Venkteshwar Institute of Technology, Indore. Frequently Asked Questions (FFM- Finance) MBA- IInd Sem. Prepared By: Garima Shrivastava, Asst. Prof. MBA, and VIT Indore. Unit No- I st Introduction

1. What is Financial Management? Meaning of Financial Management Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise. Financial management may refer to: •

Managerial finance, the branch of finance that concerns itself with the managerial significance of finance techniques



Corporate finance, an area of dealing with the corporate financial decisions.

Managerial finance is the branch of the finance that concerns itself with the managerial significance of finance techniques. It is focused on assessment rather than technique. The difference between a managerial and a technical approach can be seen in the questions one might ask of annual reports. One concerned with technique would be primarily interested in measurement. They would ask: are moneys being assigned to the right categories? Were generally accepted accounting principles GAAP followed? One concerned with management though would want to know what the figures mean. •

They might compare the returns to other businesses in their industry and ask: are we performing better or worse than our peers? If so, what is the source of the problem? Do we have the same profit margins? If not why? Do we have the same expenses? Are we paying more for something than our peers?



They may look at changes in asset balances looking for red flags that indicate problems with bill collection or bad debt.



They will analyze working capital to anticipate future cash flow problems.

Managerial finance is an interdisciplinary approach that borrows from both managerial accounting and corporate finance. Sound financial management creates value and organizational agility through the allocation of scarce resources amongst competing business opportunities. It is an aid to the implementation and monitoring of business strategies and helps achieve business objectives.

Venkteshwar Institute of Technology, Indore. Frequently Asked Questions (FFM- Finance) MBA- IInd Sem. Prepared By: Garima Shrivastava, Asst. Prof. MBA, and VIT Indore. Unit No- I st Introduction

The Role of Managerial Accounting: To interpret financial results in the manner described above, managers use financial analysis techniques. Managers also need to look at how resources are allocated within an organization. They need to know what each activity costs and why. These questions require managerial accounting techniques such as activity based costing. Managers also need to anticipate future expenses. To get a better understanding of the accuracy of the budgeting process, they may use variable budgeting. Corporate finance is the field of finance dealing with financial decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value while managing the firm's financial risks. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms. The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, short term decisions deal with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers). The terms corporate finance and corporate financier are also associated with investment banking. The typical role of an investment bank is to evaluate the company's financial needs and raise the appropriate type of capital that best fits those needs. Thus, the terms “corporate finance” and “corporate financier” may be associated with transactions in which capital is raised in order to create, develop, grow or acquire businesses. The Role of Corporate Finance: Managerial finance is also interested in determining the best way to use money to improve future opportunities to earn money and minimize the impact of financial shocks. To accomplish these goals managerial finance uses the following techniques borrowed from corporate finance: •

Valuation



Portfolio theory



Hedging



Capital structure

Venkteshwar Institute of Technology, Indore. Frequently Asked Questions (FFM- Finance) MBA- IInd Sem. Prepared By: Garima Shrivastava, Asst. Prof. MBA, and VIT Indore. Unit No- I st Introduction

2. What are the scopes and objectives of the Financial Management? Scope/Elements: 1. Investment decisions includes investment in fixed assets (called as capital budgeting).Investment in current assets are also a part of investment decisions called as working capital decisions. 2. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby. 3. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two: a. Dividend for shareholders- Dividend and the rate of it has to be decided. b. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise. Objectives of Financial Management: The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be1. 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. 3. What are the functions of Financial Management? Functions of Financial Management: 1. Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This

Venkteshwar Institute of Technology, Indore. Frequently Asked Questions (FFM- Finance) MBA- IInd Sem. Prepared By: Garima Shrivastava, Asst. Prof. MBA, and VIT Indore. Unit No- I st Introduction

will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise. 2. Determination of capital composition: Once the estimation has been made, the capital structure have 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. 3. Choice of sources of funds: For additional funds to be procured, a company has many choices likea. 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. 4. 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. 5. Disposal of surplus: The net profits decision has to be made by the finance manager. This can be done in two ways: a. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus. b. Retained profits - The volume has to be decided which will depend upon expansion, innovational, diversification plans of the company. 6. 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. 7. 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. 4. Discuss Profit Maximization Approach?

