INTRODUCTION TO

FINANCIAL
MANAGEMENT
DEFINITION OF FINANCIAL
MANAGEMENT
• "Financial management is concerned with raising financial resources
and their effective utilization towards achieving the organizational
goals."
• "Financial management is the process of putting the available funds to
the best advantage from the long term point of view of business
objectives."
NATURE OF FINANCIAL
MANAGEMENT
Financial Activity
Raising the Finance
Investing the Finance
Objective Oriented
Types of Finance
Relationship with other Departments
 Requires Proper Planning and Control
Managing Finance is an Art and Science
Legal Requirements
Important Part of Business Management
SCOPE OF FINANCIAL MANAGER:
The main objective of financial management is to arrange sufficient finance for meeting short term and long
term needs. A financial manager will have to concentrate on the following areas of finance function.
1. Estimating financial requirements:
• To estimate his business's short term and long term financial requirements.
• He will prepare a financial plan for present as well as for future.
• The amount required for purchasing fixed assets and working capital needs will have to be ascertained.
2. Deciding capital structure:
• Capital structure refers to kind and proportion of different securities for raising funds, which type of
securities should be raised.
• Long term funds should be employed to finance working capital.
• Entirely depending on overdrafts and cash credits for meeting working capital needs may not be suitable.
• A decision about various sources for funds should be linked to the cost of raising funds.
3. Selecting a source of finance:
• Preparing a capital structure which includes share capital, debentures, financial institutions, public deposits etc.
• If finance is needed for short term periods then banks, public deposits and financial institutions may be the appropriate.
• On the other hand, if long term finance is required then share capital and debentures may be the useful.
4. Selecting a pattern of investment:
• The selection of an investment pattern is related to the use of funds.
• A decision will have to be taken as to which assets are to be purchased?
• The funds will have to be spent first on fixed assets and then an appropriate portion will be retained for working capital
and for other requirements.
5. Proper cash management:
• Cash management is an important task of finance manager.
• He has to assess various cash needs at different times and then make arrangements for arranging cash.
• Cash may be required to purchase of raw materials, make payments to creditors, meet wage bills and meet day to day
expenses.
• The idle cash with the business will mean that it is not properly used.
6. Implementing financial controls:
• An efficient system of financial management necessitates the use of various control devices.
• They are ROI, break-even analysis, cost control, ratio analysis, cost and internal audit.
• ROI is the best control device to evaluate the performance of various financial policies.
7. Proper use of surpluses:
• The utilization of profits or surpluses is also an important factor in financial management.
• A judicious use of surpluses is essential for expansion and diversification plans and also in
protecting the interests of share holders.
• A balance should be struck in using funds for paying dividend and retaining earnings for
financing expansion plans.
OBJECTIVE OR GOALS OF
FINANCIAL MANAGEMENT
• Profit Maximization
• Wealth Maximization
 PROFIT MAXIMIZATION
x i m i z i ng
e a n s ma o f i t
a ti o n m r m. P r
a x i m i z f a f i e ry
! Pr o f i t m m e o o f e v
E S !! l p e e i n co n a i m c a n
G
A Sur v iv a
the r u m a i sin e s s
NT i s t he N o b u i t is
V A ic a rd re r n i n g i t y . . P r o f
AD Econo g Profi t Stand Welfa ea omic activ rning profit usiness
m t
 arnin men omic econ w i t h o u t ea
c y o f a b
a
E u r e co n
s ur v i v e eff i c i e n ve a s
 e as nd E r e o f o s e r s a
 M cial a m e a s u f i t a ls e n a b l e
S o t ” a
s e . P ro w h i c h c e s,
 o fi t e r p r i t r i s k n p r i
“ Pr en n a g a i ns i k e f a l li r se
p t e y t e c t i o i s k l a d v e
! ! ! conce Mon pro t o f a c er r u n i t s, fi t
O N e o f s i n e s s o t h e p r o
AT I of th lue bu t i o n f r om s o t he a i n
I T s V a p e t i e t c . h e m
s
LIM azine s Time Risk com o l i c e s e r e d a st
 H nore the ty g ovt. p tion is consid
 Ig nores Qual
i
m a ximiza f business.
 Ig nores b j e c t i v eo
Ig o

