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  1. Business Finance / Financial Management 01-04-2023 1 BBA/ Bocm(H)/ BBAHHM-II Semester 2022-23
  2. MEANING OF FINANCE • Finance may be defined as the art and science of managing money. • It includes financial service and financial instruments. • Finance also is referred as the provision of money at the time when it is needed. Finance function is the procurement of funds and their effective utilization in business concerns.
  3. What is Financial Management? Financial Management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources. It encompasses the procurement of the funds in the most economic and prudent manner and employment of these funds in the most optimum way to maximize the return to the owner.
  4. Financial Management • Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise.
  5. Definitions Of Financial management According to Ezra Solamn “Financial management is concerned with the efficient use of an important economic resources viz capital funds”. Howard and Upton : Financial management “as an application of general managerial principles to the area of financial decision-making. Weston and Brigham : Financial management “is an area of financial decision-making, harmonizing individual motives and enterprise goals”. Joshep and Massie : Financial management “is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations. Thus, Financial Management is mainly concerned with the effective funds management in the business. In simple words, Financial Management as practiced by business firms can be called as Corporation Finance or Business Finance.
  6. Approaches /Evolution of Financial Management 1. The Traditional Approach 2. The Modern Approach
  7. The Traditional Approach (i) Estimation of requirements of finance, (ii) Arrangement of funds from financial institutions, (iii) Arrangement of funds through financial instruments such as shares, debentures, bonds and loans, and (iv) Looking after the accounting and legal work connected with the raising of funds. Limitations The traditional approach was evolved during the 1920s and 1930s period and continued till 1950. The approach had been discarded due to the following limitations: (i) No Involvement in Application of Funds: The finance manager had not been involved in decision-making in allocation of funds. He had been treated as an outsider. He had been ignored in internal decision making process and considered as an outsider. (ii) No Involvement in day to day Management: The focus was on providing long-term funds from a combination of sources. This process was more of one time happening. The finance manager was not involved in day to day administration of working capital management. Smooth functioning depends on working capital management, where the finance manager was not involved and allowed to play any role. (iii) Not Associated in Decision-Making Allocation of Funds: The issue of allocation of funds was kept outside his functioning. He had not been involved in decision- making for its judicious utilization.
  8. The Modern Approach The modern phase began in the mid fifties and has witnessed an accelerated Pace of development with the infusion of ideas from economic theory and Application of quantitative methods of analysis. Significant contribution to the development of modern theory of Financial Management Theory of Portfolio Management developed by Harry Markowitz in 1950 The Theory of Leverage and Valuation of Firm developed by Modigliani & Miller in 1958 The Presentation of Option Valuation Model by Black and Scholes in 1970
  9. The trust of financial decision making is on Procurement of funds and their optimal Utilisation through investment, financing, dividends and working capital decision. The scope of financial management extends to 3 key decisions areas: -Investment Decision -Financing Decision -Dividend Decision -Liquidity Decision Financial Decisions
  10. 1. Investment Decision Investment decisions pertain to selection of the most productive avenues with a view to maximise the returns on investment and consequently the shareholders wealth. Investment decisions which are alternatively referred to as capital Budgeting decisions are crucial for survival and growth of any Firm as they involve large capital outlay. Acquisition of Fixed Assets Land Building Machines Intangibles Long term Assets (What & When to Buy) Survival & Growth
  11. Investment decision • Short Term Investment Decision • Working Capital Decisions • Working Capital Decision •Nature of the Business •Credit Policy •Price Level Change •Market Competitions etc….. Long Term Investment Decision Capital Budgeting Decisions Factors Affecting Investment Decisions Capital Budgeting Decision •Cash Flow of the Project •Cost of Capital •Investment criteria involved
  12. 2.Financing Decisions Financing Decisions are concerned with the procurement of the required amount of Funds on most convenient terms as and when needed. Financing Decision relates to the composition of relative proportion Of various sources of finance. It involves deciding the proportion of Equity and debt in Capital Structure. Financial Decision Capital Structure Decision Cost of Capital
  13. Decision Taken From which Source Equity should be raised- whether by issue of Equity shares or through Preference share. What should be the proportion of equity and debt in the Capital structure? From which source Debt should be raised – whether by issue of debenture Or raising long term loans. Factor affecting Financing Decisions Risk Cost Cash Flow Ability Flexibility Market Conditions Floating Costs Legal Framework
  14. 3. Dividend Decision Dividend decision involves deciding whether to distribute the profits as dividend to shareholders or to retain profits and reinvest in the business. Objective The main objective of dividend decision is to divide net earnings in an Optimum manner so as to pay dividend to the shareholders and to Retain earnings for reinvestments with the objective of maximizing The wealth of shareholders Decision Taken How much earnings should be retained for reinvestment opportunities? How much earnings should be distributed as dividend to shareholders?
