Financial Management Ch-1 Short Notes

 

1.0 INTRODUCTION

  • Importance: Financial management is crucial both in academics (due to its evolving nature) and for practitioners (as it aids in making significant business decisions).
  • Purpose: Provides theoretical and logical frameworks for effective financial decisions.

1.1 SCOPE OF FINANCE

  • Key Aspects:
    • Production: Using capital to produce goods/services.
    • Obtaining Capital: Acquiring funds through stocks, bonds, loans, or retained earnings.
    • Selling Products/Services: Using funds to market and generate returns.
  • Assets:
    • Tangible Assets: Physical items (e.g., machinery, land).
    • Intangible Assets: Non-physical items (e.g., patents, know-how).
  • Capital Raising & Investments:
    • Financial Securities: Stocks, bonds, debentures for raising capital.
    • Borrowing: Loans from banks and financial institutions.
    • Investment: Allocating funds to acquire or improve assets to generate future returns.
  • Financial Functions:
    • Raising Funds: Through equity (stock) or borrowing (loans).
    • Investment: Allocating funds to profitable projects.
    • Returns: Paying dividends to investors.

1.2 EVOLUTION OF FINANCIAL MANAGEMENT

  • Phases:
    1. Traditional Phase (40 years): Focus on sporadic events like mergers and capital issuance.
    2. Transitional Phase (1940s-1950s): Continued traditional focus, minimal change.
    3. Modern Phase (1950s onwards): Incorporation of economic theory and quantitative methods.
  • Core Decisions:
    • Investment Decisions: Allocation of funds to projects.
    • Financial Decisions: Determining the structure of financing.
    • Dividend Decisions: Distribution of profits to shareholders.

1.3 INTERFACE OF FINANCIAL MANAGEMENT WITH OTHER FUNCTIONS

  • Key Interactions:
    • Human Resources: Finance department pays salaries for new hires.
    • Marketing: Financial planning for marketing activities (e.g., promotions).
    • Production: Financial resources are required for manufacturing operations.
  • Coordination: Financial management affects all business operations, but is influenced by available funds.

1.3.1 RELATIONSHIP TO ECONOMICS

  • Macroeconomic Factors:
    • GDP, inflation, interest rates, and tax structure impact financial decision-making.
    • Financial managers need to consider these external factors to make informed decisions.
  • Microeconomics: The application of economic principles helps in analyzing the impact of business decisions.

1.3.2 RELATIONSHIP TO ACCOUNTING

  • Key Differences:
    • Accounting: Focuses on keeping score, recording past transactions, and evaluating financial health.
    • Finance: Focuses on maximizing shareholder wealth by evaluating investment decisions and minimizing capital costs.
  • Methods:
    • Accounting: Uses the accrual method (records revenues and expenses when they occur, not when cash flows).
    • Finance: Focuses on cash flow method (real-time understanding of available cash).
  • Certainty vs Ambiguity:
    • Accounting: Deals with the past, providing clear records.
    • Finance: Focuses on future decisions amidst uncertainty and risk.

 

1.4.1 Modern Approach

  • Emergence: Since the mid-1950s, the traditional financial management approach, based on theory, became less relevant due to rapid changes in the business world.
  • Key Drivers: Industrialization, technological advances, government involvement, fierce competition, and larger markets.
  • Financial Management Focus: Efficient utilization of resources, balancing returns with expenses to achieve financial goals.
  • Role of Financial Manager: Decision-making about investments, how to obtain funds, and managing liabilities, with an emphasis on profitability and risk.

1.5 Financial Decisions in a Firm

  1. Investment Decisions: Long-term asset mix decisions, e.g., capital budgeting for buildings, equipment, R&D, etc.
  2. Financing Decisions/Capital Mix: How to fund investments (debt-equity ratio, financial tools, capital markets).
  3. Dividend Decision: Determining the proportion of profit to distribute to shareholders.
  4. Liquidity Decision: Short-term asset mix decisions to maintain solvency and operational efficiency.

1.5.1 Investment Decisions - Long Term Asset Mix

  • Capital Budgeting: Determining which assets and projects to invest in, such as equipment, research, infrastructure, etc.
  • Example: A company investing in a new factory or technology upgrades to support future growth.

1.5.2 Financing Decisions/Capital Mix

  • Debt-to-Equity Ratio: Determining the best balance between debt and equity to minimize cost.
  • Example: A company using both equity and debt to finance an expansion project.

1.5.3 Dividend Decision / Profit Allocation

  • Dividend Policy: Determining how much profit should be distributed to shareholders and how much should be reinvested.
  • Example: A company paying regular dividends to its shareholders but also reinvesting a portion of the profits for future growth.

