Introduction to Financial Management

TRADITIONAL PHASE
EPISODIC

EVENTS

FORMATION
MAJOR EXPANSION
MERGERS & ACQUISITIONS

OUTSIDERS

VIEWPOINT WAS DOMINANT

MODERN PHASE
RATIONAL

MATCHING OF FUNDS TO USE

MORE ANALYTICAL AND QUANTITATIVE

Introduction to Financial Management

TRADITIONAL VIEW
ARRANGEMENT

OF SHORT AND LONG TERM FUNDS

FROM FINANCIAL INSTITUTIONS
MOBILISATION OF FUNDS THROUGH FINANCIAL
INSTRUMENTS
COMPLIANCE WITH LEGAL PROVISIONS

MODERN APPROACH
TOTAL

FUND REQUIREMENT
ASSETS TO BE ACQUIRED
PATTERN OF FINANCING THE ASSETS

Drawbacks of the traditional approach

Focused only on profits market share,

growth rate etc. ignored
Profit was also not clearly defined long
term or short term
Procurement is given more importance
than allocation

Modern approach

Focuses on procurement as well as

allocation of funds
Identifies how much of long term and
short term assets are required
Stresses on wealth maximisation

DECISIONS
INVESTMENT

FINANCE

DIVIDEND

INVESTMENT DECISION
Careful

selection of viable and profitable

investment proposals
Measure risk and uncertainty
Allocation of funds according to priority
Capital Rationing

FINANCE DECISIONS
Capital

structure decisions
Long term vs. Short term debt
Sources and Cost of funds
Portfolio Management

DIVIDEND DECISIONS
Dividend

vs. Retained Earnings

Impact on the MPS
Legal implications

Difference between Finance and Accounting

ACCOUNTING is systematic recording of the

transactions of the firm
FINANCE uses the financial statements
prepared by Accounting and uses various
tools and techniques for analysing the
financial health of the firm.
ACCOUNTING is based on accrual method.
FINANCE is based on cash flow method.
ACCOUNTING is history.
FINANCE is future.

Financial Management --ART ??

OBJECTIVE OF F.M.
Profit

SCIENCE OR

or Wealth / Value Maximization

Wealth or Value of a business is defined

as the market price of the capital
invested by shareholders.
The market value of the shares is
directly related to the performance of
the company. Better the performance,
higher is the market value of shares.

Financial Objectives

Increase Return on Investment

Value Addition and profitability
Growth in EPS and P/E ratio
Growth in market value of share
Growth in dividends
Optimum level of leverage
Minimising Cost of Capital
Efficient utilisation of short, medium and
long-term finances

business proposal raises the

value of the firm only if the
present value of future streams
of cash benefits expected from
the proposal is greater than
the initial cash outlay.