
not just profits from outstanding incomes and credit sales. accounting &It ignores non-cash transactions.

It helps in detecting cash embezzlement. Management of cash requires the specified skills of the
person managing it

It allows for speeding up the working capital cycle. It is a time-consuming process.

It helps in rewarding such debtors that make quicker It is historical in nature; that is; it rearranges the current
payments information provided in the profit and loss statement and
the balance sheet.
It speeds up the operations of an organization It is not a substitute for a profit and loss statement.
Advantages & Disadvantages of Financial Management Functions

Advantages & Disadvantages of Financial Management Functions #4: Capital management- A: Capital Structure-Debt

Advantages of Capital Structure – Debt Disadvantages of Capital Structure –Debt

You won’t give up business ownership You must repay the lender

There are tax deductions High rates

Debt financing can save a small business big It impacts your credit rating
money

You’ll establish and build business credit You’ll need collateral

Debt can fuel growth

 Advantages & Disadvantages of Financial Management Functions

Advantages & Disadvantages of Financial Management Functions #4: Capital management- A: Capital Structure-Equity

Advantages of Equity Financing

The main advantage of equity financing for small businesses, which are likely to struggle with cash flow initially,
is that there is no obligation to repay the money. Equity financing is also easier to acquire than debt financing for
early-stage or start-up businesses. Equity investors seek growth opportunities, so they are often willing to take a
chance on a good idea. But debt financiers seek security, so they usually require the business to have some sort
of track record before they will consider making a loan. Another advantage of equity financing is that investors
often prove to be good sources of advice and contacts for small business owners.

Disadvantages of Equity Financing

The main disadvantage of equity financing is that the founders must give up some control of the business. If
investors have different ideas about the company's strategic direction or day-today operations, they can pose
problems for the entrepreneur. In addition, some sales of equity, such as initial public offerings, can be very
complex and expensive to administer. Such equity financing may require complicated legal filings and a great
deal of paperwork to comply with various regulations. For many small businesses, therefore, equity financing
may necessitate enlisting the help of attorneys and accountants.
Advantages & Disadvantages of Financial Management Functions

Advantages & Disadvantages of Financial Management Functions #4: Capital management- B: Working Capital Management

Advantages of working Capital Disadvantages of working Capital

Ensures Liquidity Only Monetary Factors

Evades Interruptions in Operations Non-Situational

Enhance Profitability Based On Data

Improves Financial Health Problem in Interpretation

Value Addition
 Advantages & Disadvantages of Financial Management Functions

Advantages & Disadvantages of Financial Management Functions #4: Capital management- C:Capital Budgeting

Advantages of Capital Budgeting Disadvantages of Capital Budgeting

Capital budgeting helps a company understand the various Capital budgeting decisions are for the long term and are
risks involved in an investment opportunity. And how these majorly irreversible in nature.
risks affect the returns of the company.
It helps the company to make long-term strategic These techniques are mostly based on estimations and
investments assumptions as the future will always remain uncertain

It helps to make an informed decision about an investment Capital budgeting still remains introspective as the risk
considering all possible options factor, and the discounting factor remains subjective to the
manager’s perception.

All the techniques/methods of capital budgeting try to A wrong capital budgeting decision can affect the company’s
increase shareholders’ wealth and give the company an edge long-term durability. And hence it needs to be done
in the market. judiciously by professionals who understand the project
well.
 Advantages & Disadvantages of Financial Management Functions

Advantages & Disadvantages of Financial Management Functions #5 Risk Management

Advantages of Risk Management Disadvantages of Risk Management

It encourages the firm to think about its threats. In Qualitative risk assessment is subjective and lacks
particular, risk management encourages it to analyze risks consistency.
that might otherwise be overlooked.
In clarifying the risks, it encourages the firm to be better Unlikely events do occur but if the risk is unlikely enough to
prepared. In other words, it helps the firm to manage itself occur is maybe better to simply retain the risk and deal with
better the result if the loss does in fact occur.

It lets the organization prioritize its investment and reduces Spending too much time assessing and managing unlikely
internal disputes about how money should be spent risks can divert resources that could be used more profitably.
It reduces duplication of systems. Integration of
environmental and health and safety systems are one
instance.
THE ROLES OF THE FINANCE FUNCTION IN ORGANISATIONS
The roles of the finance function in organisations
 The roles of the finance function in organisations

LEGAL FORMS OF BUSINESS ORGANIZATION

A sole proprietorship is a business owned by one person and operated for his or her own profit.

A partnership is a business owned by two or more people and operated for profit.

A corporation is an entity created by law. Corporations have the legal powers of an individual in that it can

sue and be sued, make and be party to contracts, and acquire property in its own name.
The roles of the finance function in organisations
THANK YOU