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Unit 1

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Finance defined as the provision of money atthe time when it is required.

It also refers to the management of flows ofmoney through an organization.

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Finance is regarded as life blood of a

business enterprise. Modern economy is money oriented. Finance is one of the basic foundations of

all kinds of economic activities. Business needs money to make more

money. Money makes more money only when it is

properly managed. Efficient management of business

enterprise is closely linked with efficientmanagement of finance.

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In general, finance may be defined as theprovision of money at the time it iswanted.

Procurement of funds and their effective

utilization. Business finance: is concerned with theacquisition and conservation of capitalfunds in meeting financial needs and

overall objectives of a business enterprise. Business finance: concerned withplanning, raising, controlling andadministering of the funds used in thebusiness.

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Financial Management refers to that part ofthe management activity which is concernedwith planning and controlling of firmsfinancial resources.

Finance + Management(from Planning to Controlling)

Why ? NeedWhere? Available /UtilizeHow? To Collect/Utilize It is Combination of Finance with Planning,

Organizing, Controlling and Decision-making.

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Financial Management is concerned with

the efficient use of an important economicresource, namely, capital funds.Solomon Financial Management is concerned with

the managerial decisions that result in the

acquisition and financing of long-term andshort-term credits for the firm. An analysis of these decisions is based on

the expected inflow and outflow of funds

and their effects upon managerialobjectives

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Major Objectives Profit Maximization Wealth Maximization - Ensuring a fair returns to

shareholders. Focus on stakeholders interest

Other Objectives Building up reserves for growth and expansion. Ensuring maximum operational efficiency by

efficient and effective utilization of finance. Ensuring prompt payment to creditors. Ensuring financial discipline in the organizations. Effective decision-making on financial

operations.

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Financial planning and successful promotion ofan enterprise

Acquisition of funds as and when required a theminimum possible cost

Proper use and allocation of funds Taking sound financial decisions Improving the profitability through financial

controls Increasing the wealth of the investors and the

nation Promoting and mobilizing individual and

corporate savings

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Determining Financial Needs Selecting the sources of funds Financial Analysis and Interpretation

Cost-volume-profit Analysis Capital Budgeting Working Capital Management Profit Planning and Control Dividend Policy

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Analysis of Financial Statements Investment Decisions & Capital Budgeting-Time Value of Money, IRR, NPV, Profitability Indexetc.

Risk & Return- Certain, Uncertain risks, CAPMetc.

Corporate Financing & Capital Structure Cost of Capital, Leverage, Dividend etc.

Working Capital & Inventory Management International Finance & Foreign Exchange

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Traditional approach: to only procurement of funds needed by a

business on most suitable terms. The utilization offunds was considered beyond the purview offinance function.

Modern approach: It views finance function in broader sense. It

includes both rising of funds as well as theireffective utilization under the preview of finance.

The modern approach considers the three basic

management decisions. i.e., Investment decisions,financing decisions and dividend decisions withinthe scope of finance function.

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1. Financial Decision: Source of raising fixed

and non fixed cost-bearing securities.2. Investment decision: decision related to

both capital and current assets.

3. Dividend decision: proportion of profitpayable to shareholders consideringmarket price of shares, tax implications andother factors.

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Financial manger is the person responsible for carrying out thefinance function. He occupies the key position in anorganization.

1. Fund raising:

See that firm has adequate cash to meet the daily needs.

Make financial decisions Raise the needed funds form combination of various sources.

2. Funds allocation:

Using skills and techniques in implementing a system ofoptimum allocation of firms resources.

There should be efficient allocation of resources

Financial manger must find a rationale for answering the followingquestions

How large should an enterprise be and how fast should it grow?

In What form should it hold its assets?

How should the funds required be raised?

The answers will three broad decisions investment, financing anddividend

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External Factors

State of economy Structure of capital and

money markets Requirements of investors Government policy Taxation policy Lending policy of financial

institutions.

Internal Factors

Nature and size ofbusiness

Expected return Composition of assets Structure of ownership Trend of earnings Age of the firm Liquidity position Working capital

requirements Conditions of debt

agreements

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THE FINANCIAL SYSTEMTHE FINANCIAL SYSTEM

Meaning: Financial system comprises a

variety of intermediaries, markets andinstruments that are related to each other.

It provides means by which savings aretransformed into investments.

Its role is allocation of resources.

The efficient functioning of financialsystem is critical to a modern economy.

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Financial System

A financial System is a complex, well-integrated set of sub-systems of financialinstitutions, markets, instruments andservices.

It mobilizes and usefully allocate scarceresources of a company.

It facilitates the transfer and allocation of

funds, efficiently and effectively.

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Indian Financial System

It broadly classified into the formal(Organized) and Informal (Unorganized)financial System.

Formal System Comes under Ministry ofFinance, RBI, SEBI and Other regulatorybodies

Informal System consists of Individual MoneyLenders, Group of persons, Partnership Firmsetc.

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Indian Financial System

Formal (Organized) Informal Unorganized)

Regulators MOF, RBI,SEBI,IRDA1. Money Lenders

2. Local Bankers

3. Traders

4. Land Lords

5. Pawn Borkers

1. Financial Institutions

2. Financial Markets

3. Financial Instruments

4. Financial Services

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Components of Formal FinancialSystem

1. Financial Institutions Banks Commercial (Public, Private and

Foreign Banks)

Non-Banking Development FinancialInstitutions Like HFCs, IDBI, ICICI, SIDBI,SFC, EXIM, SIDC etc.

Mutual Funds

Insurance and Housing Finance Companies

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2. Financial Markets Capital Market (Both Equity NSE, BSE,

Bonds, Govt. Securities etc and MoneyMarket Treasury Bills, Commercial Papersetc).

3. Financial Instruments Shares, Debentures, Mutual Fund units,

Insurance Policies.4. Financial Services Factoring, Merchant Banking, Leasing, Hire

purchase, Guaranteeing etc.,

F ti f Fi i l

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Function of FinancialSystem Link the savers and investors Mobilizing and Allocating the savings Continuous upgrading of techniques Monitor the performance of the investment Achieve optimum allocation of risk bearing Creation of a financial structure that lowers the cost

of transactions Provide financial services such as insurance,

pension etc Provide information for economic and financial

Decisions Promoting the process of financial deepening and

Broadening. provides a way for managing uncertainty and

controlling risk