FUNDAMENTALS OF FINANCIAL MANAGEMENT

A FOOL AND HIS MONEY ARE SOON PARTED.

DEFINING FINANCE

1) Finance is Science and Art of managing money.

2) Finance is the study which shows that how people allocate their resources over a time period.

Why to study Finance?

To manage your personal resources e.g Budgeting. To deal with the world of business To pursue interesting and rewarding career. To help the public in making better choice e.g investment decision. To expand your mind.

Financial Decision of Households

Consumption and saving decision. Investment decision. Financing decision. Risk management.

FINANCIAL RISK MANAGEMENT

Risks related to interest rate, stock price, and exchange rate fluctuations in the financial markets.

Reduce financial risks by holding a broadly diversified portfolio of stocks and debt securities.

World of Business
Financial services Managerial finance a) Financial Analyst b) Capital Budgeting c) Project Finance Manager e) Cash Manager f) Credit Analyst g) Pension Fund Manager Career opportunities

 CAREER OPPORTUNITIES a) Banking and related institution b) Personal financial services c) Investment d) Real estate e) Insurance

KEY ACTIVITIES OR FUNCTIONS OF FINANCIAL MANAGER

BALANCE SHEET
CURRENT ASSETS FIXED ASSETS CURRENT LIABILITIES LONG TERM DEBT OWNERS EQUITY

TOTAL ASSETS

TOTAL LIABILITIES & S.E

DISTINCTION BETWEEN SHARES AND BONDS

Bond is a debt instrument whereas Shareholders are the owner. Interest on bonds is a fixed charge, whereas dividend is distribution of profit. Shares are perpetual whereas bonds are always issued for stipulated period. Shares are more risky for shareholder Shares enjoy the voting right, whereas bonds dont.

FINANCE AND OTHER RELATED DISCIPLINES

FINANCIAL DECISION AREAS a) Investment Analysis b) Working Capital Management c) Sources and Cost of Funds d) Capital Structure e) Dividend Policy f) Analysis of Risk & Return

RELATED DISCIPLINES
PRIMARY DISCIPLINE SECONDARY DISCIPLINE a) Accounting a) Marketing b) Economics b) Production c) Statistics

GOAL OF THE FINANCIAL MANAGER

PROFIT MAXIMIZATION Represented by EPS EPS = Net profit after tax / No: of Common shares

DRAWBACKS
Ignores the timings of returns It does not represent dividend paid to Shareholders Risk factor Quality of benefits

MAXIMIZATION OF SHAREHOLDERS
Measures the price of the Stock,based upon 1) Timings of Cash flows 2) Their magnitude available to Shareholders 3) Risk 4) Quality of benefits

ECONOMIC VALUE ADDED

Operating profit after tax = $410,000 Cost of funds = $350,000 EVA = $ 60,000