 WEALTH MAXIMIZATION
Wealth maximization is one of the modern o n
approaches. The term wealth means shareholder ! ! ! b a s ed
wealth or the wealth of the persons those who are E S ion
is
h o r te r
involved in the business concern. Wealth A G iz fits ts a h
a t s
maximization is also known as value maximization or N T x
a otim pro en alt
e s we m e
A alth nd n ion p d to
m r ti
net present worth maximization. The goal of the
DV w e s a z t
a par e rs
t h e
finance function is to maximize the wealth of theA Th flo im om
e w i d e
x c n si n ctor
owners for whom the firm is being carried on. The  cash it ma as c o io
f w n tio n
r iter y fa e.
wealth of corporate owners is measured by the Pro m vie zatio miza i n c int rat
o erta ing me
share prices of the stock. While taking decisions,  r i
te xim ma ey x i a t
a n m iz unc ount th ti
only that action is expected to increase share price m alth mo axi and isc s bo the rsa.
W e
e of th m risk the d lect nty, e-ve
should be taken. The market price of shares  valu eal the ing r ef rtai vic
(excluding impact of speculation) serves as the h e w ers ider rate unce and
T sid ns ing he er
standard to judge whether financial decisions have  con o t
e c coun her s hig
t h
il
been taken and implemented efficiently or not. wh e dis . Hig ate i
r
Therefore, maximization of the market value is Th risk ting
considered to be the proper objective and and coun
d is
universally accepted concept in the field of business.
PROFIT MAXIMIZATION VS
WEALTH Financial
MAXIMIZATION
management is essential for any
organization that seeks to manage their finances
in an orderly manner. Wealth maximization and
profit maximization are two important goals of
financial management and are quite different to
each other. Profit maximization looks at the
shorter term and focuses on making larger profits
in the short term, which could be at the expense
of long term benefits. Wealth maximization, on
the other hand, focuses on the long term and
strives at long term value creation.
GANIZATIONAL
STRUCTURE
 ROLE OF FINANCE MANAGER
A financial manager is a person who takes care of all the important
financial functions of an organization. The person in charge should
maintain a far sightedness in order to ensure that the funds are
utilized in the most efficient manner. His actions directly affect the
Profitability, growth and goodwill of the firm

Raising of Funds  International Financial Decision

Allocation of Funds  Risk Management
Profit Planning  Investment Decision
Understanding Capital Markets  Dividend Decision
 INTER-RELATIONAs an integral part of overall management, financial
management is not a totally independent area. It
draws a heavy interest in related disciplines namely
Economics, Accounting, Marketing, Production and
Quantitative methods.
 Accounting is an important input in financial
decision making
 The measurement of fund in accounting is
based on accrual principle but finance is based
on Cash flow.
 Accounting provides financial data on past,
present and future.
 Financial manager should consider the impact
of product development and plan promotion in
marketing area since their plan requires capital
Decisions under
Financial Management

• Investing Decision

• Financing Decision

• Dividend Decision
Investing Decision
• Investment in Short Term & Long Term Projects

• Short Term Projects

- Decisions relating to Working Capital Mgt.

-Inventory Management,

- Receivables Management, etc.

Long Term Decision
 Relates to Capital Budgeting Decisions
 Techniques:
(i) Traditional- Payback Period, Accounting
Rate of Return
(ii) Modern- Net Present value Method,
Internal Rate of Return,
Profitability Index, etc.
Financing Decision
• Decision relation to Funding of the Projects
• Sources
-Short Term (trade credit, bank overdraft,etc.)
-Long Term
(i) Owners Funds ( Equity/Preference Share
Capital, Retained Earnings)
(ii) External Funds( Debentures, Long Term
Loans, etc.)
 Dividend Decision
This decision relates to How much of the Earnings to be
DISTRIBUTED AS DIVIDENDS?
AND
HOW MUCH TO BE KEPT

AS RETAINED EARNINGS?
Case 1
In March 2017, Hindustan Zinc Limited (HZL), a subsidiary of multinational mining
company Vedanta Limited, announced a special one-time interim dividend of Rs.27.50 per
share with a face value of Rs.2 each share.