  15. INTER-RELATION AMONG FINANCIAL DECISIONS. • There is a interrelation between investment decision and financing decision, without knowing the amount of funds required and types of funds (short-term & long-term) it is not possible to raise funds. • These two are dependent on each other. 01-04-2023 15
  17.  Financing decisions influences and is influenced by dividend decision, since retention of profits for financing selected projects reduces the profit available to ordinary shareholders, there by reducing dividend payout ratio.  Hence, there is an interrelation between financing decision and dividend decision. 01-04-2023 17
  18.  Dividend decision and investment decisions are interrelated because retention of profits for financing the selected assets depends on the rate of return of proposed investment and the opportunity cost.  Profits are retained when return on investment is higher than the opportunity cost of retained profits and vice-versa. 01-04-2023 18
  19.  Acquiring Sufficient Funds,  Proper Utilizations of Funds,  Increasing Profitability,  Maximizing Firm’s Value. 01-04-2023 19
  20.  Estimating Financial Requirements,  Deciding Capital Structure,  Selecting a Sources of Finance,  Selecting a pattern of Investment.  Proper Cash management  Proper use of surplus 01-04-2023 20
  21.  Financial Management and Economics  Financial Management and Accounting  Financial Management and Mathematics  Financial Management and Production  Financial Management and Marketing  Financial Management and HRM 01-04-2023 21
  22.  It is a term which denotes the maximum profit to be earned by an organization in a given period of time.  The profit maximization goal implies that the Investment, Financing and Dividend decisions of the enterprise should be oriented to profit maximization.
  23. The following important points are in support of the profit maximization objectives of the business concern: (i) Main aim is earning profit. (ii) Profit is the parameter of the business operation. (iii) Profit reduces risk of the business concern. (iv) Profit is the main source of finance. (v) Profitability meets the social needs also.
  24. The following important points are against the objectives of profit maximization: (i) Profit maximization leads to exploiting workers and consumers. (ii) Profit maximization creates immoral practices such as corrupt practice, unfair trade practice, etc. (iii) Profit maximization objectives leads to inequalities among the stake holders such as customers, suppliers, public shareholders, etc. 01-04-2023 25
  25. Profit maximization objective consists of certain drawback also: (i) It is vague: In this objective, profit is not defined precisely or correctly. It creates some unnecessary opinion regarding earning habits of the business concern. (ii) It ignores the time value of money: Profit maximization does not consider the time value of money or the net present value of the cash inflow. It leads certain differences between the actual cash inflow and net present cash flow during a particular period. (iii) It ignores risk: Profit maximization does not consider risk of the business concern. Risks may be internal or external which will affect the overall operation of the business concern. 01-04-2023 26
  26.  Fundamental objective of wealth maximization is to maximize the market value of the firm’s shares.  Maximizes the net present value of a course of action to the shareholders.  Benefits are measured in terms of cash flows.
  27. (i) Wealth maximization is superior to the profit maximization because the main aim of the business concern under this concept is to improve the value or wealth of the shareholders. (ii) Wealth maximization considers the comparison of the value to cost associated with the business concern. Total value detected from the total cost incurred for the business operation. It provides extract value of the business concern. (iii) Wealth maximization considers both time and risk of the business concern. (iv) Wealth maximization provides efficient allocation of resources. (v) It ensures the economic interest of the society. 01-04-2023 28
  28. (i) Wealth maximization leads to prescriptive idea of the business concern but it may not be suitable to present day business activities. (ii) Wealth maximization is nothing, it is also profit maximization, it is the indirect name of the profit maximization. (iii) Wealth maximization creates ownership-management controversy. (iv) Management alone enjoy certain benefits. (v) The ultimate aim of the wealth maximization objectives is to maximize the profit. (vi) Wealth maximization can be activated only with the help of the profitable position of the business concern. 01-04-2023 29
  29.  It focuses on the long term.  It takes into account the time value of money.  It considers risk.  It maintains market price of the shares of the organization.  It recognizes the value of regular dividend payments.
  30. Profit Maximization Wealth Maximization  Its main objective is to earn large amount of profits.  It emphasizes short term  It ignores time value of money.  It ignores risk and uncertainty.  It ignores timing of return  Its main objective is to achieve highest market value of common stock.  It emphasizes long term  It considers time value of money.  It recognizes risk and uncertainty.  It recognizes the timings of return.
  31.  Financial Forecasting and Planning  Acquisition of Fund  Investment of funds  Maintain Proper Liquidity 01-04-2023 32
  32.  Financial Planning  Acquisition of Funds  Proper Use of Funds  Financial Decision  Improve Profitability  Increase the Value of the Firm 01-04-2023 33