FINANCE - INTRODUCTION

Finance is the life blood and nerve Centre of

business, just as circulation of blood in
human body .Finance is very essential to
smooth running of business. It has been
rightly termed as universal lubricant which
keeps the enterprise dynamic. Financial
management study about the process of
procuring and judicious use of financial
resources to maximize the value of the firm.
 DEFINITION
“Business finance can be broadly defined as the activity
concerned with the planning , raising , controlling and
administering the funds used in the business.”
….. Guthmann Dougal
“The business activity which is concerned with the
acquisition and conservation of capital funds to meet
the financial needs and overall objectives of business
enterprise.”
…. Wheeler
“Business finance deals primarily with raising,
administering and disbursing funds by privately owned
business units operating in non-financial fields of
industry.”
….. Prather and Wert
 FINANCE

PUBLIC PRIVATE
FINANCE FINANCE
- GOVERNMENT INSTITUTIONS
- STATE GOVERNMENT -PERSONAL FINANCE
- LOCAL SELF - GOVERNMENTS -BUSINESS FINANCE
-FINANCE OF NON-
- CENTRAL GOVERNMENT PROFIT ORGANISATION
 BUSINESS
Industry BUSINESS Commerce

Trade Aids to
Trade

Transport
Primary Secondary
Insurance
Domestic Warehousing,A
Foreign
dvertising,Ban
king
Extrac Genetic Manuf Constru
tive acturin ctive
g Wholesale Retail Export Import Entrepot
 BUSINESS FINANCE

SOLE- COMPANY OR
PARTNERSHIP
PROPRITORY CORPORATION
FIRMS FINANCE
FINANCE FINANCE
 Financial Management
It refers to that part of the
management activity which is
concerned with the planning and
controlling of firms financial resources.
It deals with finding out various
sources for raising funds for the form.
The use of such funds also form part of
financial management.
Financial Management – Definition
• “ Financial Management is the operational activity
of a business that is responsible for obtaining and
effectively utilising the funds necessary for efficient
operations. -J.L. Massie.
• “ The area of the business management devoted to
a judicious use of capital and a careful selection of
sources of capital in order to enable a spending
unit to move in the direction of reaching its goals.’’-
J.F. Bradley.
 FM - Importance
• Financial planning and promotion of an enterprise
• Acquisition of funds at right time at minimum 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 mobilising individual and corporate
savings.
 Finance Function
• Finance function starts with the setting up of an
enterprise and remains at all times. For every
activity finance is required. The need for money
is continuous.Finance function consist of
 Acqusition of sufficient funds
 Proper utilisation of funds
 Increasing profitability and
 Maximising firms value.
 Scope of Finance Function or Financial
Management
• Estimating financial requirements
• Deciding capital structure
• Selecting source of finance
• Selecting pattern of investment
• Proper cash management
• Implementing financial controls
• Proper use of Surplus
Finance with other business functions

Business Functions

PURCHASE DISTRIBUTION PERSONNEL

ACCOUNT
PRODUCTION
ING RESEARCH AND
DEVELOPMENT
Accounting and financial management

Financial
Accountin Provides data
g Provides
Management information TO
Financial Decisions
Accounting Manageme Take 1. Financing
Cost nt 2. Investment
Accounting Provides data 3. Dividend

Process and
Analyse data
received

Data generation
 Objectives of Financial Management

• Profit Maximisation
 profit earning – main aim
 barometer of efficiency
 survive unfavourable situation
 main source of finance
 essential for fulfilling social goals.
 Objectives - contd
Objections
 ambiguity
 ignores time value of money
 Ignores risk factor
 dividend policy.
 Objectives - contd
• Wealth Maximisation
• Stockholders current wealth in a firm = (No.
of shares owned) x (Current stock price per
share)
• Maximum Utility refers to maximum
stockholders wealth refers to maximum
current stock price per share.
 Objectives - contd
• Serves interest of owners and outsiders
• Long run survival and growth
• Risk factor and time value of money is
considered.
• Effect of dividend policy on market price of
share
• Value maximisation of equity shareholders
through increase in stock price per share
 Financial Decisions

Investment
Decision

Financing Dividend
Decision Decision
Inter relation of financial Decision

Financial Management
Is concerned with
Financing Dividend
Investment decision decision
decision

Risk return relationship

To achieve the goal of

Wealth
maximisation
 Factors affecting Financial Decisions

External Factors Internal Factors

1. State of economy 1. Nature and size of business

2. Structure of capital and money markets 2. Expected return cost and risk
3. Requirements of investors 3. Composition of assets
4. Government policy 4. Structure of ownership
5. Taxation policy 5. Trend of earnings
6. Lending policy of financial institutions 6. Age of the firm
7. Liquidity position
8. Working capital requirements
9. Conditions of debt agreement
 Risk- Return Trade off

Investment Decision
-Capital budgeting
-working capital
management
Risk
Financing Decision Market
-Capital structure value of the
Firm
Return
Dividend Decision
-Dividend policy
 Financial Management Process
Financial planning and
control

Feed back

Financial Decisions
1. Investment Market price Shareholders
Risk and return
2. Financing of share wealth
3. Dividend
 Functional Areas of Financial Mgt
 Determining financial needs
 Selecting source of funds
 Financial analysis and interpretation
 Cost Volume Profit Analysis
 Capital Budgeting
 Working Capital Management
 Profit Planning and Control
 Dividend Policy.
 ORGANISATION OF FINANCE FUNCTION

• The responsibilities for financial management

are spread throughout the organisation in the
sense that financial management is, to an
extent, an integral part of the job for the
managers involved in planning, allocation of
resources and control.
 Principal – agency problem
• The agency problem is a conflict of interest inherent in any
relationship where one party is expected to act in another's
best interests. In corporate finance, the agency
problem usually refers to a conflict of interest between a
company's management and the company's stockholders.
• The relationship between business owners and business
management gets complicated when they're not the same
people. One approach to understanding it is agency theory:
Managers are agents for the owners and are obligated to
represent their best interests. Types of agency problems arise
when managers' self-interest conflicts with that of the owners.