Prof.S.Vasantha. Executive Placement 2003 BIM School of Management Studies – Striving towards...

Financial Management-

IntroductionProf.S.Vasantha

Executive Placement 2003 BIMSchool of Management Studies – Striving towards Excellence

Vels University www.velsuniv.org

Meaning of Financial Management

Financial management is concerned with the

managerial decisions that result in the acquisition

and financing of short term and long term credits

for the firm




Financial management is defined as the management of flow of funds in a firm and it deals with financial decision making of the firm. Financial management includes any decision made by an investor that affects his finances. In financial management the emphasis is laid on optimum utilization of funds




Financial management is also referred as planning, organizing and controlling the monetary resources of an organization. Financial management helps in improving the allocations of working capital within business operations. It reviews the financial health of the company by using tools like ratio analysis.



Goals / Objectives of Financial Management

A goal of the firm is the target against which a firm’s operating performance is measured. The goals serve as the point of reference to a decision maker. The objectives or goals of financial management are:1. Profit Maximization.2. Wealth Maximization.



Objectives of Financial Management

Profit Maximization: The objective of financial management is to earn maximum profits. Various important decisions are taken to maximize the profit of the firm.. If the company does not earn good profits and fails to distribute higher dividends, the people would not invest in such a company and people who have already invested will sell their stock.




Wealth Maximization: The objective of wealth maximization of shareholders considers all future cash flows, dividends, earning per share, risk of a decision, etc. Shareholders are always interested in maximization of wealth which depends upon the market price of the shares. Increase in market price lead to appreciation in shareholder’s wealth and vice versa. So the major goal of financial management is to maximize the market price of the equity shares of the company.



ECONOMIC VALUE ADDED

• Economic Value Added is a financial performance method to calculate the true economic profit of a corporation. EVA method is based on the past performance of the enterprise. The underlying economic principle in this method is to determine whether the firm is earning higher rate of return on the entire invested funds than the cost of such funds.



ECONOMIC VALUE ADDED

• EVA = NOPAT – (WACC * TCE)• NOPAT= Net operating profit after tax• TCE = Total capital employed• WACC = weighted average cost of capital



MARKET VALUE ADDED

• MVA measures the change in the market value of the firm’s equity vis-à-vis equity investment. Market Value Added (MVA) is the difference between the current market value of a firm and the capital contributed by investors. If MVA is positive, the firm has added value. If it is negative, the firm has destroyed value. The amount of value added needs to be greater than the firm's investors could have achieved investing in the market portfolio



MARKET VALUE ADDED

• MVA Market value of firm’s equity – Equity capital

investment/funds




Return Maximization: The third objective of financial management says to safeguard the economic interest of all the persons who are directly or indirectly connected with the company – whether they are shareholders, creditors or employees. All these parties must also get maximum return on the investment and this can be possible only when the company earns higher profits to discharge its obligations to them



Scope of Financial Management

• Traditional Approach:• Arrangement of funds from financial institutions.• Arrangement of funds through financial

institutions, i.e, shares, bonds, etc.• Looking after the legal and accounting

relationship between a corporation and its sources of funds.




• Modern Approach:• According to modern concept, financial

management is concerned with both acquisitions of funds as well as their allocation




• Modern Approach• Funds requirement decision /Liquidity

Management• Financing Decisions• Dividend Decision• Investment decision

Prof.S.Vasantha. Executive Placement 2003 BIM School of Management Studies – Striving towards...

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