Financial Management

What is Financial Management?

Financial management refers to the efficient acquisition, allocation and usage of
funds of the company. It deals in three main dimensions of financial decisions namely,
Investment decisions, Financial decisions and Dividend decisions.
Types/Functions of Financial Decision
The decision of financial management can be broken into three major areas:
 Investment Decision.
 Financing Decision and.
 Asset management Decision.
Investment decision
Investment decisions refer to the decisions regarding where to invest so as to earn
the highest possible returns on investment. Investment decisions can be taken for both
long term as well as short term.
Financial Decision
Such decisions involve identifying various sources of funds and deciding the best
combination for raising the funds. The main sources for raising funds are shareholders'
funds (referred as equity) and borrowed funds (referred as debt).
Asset management decision
Asset management is the practice of increasing total wealth over time by acquiring,
maintaining, and trading investments that have the potential to grow in value. Asset
management professionals perform this service for others
Form of Businesses
An economic activity that involves the exchange, purchase, sale or production of
goods and services with a motive to earn profits and satisfy the needs of customers.
Typically, there are four main types of businesses: Sole Proprietorships, Partnerships,
Limited Liability Companies (LLC), and Corporations.
Sole proprietorship
A sole proprietorship is an unincorporated company that is owned by one individual
only. While it is the simplest form of businesses, it also offers the least amount of financial
and legal protection for the owner.
Partnership
A partnership is a business owned by two or more people, known as partners. Like
sole proprietorships, partnerships are able to take advantage of flow-through taxation.
Owners in partnerships are responsible for the liabilities of the firm.
Corporation
A corporation is a business organization that acts as a unique and separate entity
from its shareholders. A corporation pays its own taxes before distributing profits or
dividends to shareholders.
Difference between Money Market and capital Market?
Money Market: The money market is the trade in short-term debt. It is a constant flow of
cash between governments, corporations, banks, and financial institutions, borrowing and
lending for a term as short as overnight and no longer than a year.
Capital Market: The capital market encompasses the trade in both stocks and bonds. These
are long-term assets bought by financial institutions, professional brokers, and individual
investors.
Difference between Primary Market and Secondary market?
Primary Market: The primary market, also known as the "new issue market" or "primary
capital market," is a financial market where newly issued securities, such as stocks, bonds,
or other financial instruments, are bought and sold for the first time by issuers to raise
capital. In the primary market, companies and governments raise funds by issuing new
securities to investors.
Secondary market: The secondary market, also known as the "secondary capital market" or
"aftermarket," is a financial market where previously issued securities, such as stocks,
bonds, and other financial instruments, are bought and sold among investors. In the
secondary market, these securities are traded after their initial issuance in the primary
market.
What is Interest and its types.
Interest is the cost of borrowing money or the return on investment for lending
money. It's essentially the compensation paid to a lender (or earned by an investor) for the
use of their funds over a specified period.
Types of interest:
1. Simple interest
2. Compound interest
Simple interest is calculated using only the principal amount of the loan.
Compound interest is calculated using the principal amount of the loan, plus the interest
that has accumulated over previous periods.
What is Annuity and its types.
An annuity is a financial product or arrangement where you make regular payments
or receive regular payments over a specific period. It's like a series of payments made at
regular intervals. Here are the main types of annuities.
Ordinary Annuity:
 In an ordinary annuity, payments are made or received at the end of each
period. This means that the first payment occurs at the end of the first period,
and subsequent payments occur at the end of each subsequent period.
 Examples of ordinary annuities include most traditional mortgages and regular
monthly rent payments.
Annuity Due:
 In an annuity due, payments are made or received at the beginning of each
period. This means that the first payment occurs immediately at the beginning
of the first period, and subsequent payments occur at the beginning of each
subsequent period.
 Examples of annuities due include some insurance premium payments and
certain lease agreements.
Perpetuity: A perpetuity is a financial instrument or investment that provides a regular and
infinite series of cash flows or payments that continue indefinitely into the future. These
payments are typically received or paid at regular intervals, such as annually, semi-annually,
or quarterly.
Liquidation Value:
Liquidation value represents the estimated value of a business's assets when they are
sold individually in an orderly and controlled manner, typically during a forced sale or
winding down of the company.
Going Concern Value:
Going concern value is the estimated value of a business as an operating entity that
will continue its normal operations into the foreseeable future.
Market Value:
Market value is the current price at which an asset or a company can be bought or
sold in the open market. It represents the price that buyers and sellers in the market have
agreed upon.
Book Value:
Book value is the value of an asset or a company based on its historical accounting
records. It represents the net value of assets after deducting liabilities as per the balance
sheet.
Intrinsic Value:
Intrinsic value is an estimate of the true worth of an asset or a company based on
fundamental analysis. It attempts to determine the underlying or inherent value of an
asset, regardless of its current market price.
Difference between preferred stock and common stock.
Preferred Stock: Preferred stock is a type of investment that combines features of both
stocks and bonds. It offers regular fixed dividends to investors, similar to interest payments
on bonds, and has higher priority for dividend payments compared to common stock.
However, it typically doesn't have voting rights in the company's decisions.
Common Stock: Common stock represents ownership in a company. When you own
common stock, you have a share of the company and may have voting rights in company
decisions. You can also benefit from potential stock price increases and receive dividends if
the company chooses to pay them.