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BY: JASKARAN SINGH
MBA I sem.
FINANCIAL
MANAGEMENT
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FINANCIAL MANAGEMENT
Meaning:
Finance is said to be the life blood of
business.
Right from conceiving the idea of birth of
business to its liquidation finance is
required.
So finance is the pivot around which
whole business operations cluster.
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Therefore, Financial management is
concerned with the managerial decisionthat results in the acquisition of short term
and long term credits for the business.
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SCOPE OF FINANCIAL
MANAGEMENTWe may divide the scope of financial
management under two different aspects.
Traditional Approach:Under this role of
financial manager was only restricted to
procurement of funds and it includes:
Study and analysis of of the institutions
and sources of finance which can be used
for raising funds.
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Study and analysis of financial instruments
which can be used for raising funds. Estimation of requirement of finance.
Limitations of traditional approach:
Limited scope.
Ignores working capital financing.
Ignores routine problems.
Limited use,only corporate enterprises.
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Modern approach: It enlarged the scope
of financial management and it includes:
What is the total volume of the funds an
enterprise should commit.
What specific assets should an enterpriseacquire.
In what form should the firm hold its
asssets.
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Modern approach encompasses three
major decisions, namely: Investment decisions
Financing decisions
Dividend policy decisions
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FUNCTIONS OF FINANCE
MANAGER Formulation of objectives.
Forecasting and estimating capital
requirements.
Designing the capital structure i.e. Debt to
equity.
Determining the suitable source of finance.
Procurement of funds.
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Investment of funds.
Dispersal of profits. Maintaining the proper liquidity.
Maintaining relations with outside
agencies. Evaluating financial performance.
Keeping touch with stock exchange
quotations and behaviour of share prices.
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TOOLS AND TECHNIQUES OF
FINANCIAL MANAGEMENT Capital budgeting technique: The process
of deciding on long term investment is
known as capital budgeting. It is
concerned with suitable investment in longterm projects.
Cost of capital: their are different sources
of raising finance like equity shares,preference shares, debentures etc.Interest
has to be paid on debentures and dividend
on shares.
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Leverage: Leverage means that how much
debt should be incorporated so that equity
share capital gets maximized.
Cash management: It refers to a broad
area of financeinvolving the collection,
handling, and usage of cash.it involvesassessing market liquidity,cash flows and
investments.
Recievables management: Recievablesmeans current assets other than cash i.e.
B/R, debtors etc.
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Inventory management: Inventory
management is very important functionthat determines the health of supply chain
as well as the impact of financial health of
the balancesheet.
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FINANCIAL SYSTEM
A set of complex and closely connected
institutions,agents,practices,markets,
transactions,claims and liabilities in the
economy.
It is a market for creation and exchange of
financial assets and servises.
Indian financial system consists of
financial markets, financial instruments,
financial services, financial intermidiaries
and regulatory frameworks.
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Functions of financial system
Facilitating the pooling of funds and
channelizing them into productive
avenues.
It provides with a huge information base.
It provides a platform for transfer of
resources, both temporary and permanent.
It provides a payment mechanism for
exchange of goods and services.
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It ensures smooth functioning of all
financial markets.
It helps individuals and corporates in
managing and controlling risk.
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Participants of financial system
Financial markets:
Nature of claim-Debt & Equity market.
Seasoning of claim-Primary & Secondarymarkets.
Maturity of claim-Money & Capital market.
Organization structure-OTC & ExchangeTraded Markets.
Timing of delivery-Spot & derivative
markets.
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Financial Intermediaries:
BanksFinancial intermediaries.
Insurance companies.
NFBCs
Financial service providers.
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Financial instruments:
1.Money market instruments.Commercial papers:Unsecured promissory
notes with maturity period from 15 days to
1 year.Certificate of deposits: Also unsecured
and issued by the companies with god
credit worthiness.Treasury bills:Issued by RBI on the behalf
of govt.,also known as zero-coupan bond
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Call or term money:It is inter bank
transaction in which banks borrow moneyfor 1 day.Rate of interest is high in call or
term money.
2. Capital market instruments:Equity shares.
Preference shares(Hybrid security).
Debentures.
Bonds.
Fixed deposits.
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Regulatory framework:
RBI
SEBI
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OBJECTIVES OF FINANCIAL
MANAGEMENT The firms mainly have two major
objectives i.e. Profit maximization and
wealth maximization.
Profit maximization was traditional
concept, all the firms now look for wealth
maximization.
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Profit maximization
This implies that the finance manager has
to take decision in such a manner so that
the profit of the concern are maximized.
This can be increased by increasing sales
turnover and minimizing the manufacturing
and financial cost.
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Wealth maximization Wealth maximization means maximizing
the wealth of the shareholders in terms of
market value of the shares and value of
the firm.
It is regarded operationally and
managerially better objective because it
considers:
Time value of money
Risk or uncertainty
Effect of dividend policy on MP of shares.
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Difference between
Profit maximization
It does not specify the
time value of money.
It does not consider the
risk factor.
It doe not consider the
effect of dividend policy
on market price of shares
It ignores the interest ofoutsiders.
It does not differentiate
between long term and
short term profits.
Wealth maximization
It takes into account the
time value of money.
It considers the risk the
factor.
It consider the effect of
dividend policy on market
price of shares.
It considers the interestof outsiders.
It considers the fact.
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TIME VALUE OF MONEY
The concept of time value of money refers
to the fact that money received today is
different in its worth than money received
at some other time in future date.
This preference for current money as
against future money is known as time
value of money.
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Reasons for time preference of
money Future uncertainties.
Preference for consumption.
Inflationary economy.
Investment opportunities.
A bird in hand is worth than twoin the bush
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CAPITAL BUDGETING
DECISION The process of deciding on suitable long
term investment is known as capital
budgeting decision.
It is concerned with sizeable investment
long term projects.
They can be tangible assets like plant &
machinery,equipments or the intangible
assets like patents,technology and
trademark.
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Features of capital budgeting
decisions Affects the firms strategic position many
years hence.
Huge amount is invested.
Irreversible decision.
Difficult to take as almost more than one
alternative is present.
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Process of capital budgeting
decisions Strategic planning.
Investment opportunities.
Preliminary screening.
Feasibility study.
Implementation.
Post implementation audit.
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THANK YOU