Page 9 - DMGT409Basic Financial Management

Basic Financial Management

Notes
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Caution Financial Management is broadly concerned with the acquisition and use of funds

by a business firm. Its scope may be defined in terms of the following questions.

1. How large should the firm be and how fast should it grow?
2. What should be the composition of the fi rm’s assets?
3. What should be the mix of the fi rm’s fi nancing?
4. How should the firm analyze, plan and control its fi nancial affairs?

Financial Management is concerned with the efficient use of an important economic resource

namely, capital funds.
Thus, Financial Management includes – Anticipating Financial Needs, Acquiring Financial
Resources and Allocating Funds in Business (i.e., Three A’s of fi nancial management).
Figure 1.1: Framework of Financial Management

Management of Long-Term Assets:
Management of Long-Term Management of Long-Term Assets:
Management of Long-Term
Funds :
Funds :
Capital Budgeting
Capital structure Capital Budgeting
Capital structure
Cost capital
Cost capital
Operational Leverage
Sources of Long-term-Funds Operational Leverage
Sources of Long-term-Funds
Financial Leverage
Financial Leverage
Risk Analysis
Dividend policy
Dividend policy Risk Analysis
Financial Management
Working Capital Management

Management of Short-term funds: Management of short-Term Assets:
Management of short-term Receivable Management
Liabilities like creditors, Bank Inventory Management
Overdrafts, Bills payable, short- Cash Management
term Loans Principles of working Capital
Principles of working capital Management
Management Working capital Policy
Working Capital Policy

1.2 Objectives of Financial Management

(Profit – Maximization vs Wealth Maximization)

The goals of financial management can be broadly classified into two categories:
1. Basic Goals: Traditionally, the basic goals of financial management have been
(A) Maintenance of liquid assets and (B) Maximization of profitability of the firm. However,
these days, there is a greater emphasis on (C) Shareholders’ wealth maximization rather
than on profit maximization.

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