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Introduction to Financial
Management

UNIT 1 INTRODUCTION TO FINANCIAL
MANAGEMENT
Structure
Nos.
1.0
1.1
1.2
1.3
1.4

Introduction
Objectives
Evolution of Financial Management
Significance of Financial Management
Principles of Financial Management
1.4.1
1.4.2
1.4.3
1.4.4

1.5
1.6
1.7

5
6
6
6
8

Investment Decision
Financing Decision
Dividend Decision
Liquidity Decision

Objectives of Financial Management
Economic Profit vs. Accounting Profit
Agency Relationship
1.7.1
1.7.2

1.8
1.9
1.10
1.11
1.12
1.13

Page

9
11
11

Problems Related with Agency Relationship
Costs of the Agency Relationship

The Changing Financial Landscape
Organisation of Financial Management
Tasks and Responsibilities of Modern Financial Manager
Summary
Self-Assessment Questions/Exercises
Solutions/Answers

12
13
13
15
15
15

1.0 INTRODUCTION
Finance is the application of economic principles and concepts to business decision making and problem solving. The field of finance broadly consists of three categories: Financial Management, Investments and Financial Institutions.
i)

Financial Management: This area is concerned with financial decision making within a business entity. Financial management decisions, include maintaining optimum cash balance, extending credit, mergers and acquisitions, raising of funds and the instruments to be used for raising funds and the instruments to be used for raising funds etc.

ii)

Investments: This area of finance focuses on the behaviour of financial markets and pricing of financial instruments.

iii)

Financial Institutions: This area of finance deals with banks and other financial institutions that specialises in bringing supplier of funds together with the users of funds. There are three categories of financial institutions which act as an intermediary between savers and users of funds, viz., banks, developmental financial institution and capital markets.