Overview of Financial

Management

SARITA YADAV
WHAT IS FINANCIAL MANAGEMENT

PLANNING
ORGANIZING

FINANCIAL
ACTIVITIES

CONTROLLING DIRECTING
CHANGING ROLE OF FINANCIAL
MANAGER
 Approaches
Characteristics of Financial
Management
 Financial Management is an Essential Part
of Top Management
 Continuous Function
 Different from Accounting Function
 Wide Scope
 Inseparable Relationship between Finance
and Other Activities
 Applicable to All Types of Organizations
 SCOPE OF FINANCIAL
MANAGEMENT

 Scope
Objectives of FM
 To ensure regular and adequate supply of funds to the concern.
 To ensure adequate returns to the shareholders which will depend
upon the earning capacity, market price of the share, expectations
of the shareholders.
 To ensure optimum funds utilization. Once the funds are procured,
they should be utilized in maximum possible way at least cost.
 To ensure safety on investment, i.e, funds should be invested in
safe ventures so that adequate rate of return can be achieved.
 To plan a sound capital structure-There should be sound and fair
composition of capital so that a balance is maintained between debt
and equity capital.
 FUNCTIONS OF FINANCIAL
MANAGEMENT
 ESTIMATING CAPITAL REQUIREMENT
 CHOICE OF SOURCE OF FUND
 DETERMINING CAPITAL COMPOSITION
 INVESTMENT OF FUNDS
 WORKING CAPITAL DECISION
 DIVIDEND POLICY DECISION
Objectives of Financial
Management
 Profit Maximization
 Wealth Maximization
Profit Maximization
 Measurement of performance
 Efficient allocation and utilization of
resources
 Maximization of social welfare
 Source of incentive
 Helpful in facing adverse business
conditions
 Halpful in the growth of the firm
Limitations of profit
maximization
 Ambiguous
 Ignores the time value of money
 Ignores risk factors
 Ignores future profits
 Ignores social obligations of business
Wealth Maximization
 It uses cash flows instead of accounting profits
 It gives due importance to the time value of money
 It gives due importance to payment of regular
dividends
 It gives due importance to risk factor and analyses
risk and uncertainty
 It takes into consideration long-run survival and
growth of the firm
Functions of financial manager
 Financial Planning
 Procurement of funds
 Coordination
 Control
 Business Forecasting
 Other functions like cash management,
banking relations, credit management, asset
management, accounting, auditing etc.
Time Value of Money
 A finance manager is required to make decisions on investment,
financing and dividend in view of the company's objectives. The
decisions as purchase of assets or procurement of funds i.e. the
investment/financing decisions affect the cash flow in different time
periods. Cash outflows would be at one point of time and inflow at
some other point of time, hence, they are not comparable due to the
change in rupee value of money. They can be made comparable by
introducing the interest factor. In the theory of finance, the interest
factor is one of the crucial and exclusive concept, known as the time
value of money. 
 Time value of money means that worth of a rupee received today is
different from the same received in future. The preference for money
now as compared to future is known as time preference of money.
The concept is applicable to both individuals and business houses.
Reasons of time preference of
money
 Risk
 Preference for present consumption
 Investment opportunities
Techniques of compounding 
 Future value (FV) of a single cash flow :
 The future value of a single cash flow is defined as :
 FV = PV (1 + r)n
 Where, FV = future value
 PV = Present value
 r = rate of interest per annum
 n = number of years for which compounding is done.
Future value of an
annuity
An annuity is a series of periodic cash flows, payments or receipts, of
equal amount. The premium payments of a life insurance policy, for
instance are an annuity. In general terms the future value of an
annuity is given as :
 FVAn = A * ([(1 + r)n - 1]/r)
 Where,
 FVAn = Future value of an annuity which has duration of n
years.                            
 A = Constant periodic flow
 r = Interest rate per period             
 n = Duration of the annuity
Techniques of discounting 
 Present value of a single cash flow :
 The present value of a single cash flow is given as
:
 PV = FVn (1/1+r  )n                 
 Where,
 FVn = Future value and years
 r = rate of interest per annum
 n = number of years for which discounting is done.
Value Maximization in
financial management
 Value maximization in financial management is the goal of
making decisions that increase the overall value of a
company. The concept of value maximization suggests that
the ultimate goal of a firm is to maximize the value of its
shareholders' wealth, which is reflected in the firm's stock
price.
 The value of a company is determined by a variety of factors,
such as its financial performance, the strength of its
management team, its competitive position in the market, and
its ability to generate future cash flows. Financial managers
can help to maximize the value of the company by making
strategic decisions that optimize these factors.
Implications
 Financial managers to take a long-term view such as investing in
profitable projects, managing risk effectively, optimizing the
capital structure of the firm, and paying out dividends to
shareholders should all be made with the goal of increasing the
long-term value of the company.
 Financial managers to balance the interests of shareholders with
the interests of other stakeholders, such as employees,
customers, and suppliers.
 Financial managers to focus on generating sustainable, long-term
growth rather than short-term gains. This means that decisions
should be made with a focus on building competitive advantages,
developing new products and services, and expanding into new
markets, rather than on maximizing short-term profits.
Value Maximisation Model
Constrained Optimization
 Legal Constraints
 Input Constraints
 Financial Constraints
Economic Value Added
 Economic value added (EVA), also known as economic profit, aims
to calculate the true economic profit of a company.
 EVA is used to measure the value a company generates from funds
invested in it.
 However, EVA relies heavily on invested capital and is best used for
asset-rich companies, where companies with intangible assets,
such as technology businesses, may not be good candidates.
 EVA= NOPAT - (Invested Capital * WACC)
 Where:
 NOPAT = Net operating profit after taxes
 Invested capital = Debt + capital leases + shareholders' equity
 WACC = Weighted average cost of capital
Advantages and
Disadvantages of EVA
 If a company's EVA is positive, it means that the company is
generating returns in excess of its cost of capital and is creating value
for its shareholders. Conversely, if a company's EVA is negative, it
means that the company is not generating returns in excess of its cost
of capital and is destroying value for its shareholders.
 EVA is a popular metric because it provides a clearer picture of a
company's economic profitability than traditional accounting
measures, such as net income.
 One potential limitation of EVA is that it can be difficult to calculate
accurately, as it requires a detailed understanding of a company's
operations and financial structure. Additionally, some critics argue that
EVA may incentivize companies to focus too heavily on short-term
profitability at the expense of long-term growth and value creation.
Market Value Added
 Market Value Added (MVA) is a financial performance
metric that measures the difference between the total
market value of a company and the total amount of
capital that has been invested in the company over time.
It is a tool used by financial analysts and investors to
assess the effectiveness of a company's management
team in creating shareholder value.
 MVA = V - K
 where MVA is the market value added of the firm, V is
the market value of the firm, including the value of the
firm's equity and debt (its enterprise value), and K is the
total amount of capital invested in the firm.
Advantages of Market Value
Added (MVA)
 Makes companies more attractive to
potential investors
 Boosts the survival chances of a
company
Sales/Revenue
- Variable Cost (VC)
Contribution
-Fixed Cost
EBDIT
-D
EBIT
-I
EBT
-T
EAT
-Div (PS)
EATESH/No. of Shares
EPS
THANK YOU