Introduction To Financial Management
Introduction To Financial Management
Introduction To Financial Management
Financial
Management
BY: ASSOCIATE PROF. RIA SANTOS FAJILAGO
DEPARTMENT OF BANKING AND FINANCE
COLLEGE OF ACCOUNTANCY AND FINANCE
Learning Outcomes
Describe financial management in terms of
the three major decision areas that
confronts the financial manager
Identify the goal of the firm and extrapolate
why shareholders’ wealth maximization is
preferred
Explain the basic responsibilities of financial
managers
Nature of Financial Management
Financial management also referred to as managerial
finance, corporate finance and business finance is a
decision-making process concerned with planning,
acquiring, and utilizing funds in a manner that achieves
the firm’s desired goals.
It is also described as the process for and the analysis of
making financial decisions in the business context.
Financial management is part of a larger discipline
called finance which is a body of facts, principles and
theories relating to raising and using money by
individuals, businesses, and governments.
FINANCIAL MANAGEMENT
UTILIZING DESIRED
PLANNING ACQUIRING
FUNDS GOALS
Meaning of Financial Management
ORGANIZING
DIRECTING
PROCUREMENT OF FUNDS
ALLOCATION OF FUNDS
INVESTMENT
FINANCIAL
DIVIDEND
Objectives of Financial
Management
The financial management is generally concerned with procurement, allocation and
control of financial resources of a concern.
Objectives:
1. To ensure regular and adequate supply of funds to the concern.
2. To ensure adequate returns to the shareholders which will depend upon the earning
capacity, market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be
utilized in maximum possible way at least cost.
4. To ensure safety on investment, i.e., funds should be invested in safe ventures so that
adequate rate of return can be achieved.
5. 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
Estimation of capital requirements
A finance manager has to make estimation with regards to capital requirements of the
company. This will depend upon expected costs and profits and future programs and
policies of a concern. Estimations have to be made in an adequate manner which
increases earning capacity of enterprise.
Determination of capital composition
Once the estimation has been made, the capital structure has to be decided. This
involves short- term and long- term debt equity analysis. This will depend upon the
proportion of equity capital a company is possessing and additional funds which have
to be raised from outside parties.
Choice of sources of funds
For additional funds to be procured, a company has many choices:
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.
Choice of factor will depend on relative merits and demerits of each source and period of
financing.
Functions of Financial
Management cont.
Investment of funds
The finance manager has to decide to allocate funds into profitable ventures so that there is
safety on investment and regular returns is possible.
Disposal of surplus
The net profits decision has to be made by the finance manager. This can be done in two ways:
Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.
Retained profits - The volume has to be decided which will depend upon expansion, innovational,
diversification plans of the company.
Management of cash
Finance manager has to make decisions with regards to cash management. Cash is required for
many purposes like payment of wages and salaries, payment of electricity and water bills,
payment to creditors, meeting current liabilities, maintenance of enough stock, purchase of raw
materials, etc.
Financial controls
The finance manager has not only to plan, procure and utilize the funds but he also has to
exercise control over finances. This can be done through many techniques like ratio analysis,
financial forecasting, cost and profit control, etc.
Significance of Financial
Management
Broad applicability
Financial management is equally applicable to all forms of business like sole
proprietorships, partnerships and corporations. It is also applicable to non-profit
organizations like trust, societies, government organizations, public sectors and so forth.
Reduction of chances of failure
The strength of business lies in its financial discipline. Finance function is treated as
primordial which enables the other functions like production, marketing, purchase, and
personnel to be effective in the achievement of organizational goals and objectives.
Measurement of return on investment
Financial management studies the risk-return perception of the owners and the time
value of money. It considers the amount of cash flows expected to be generated for
the benefit of the owners, the timing of these cash flows and the risk attached to these
cash flows.
Role of a Financial Manager
Financial management—the art and science of managing a firm’s
money so that it can meet its goals—is not just the responsibility of
the finance department. All business decisions have financial
consequences. Managers in all departments must work closely with
financial personnel. If you are a sales representative, for example,
the company’s credit and collection policies will affect your ability to
make sales. The head of the IT department will need to justify any
requests for new computer systems or employee laptops.
Revenues from sales of the firm’s products should be the chief
source of funding. But money from sales doesn’t always come in
when it is needed to pay the bills. Financial managers must track
how money is flowing into and out of the firm. They work with the
firm’s other department managers to determine how available funds
will be used and how much money is needed. Then they choose the
best sources to obtain the required funding.
Role of a Financial manager cont.
A financial manager will track day-to-day operational data such as
cash collections and disbursements to ensure that the company has
enough cash to meet its obligations. Over a longer time horizon, the
manager will thoroughly study whether and when the company
should open a new manufacturing facility. The manager will also
suggest the most appropriate way to finance the project, raise the
funds, and then monitor the project’s implementation and operation.
Financial management is closely related to accounting. In most
firms, both areas are the responsibility of the vice president of
finance or Chie Financial Officer. But the accountant’s main function
is to collect and present financial data. Financial managers use
financial statements and other information prepared by accountants
to make financial decisions. Financial managers focus on cash flows,
the inflows and outflows of cash. They plan and monitor the firm’s
cash flows to ensure that cash is available when needed.
Finance manager is expected to
analyze the business firm and
determine the following:
Looking forward, the finance department will work with managers to prepare the
organization’s budgets and forecasts, and to report back on the progress against these
throughout the year. This information can be used to plan staffing levels, asset purchases
and expansions and cash needs, before they become necessary. Some organizations
often ‘plan’ by the seat of their pants, while organizations know it is important to have
some idea of where you want to go before you start going there.
Finally, the finance department should be called upon to provide information to assist
managers in making key strategic decisions, such as which markets or projects to pursue
or the payback periods for large capital purchases. The finance department can often
contribute an objective perspective based on special financial assessment techniques.
In summary, some organizations know the finance department should be considered a
resource to assist managers in the running of the business. With the growing popularity of
outsourced finance departments, it is possible for even small businesses to have access
to all of the benefits of a full finance department, through part time professionals, at a
fraction of the cost of employing a full time finance department.
References
1. https://www.managementstudyguide.com/financial-management.htm
2. https://opentextbc.ca/businessopenstax/chapter/the-role-of-finance-and-the-
financial-manager/
3. https://www.google.com/search?q=organizational+structure+of+the+finance
+department&tbm=isch&source=univ&sa=X&ved=2ahUKEwjIx9q8lIniAhUBE4gK
HccBBGYQsAR6BAgJEAE&biw=1366&bih=631#imgrc=S8tCnc6DocJnFM:
4. https://www.smythecpa.com/news-insights/roles-and-responsibilites-of-a-
finance-department/