Introduction to Financial Management

Overview

• This is the first chapter in a 24-chapter series on Financial Management.
• Emphasis on understanding basic terms and concepts as they are fundamental for later chapters.

Key Topics Covered

1. Meaning of Financial Management

   • Definition and importance.

2. Scope of Financial Management

   • Financial management involves procurement, employment, and distribution of funds.

3. Roles and Responsibilities of a Finance Manager

   • A finance manager manages the funds of a company through three main tasks:
     • Procurement of funds
     • Employment of funds
     • Maximizing returns

4. Types of Decisions in Financial Management

   • Investment Decision: Where to invest limited resources for maximum return.
   • Financing Decision: Choosing the source of funds (debt vs equity).
   • Dividend Decision: Deciding how much profit to distribute to shareholders vs reinvesting in the business.

Evolution of Finance Manager's Role

• Traditional role: Focused mainly on procuring funds.
• Modern role: Includes managing funds, risk management, and ensuring maximum returns due to global competition.

Scope of Finance Function

• Initially, finance managers were responsible for raising funds when needed.
• Currently, they manage how funds are raised, invested, and distributed.

Goals and Objectives of Financial Management

• Profit Maximization: Ensuring maximum profitability of the firm.
• Wealth Maximization: Increasing the value of shareholders' investments.

Comparison

• Profit Maximization often ignores risks and timing of returns, focusing on short-term gains.
• Wealth Maximization considers long-term value and sustainability.

Risk-Return Trade-off

• Higher risk typically leads to higher potential returns and vice versa.
• Finance managers must balance risk and return in their investment decisions.

Financial Management vs Financial Accounting

• Financial Accounting: Recording and reporting financial transactions.
• Financial Management: Planning, managing, and distributing financial resources.

Important Terms

• Money Market: Short-term debt transactions.
• Capital Market: Long-term securities like stocks and bonds.
• Shares: Represent ownership in a company.
• Debt: Loans or borrowed capital.

Summary

• Key areas: Meaning, scope, role, objectives, risk-return trade-off, and differentiation from accounting.
• Understanding these basics is crucial for moving forward with more complex topics in financial management.