1.6 Objectives/Goals of Financial Management

  • Maximizing Economic Well-Being: Financial decisions should aim to maximize the value for the company's owners.
  • Profit Maximization: Focused on generating the highest possible profit without considering other factors.
  • Wealth Maximization: A broader approach focusing on increasing shareholder wealth, accounting for risks and timing of returns.

1.6.1 Profit Maximization

  • Profit Maximization Goal: Maximizing profits by increasing revenue and reducing costs.
  • Criticism: Ignoring market imperfections and the timing of benefits.
    • Example: A company focusing on profit maximization might sacrifice quality or sustainability, which could lead to long-term risks.

1.6.1.1 Limitations of Profit Maximization

  1. Vagueness: The term "profit" is unclear, as it can refer to total profit, rate of profit, or profit before/after taxes.
  2. Timing of Benefits: Profit maximization ignores when profits are realized. For example, early returns are more valuable than delayed returns.
  3. Quality of Benefits: Profit maximization does not account for the certainty or risk associated with the expected benefits.

1.6.2 Maximization of Wealth for Shareholders

  • Wealth Maximization: Focuses on increasing the market value of the company’s stock, considering the timing and risk of returns.
    • Net Present Value (NPV): A method used to evaluate investment projects, ensuring that the benefits outweigh the costs.
    • Example: A company investing in projects with positive NPV, thereby increasing the value of shareholders' wealth.
  • Key Difference: Unlike profit maximization, wealth maximization considers the long-term growth of shareholder wealth.

 



 

Comments

Post a Comment

Popular posts from this blog

FINANCIAL managment explain hindi/english

  1.0 Introduction Financial Management एक ऐसा विषय है जो academic और practical, दोनों क्षेत्रों में बहुत महत्वपूर्ण है। Academics के लिए ये interesting इसलिए है क्योंकि ये विषय evolving है और अभी भी कई topics पर disagreement है। Practitioners के लिए ये इसलिए important है क्योंकि financial decisions किसी भी business के सबसे critical decisions होते हैं। Financial management से practitioners को theoretical और logical आधार मिलता है जो उन्हें बेहतर decisions लेने में मदद करता है। 1.1 Scope of Finance हर organisation के तीन महत्वपूर्ण हिस्से होते हैं : Production ( उत्पादन ) Obtaining Capital ( पूंजी जुटाना ) Selling Products/Services ( उत्पादों या सेवाओं को बेचना ) Finance activity का मतलब है : पूंजी जुटाना। उस पूंजी को ऐसी जगह लगाना जहां से returns ( लाभ ) मिले। Assets: Tangible Assets : जैसे मशीन...
Read more

Human Resource Management (HRM) - CH-1

  Human Resource Management (HRM) – Hindi-English Mixed Explanation 1. INTRODUCTION TO HUMAN RESOURCE MANAGEMENT Human Resource (HR) किसी भी संगठन का एक अहम resource होता है. कह सकते हैं कि "90% business लोग होते हैं". HR एक competitive advantage create करता है और इसको manage करना challenging task है क्योंकि HR एक ऐसा resource है जो सोच सकता है और decisions को question कर सकता है. HR के बिना कोई भी संगठन अपनी full potential तक नहीं पहुँच सकता क्योंकि हर employee के पास अलग-अलग needs, personalities और ambitions होते हैं. जब कोई employee संगठन का हिस्सा बनता है, तो वह अपने साथ एक पूरी personality और package लेकर आता है, इसलिए लोगों से निपटना HRM का बहुत critical task बन जाता है. 1.1 DEFINING HUMAN RESOURCE MANAGEMENT (HRM) Pande और Basak के अनुसार, "Human Resource Management एक strategic और coherent approach है जो organization के सबसे valuable asset - लोगों का management करता है." Armstrong के हिसाब से, "HRM एक strategic approach है जो लोगों को manage ...
Read more

Consumer Behaviour ch-1st , short notes

  1. What is Consumer Behaviour? Definition : Study of how individuals meet their needs by selecting, securing, and consuming products or services. Process : Involves recognizing needs, making decisions to satisfy them, and evaluating the outcomes. Importance : Helps businesses understand consumer needs, leading to better communication and marketing strategies. 2. Importance of Consumer Behaviour Better Communication : Knowing consumer needs helps tailor messages. Boosts Sales : Understanding customer preferences increases product appeal. Informed Marketing : Guides strategic marketing planning and execution. Competitive Edge : Allows companies to meet consumer expectations better than competitors. 3. Key Questions in Consumer Behaviour Why do consumers buy? (e.g., lifestyle, group acceptance) What influences their decisions? (e.g., internal factors like beliefs; external ...
Read more