Introduction To FM

Introduction to
Financial
Management
Dr. G. V. Kesava Rao
B.Sc., MBA, PGDFM, LL.M (Research), FDP (IIM A), CS, Ph. D
Qualified Insolvency Professional – IBBI
Adjunct Faculty – IBS Bengaluru
Introduction
▪Finance is the backbone
of every business.
▪Finance is the life blood
of the business.
By Dr. G V Kesava Rao 2

Introduction
▪ It is therefore, the prime
responsibility of the finance
manager to strike judicious
balance between return and
risk in order to maximize
value of the firm.
Introduction
▪ To assure maximum profits
to the firm, a finance
manager must monitor the
cash inflows and outflows of
the business and thereby
ensure effective utilization of
resources. By Dr. G V Kesava Rao 4
Introduction
▪ Business Finance is that
business activity which is
concerned with the acquisition
and conservation of capital
funds in meeting financial
needs and overall objectives of
business enterprises.
Introduction
• At the macro level, finance is the study
of financial institutions and financial
markets and how they operate within the
financial system in both the Indian and
global economies.
• At the micro level, finance is the study
of financial planning, asset management,
and fund raising for businesses and
financial institutions.
What is Financial
Management?
Concerns the acquisition,

financing, and management
of assets to accomplish the
overall goal of a business.

What is Financial
Management?
Financial management
involves the efficient use
of financial resources in
the production of goods.

What is Financial
Management?
Financial management is
that managerial activity
which is concerned with
planning & controlling of the
firm’s financial resources.

Definition of Financial
Management?
“Financial management is the
operational activity of a
business that is responsible for
obtaining and effectively utilising
the funds necessary for efficient
operations.
-Joseph & Massie
Definition of Financial
Management?
“Financial management is
concerned with the acquisition,
financing and management of
assets with some overall goal in
mind.”
-Van Horne and Wachowicz
Evolution of Financial
Management
▪Traditional Phase
▪Transitional Phase
▪Modern Phase
Scope of Financial
Management
Maximizing Wealth of Shareholders
Acquiring Effective
funds at low allocation of
cost funds
Minimizing Risk

Finance Functions
▪ Capital structure decisions.
▪ Capital budgeting decisions.
▪ Dividend decisions.
▪ Working capital management.
▪ Risk-Return Trade Off

Financial Decisions
▪Financing Decision
▪Investment Decision
▪Dividend Decision
▪Liquidity Decision
Objectives of Financial
Management
▪ Profit Maximisation
▪ Wealth Maximisation
▪ Maximizing EPS (Fair Return)
▪ Welfare Maximization
▪ Build Reserves for Growth
▪ Maximum Operational Efficiency
▪ Financial Discipline
Profit Maximisation
Maximizing the Rupee Income of Firm
▪ The very purpose of Business is profit
▪ Profit is a barometer of efficiency
▪ Survival and Growth
▪ Need to have surplus to meet
contingencies
▪ Resources are efficiently utilized
▪ To build the confidence of investors and
lenders
▪ Serves interest of society also
Limitations or Criticism
• Ambiguity
• Maximum Profit is an abstract idea
• Timing of Benefits
• Certainty of benefits is not considered
• Encourages corrupt practices (Immoral)
• Invites Competition
• Customer Relationship
• True & fair picture is not reflected
• Workers demand high salary & benefits,
may lead to bad Industrial Relations
Wealth Maximization
▪ Maximizes the net present value of a course
of action to shareholders.
▪ Accounts for the timing and risk of the
expected benefits.
▪ Benefits are measured in terms of cash
flows.
▪ Fundamental objective is to maximize the
market value of the firm’s shares.

Agency Problems
The management is supposed to
pursue the objective set for the
firm and in the best interests of
the shareholders.
Instead, if they try to undertake
activities in their own interest it is
called agency problem.
▪ The job of chief financial executive
does not cover only routine aspects of
finance and accounting. As a member
of top management, he is closely
associated with the formulation of
policies as well as decision-making.
Under him are controllers and
treasurers, although they may be
known by different designations if
different firms.

Role of Financial Manager
Board of Directors
Managing Director
Production Finance HRD Marketing

Director Director Director Director
Treasurer Controller
Role of Treasurer
Treasurer
Credit Cash Retirement Cost

Mgt Mgt Benefits Control

Treasurer
The main concern of treasurer is with the
financing activities of the firm.
Following are some of functions of the treasurer.
▪ Obtaining finance
▪ Banking relationship
▪ Investor relationship
▪ Short-term financing
▪ Cash management
▪ Credit administration
▪ Investments, and
▪ Insurance
Role of Controller
Controller
Planning & Inventory

Budgeting Mgt.
Performance
Accounting Evaluation

Controller
The functions of the controller are related
mainly to accounting and control.
The typical functions performed by him
include the following
▪ Financial accounting
▪ Internal audit
▪ Taxation
▪ Management accounting and control
▪ Budgeting, planning, and control
Role of Treasurer & Controller
✓ Treasurer & Controller work under

Finance Director or CFO.
✓ Treasurer’s function is to raise funds

at low cost.
✓ Controller oversees whether funds

are correctly applied.
Finance Functions

Role of the Finance Manager:
Traditional Role of Finance Managers:
▪ The traditional role of the finance manager is to
confine to the raising of funds in order to meet
operating requirements of the business. This
traditional approach has been criticized by
modern scholars on the following grounds.
▪ In the past the role of financial manager was
passive.
▪ He was considered as a part of the accounts
department.
▪ His role was to maintain the store records,
preparing accounting and other quasi-financial
reports, raising funds when needed.
▪ He was a staff officer.
Emerging Role
Changes Post 1990’s
▪ Licensing Framework
▪ MRTP to Competition Act-2002
▪ FERA to FEMA – 1999
▪ Free pricing of Securities
▪ Cash Credit to Working Capital
Finance
Emerging Role
Changes Post 1990’s
▪ Stable and Administered Interest
Rates
▪ Relaxations in FDI
▪ Investor Education and Involvement
▪ Introduction of derivatives
▪ Global Mergers
▪ IFRs By Dr. G V Kesava Rao 31
Emerging Role
All these coupled with
▪ Global Competition
▪ Technological Developments
▪ Volatile Financial Markets
▪ Economic Uncertainties
▪ Changes in Tax and Other Laws
▪ Ethical Concerns in dealings
▪ Shareholder’s Activism
Emerging Role
▪ Made the Job of Financial Manager, Complex,
Challenging, Demanding and Very Important in
▪ Financial Planning
▪ Financial Structure
▪ Mergers, Acquisitions & Restructuring
▪ Working Capital management
▪ Performance Management
▪ Risk Management
▪ Investor Relations
Any Questions?
Have Great Day

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Introduction to

By Dr. G V Kesava Rao 2

Concerns the acquisition,

By Dr. G V Kesava Rao 7

By Dr. G V Kesava Rao 8

By Dr. G V Kesava Rao 9

By Dr. G V Kesava Rao 13

▪ Capital structure decisions.

▪ Capital budgeting decisions.

▪ Working capital management.

▪ Risk-Return Trade Off

By Dr. G V Kesava Rao 19

By Dr. G V Kesava Rao 21

Production Finance HRD Marketing

Credit Cash Retirement Cost

By Dr. G V Kesava Rao 23

Planning & Inventory

By Dr. G V Kesava Rao 25

✓ Treasurer & Controller work under

✓ Treasurer’s function is to raise funds

✓ Controller oversees whether funds

By Dr. G V Kesava Rao 28

Have Great Day

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