Venkteshwar Institute of Technology, Indore. Frequently Asked Questions (FFM- Finance) MBA- IInd Sem. Prepared By: Garima Shrivastava, Asst. Prof. MBA, and VIT Indore. Unit No- I st Introduction

Profit Maximization Approach – The Financial Management Objectives: The company must take the investment and the decisions of financing on a basis of continuation. To take the wise optimum and the decision, a clear arrangement of the objectives is a need. There are two approaches broad-discussed concerning objectives financial management. One is approach of maximization of benefit and second is approach of maximization of richness. The objectives are employed in the direction of a criterion of goal or decision for the decision implied in financial management. Profit maximization approach: The economists believes that one long period that the maximum benefit of income is the single goal of any organization of businesses, because that will also lead to the optimum allocation of resources. Actions which increase the benefit of companies are undertaken and those which decrease the benefit are avoided. Thus, of the prospect for the economic theory, the maximization of benefit is simple a criterion of economic efficiency. There is also an extensive agreement which under the perfect competition, where all the prices reflect true values exactly and consume them is quite informed, benefit maximizing the behavior by company’s leads to the effective allocation of resources and the maximum good social being. The rationale behind profit maximization objectives is simple. A business firm is s profit seeking organization. Profit is a test of economic efficiency, It is assumed to lead to efficient allocation of resources, It ensure maximum social welfare. Limitation of profit maximization objectives: • The concept of the benefit is vague: The definition of the benefit of limit is vague and ambiguous. Does it refer to the gross profit or profits after tax? Total benefit or benefit by share? The benefit is interpreted by various people in various manners. • Ignores time value of money: The fact that one rupee received today is of more than value than one rupee received later. This concept is to lead been unaware of to the errors in decision making. • It ignores risk: The future advantages can have various degrees of certainty. The more certain the return envisaged is, the more is its high value or reciprocally more is the return envisaged dubious. More is its lower value. This concept is also completely ignored. It also arranges the two proposals implying various degrees of risk.

Venkteshwar Institute of Technology, Indore. Frequently Asked Questions (FFM- Finance) MBA- IInd Sem. Prepared By: Garima Shrivastava, Asst. Prof. MBA, and VIT Indore. •

Unit No- I st Introduction

A system based on the private property and the maximization of benefit could be effective, but it carries out it leads to the serious inequality of the income and the richness among various groups. Naturally, the contrary argument is that the company as a whole is clearly easier because it leads to the optimum allowance of the resources of the company.

5. Discuss Profit Maximization approach V/S Value Maximization approach. Profit Maximization approach: The traditional approach of financial management was all about profit maximization. The main objective of companies was to make profits. The traditional approach of financial management had many limitations: 1. Business may have several other objectives other than profit maximization. Companies may have goals like: a larger market share, high sales, greater stability and so on. The traditional approach did not take into account so many of these other aspects. 2. Profit Maximization has to define after taking into account many things like: a. Short term, mid term, and long term profits b .Profits over period of time The traditional approach ignored these important points. 3. Social Responsibility is one of the most important objectives of many firms. Big corporate make an effort towards giving back something to the society. The big companies use a certain amount of the profits for social causes. It seems that the traditional approach did not consider this point.

Wealth/ Value Maximization approach:

Modern Approach is about the idea of wealth maximization. This involves

Venkteshwar Institute of Technology, Indore. Frequently Asked Questions (FFM- Finance) MBA- IInd Sem. Prepared By: Garima Shrivastava, Asst. Prof. MBA, and VIT Indore. Unit No- I st Introduction

increasing the Earning per share of the shareholders and to maximize the net present worth.

Wealth is equal to the difference between gross present worth of some decision or course of action and the investment required to achieve the expected benefits. Gross present worth involves the capitalized value of the expected benefits. This value is discounted a some rate, this rate depends on the certainty or uncertainty factor of the expected benefits.

The Wealth Maximization approach is concerned with the amount of cash flow generated by a course of action rather than the profits. Any course of action that has net present worth above zero or in other words, creates wealth should be selected.

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MBA- IInd Sem. Prepared By: Garima Shrivastava, Asst. Prof. MBA, and VIT Indore. Unit No- I st Introduction. 1. What is Financial Management? Meaning of ...

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