The total dividend of Rs.271,570.00 million paid during the year 2016-17 was the highest
dividend paid ever paid by an Indian company in a financial year. However, things started
changing after the announcement of the special interim dividend – the price of the
company’s shares started declining from March 2017.

According to an independent investment advisory organization, HZL was one of the top 73
BSE S&P 500 companies with a potential to pay a higher dividend than it had been paying
due to its strong fundamentals in terms of operating margins and financial position.
Despite all these positive factors, the declining trend in the share price remained a cause
for concern for the shareholders as well as for the company. The management of HZL
needed to look into the issue to understand the main reasons for the drop in share prices.
• On March 22, 2017, the management of Hindustan Zinc Limited (HZL) announced
a special one-time interim dividend of 13.75% equivalent to Rs.27.50 on an equity
share of face value Rs. 2. The announcement of a special dividend resulted in a
cash outflow of Rs. 139,850 million, including the Dividend Distribution Tax (DDT).
The golden jubilee dividend paid in the month of April 2016 and the interim
dividend paid in the month of October 2016, took the total dividend paid by HZL
during the year to Rs.271,570 million, resulting in the single largest payment of
dividend in a financial year by an Indian company, inclusive of DDT .

Announcing the special one-time interim dividend, the chairman of Vedanta

Group, Agnivesh Agarwal, said, “We are pleased to reward our shareholders with a
special dividend, which reflects the Company’s confidence in its continued robust
performance and demonstrates our commitment towards delivering value for our
shareholders. Since disinvestment by the Government in 2002, the cumulative
dividends paid by the Company, including the current special dividend, is Rs.
375,170 million including dividend distribution tax.”...
• HZL was incorporated as a Public Sector Undertaking under the Metal
Corporation of India Acquisition Act, 1966, with a majority of stake
held by the Government of India (GoI). It was involved in the business
of mining and the production of zinc, lead, silver, and cadmium. Until
the year 2002, the majority stake was in the hands of the GoI.
However, after the announcement of the disinvestment policy by the
GoI in the year 2002, the Sterlite Opportunities and Ventures Limited
(SOVL), a subsidiary of Vedanta Limited , acquired a stake of 26% and
management control from the GoI through an open offer and
acquired another 20% stake from the public as per the Securities
Exchange Board of India (SEBI) regulations 1997....
• The total revenue of HZL increased from Rs.129,481.40 million in the year
2011-12 to Rs. 169,558.60 million crores in the year 2015-16. Also the net
profit after tax increased from Rs. 55260.40 million in the year 2011-12 to
Rs.81665.80 million in the year 2015-16. However, in the year 2015-16, a
decline of 3.7% and 0.13% was observed in the total revenues and net
profit of the firm compared to the previous year (Refer to Exhibit-III for
Operating Performance of HZL). The total investments in non-current
assets increased from Rs. 98507.80 million in the year 2011-12 to
Rs.181,544.70 million in the year 2015-16, while investments in current
assets increased from Rs. 196342.10 million in the year 2011-12 to Rs.
370893.20 million in the year 2015-16 (Refer to Exhibit-IV for Break-up of
HZL’s Non-Current Investments). The majority of investments in current
assets included current investments held for the purpose of trading
activities on stock exchanges. The current investments were made in the
purchase and sale of bonds, debentures, and mutual funds.
• Amid strong future business forecasts, a favorable operating and
financial position, and regular payment of dividends, HZL was
considered to be a strong company with the potential to pay higher
dividends than it had been paying. According to an analysis done by an
investors’ advisory services organization, Institutional Investors
Advisory Services (IiAS), HZL was considered to be one of the top 73
S&P BSE index companies that had the potential to pay higher
dividends than it was paying. To conduct the analysis, IiAS considered
companies with a profitability of above Rs.500 million and a positive
cash flow from operations. The positive operational cash flows were
calculated by deducting 75% of the average of three years’ capital
expenditure and deducting the equity and preference dividends paid
during the fiscal year 2015.