Introduction to Finance

Prof. (Dr.) Paresh Shah,

FCMA.,Ph.D.,F.D.P.(IIM-AHD)
 HUMAN OCCUPATIONS
-ECONOMICAL ACTIVITIES
-HUMAN OCCUPATION
• CLASSIFICATION OF HUMAN
OCCUPATIONS
-PROFESSIONS
-EMPLOYMENT
-BUSINESS

Financial Management 2nd Edition

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 BUSINESS ENVIRONMENT
• A BUSINESS FIRM MUST PERFORM ITS
ACTIVITIES REPEATEDLY, WHICH
CONSIST OF A CYCLE:
– DRAWING INPUTS
– INTERNALLY PROCESSING THIS INPUTS;
AND
– RELEASING OUTPUT INTO THE
ENVIRONMENT / SOCIETY.

Financial Management 2nd Edition

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 BUSINESS AS A SYSTEM
• A SYSTEM MAY BE DESCRIBED AS A
SET OF INTERRELATED, INTEGRATED
PARTS, WHICH CONTRIBUTE TO THE
SMOOTH, EFFICIENT AND EFFECTIVE
FUNCTIONING OF A BUSINESS FIRM.
• ‘SYSTEM APPROACH’
• ‘ SYSTEM ANALYSIS’.

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 Management Of Business
• For, Efficient and effective working, the
operational area of business can be divided
into four main parts:
-Production Management,
-Marketing Management,
-Financial Management,
-Personal Management.

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 Survival and growth
• Profit is essential for survival and growth of
the business.

Financial Management 2nd Edition

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 TYPES OF BUSINESS
ORGANIZATIONS
• Business Organization
• The term business organization
represents a business firm or a
business enterprise.

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Type of Business Organizations:
-- Sole traders of sole- proprietorship
– Partnership
– Hindi Undivided Family or Joint Hindu
Family Business
– Cooperatives
– Joint Stock Company or Corporate Form of
Business Organization
– Public Enterprise or State Enterprise

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 Duties and responsibilities of Finance
Executives
• RECURRING DUTIES.
– Deciding the Financial Needs:
• Raising the funds required:
• Allocation of funds:
• Fixed Asset Management

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 Duties and responsibilities of
Finance Executives
• Working Capital Management:
• Allocation of Income
• Control of Funds:
• Evaluation of Performance:
• Corporate Taxation
• Other Duties:

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 Duties and responsibilities of Finance
Executives
• Non-recurring Duties

Financial Management 2nd Edition

By Paresh Shah
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 DEFINITION OF FINANCE
FUNCTION
• It involves the task of providing
funds needed by the enterprise on
terms that are most favorable in the
light of this objective ‘ In other
words, it can be defined in simple
terms as procurement of funds, and
their effective utilization in the
business’
Financial Management 2nd Edition
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 DEFINITION OF FINANCE
FUNCTION
• Henry Ford remarked: “Money is an arm or
leg. You either use it or lost it. This remarks
explains the significance of money or cash.
• The Sanskrit saying arthahsachivah, which
means ‘finance reigns supreme’, speaks for the
significance of a firm’s finance function.

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 SCOPE OF FINACE FUNCTION
• The scope of finance is broader and involves
taking decisions about:
• Which specific assets should a company
acquire?
• What total volume of funds should a company
borrow?

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 SCOPE OF FINACE FUNCTION
• What are the sources from which the funds required
to be raised?
• Some examples of such decisions are:
– Decision regarding any change in marketing and
advertising technique that do not involve a change
in actual advertising budget.
– Decisions pertaining to administrative practices.
– Decisions about labours’ participation in
management.
– As pointed out by F.W.Paish, finance is the life-
blood of business.
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 CLASSIFICATION OF FINANCE
FUNCTION
• Managerial Finance Functions
– Investment decisions involving the type
and volume of assets to be acquired.
– Financial decision involving the decision
about the various sources and extent of
funds to be obtained.
– Dividend decision involving the extent of
profit to be allocated and the extent of
profit to be retained.
Financial Management 2nd Edition
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CLASSIFICATION OF FINANCE
FUNCTION
• Routine Financial Function
– Supervision of cash receipts and payments,
and the safeguarding of cash balances.
– Custody and safeguarding of securities,
policies and other valuable documents.
– Record keeping of financial transactions
and reporting.

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 Financial Management
• ‘Financial Management is concerned with the
acquisition, financing, and management of
assets with some overall goal in mind.’ (J.C.
Van Horne)
• ‘Financial Management is an area of financial
decisions making, harmonizing individual
motives and enterprise goals.’ (Weston and
Brigham)

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 Financial Management
• ‘Financial Management is the
application of planning and control
functions to the finance function.’
(Archer and Ambrosio)
• Two broad groups: (a) Traditional
approach; and (b) Modern approach.

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 OBJECTIVES OR GOALS OF
FINANCIAL MANAGEMENT
• Economic welfare can be maximized by:
• Profit maximization; and
• Wealth maximization.

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 INTERFACE BETWEEN FINANCE
AND OTHER AREAS
• Production:
• Marketing
• Personnel
• Research and Development

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 APPROACHES OF BUSINESS
FINANCE
• The word ‘finance’ is derived from
the an old French word ‘Finer’,
meaning thereby to pay, settle or
finish.
• A business needs funds from
‘cradle to its grave’.

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 APPROACHES OF BUSINESS
FINANCE
• Business finance connotes financing of
business activities
• Business finance is divided in to two
categories:
• Traditional Approach
• Modern Approach

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 Business finance versus Corporation
finance:
• Business finance is concerned with how
the finances of a business enterprise
should managed.
• Business finance may be broadly defined
as the process of retaining, providing and
managing of all the funds to be used in
connection with business activity. It is an
activity concerned with planning, raising,
controlling and administrating of funds
used in the business.
Financial Management 2nd Edition
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 Business finance versus
Corporation finance:
• Corporation finance refers to the study
of finance for incorporated bodies.
• Husband and Dockery state: Basically,
corporation finance serves two important
functions. First, it is a means of
assembling the funds necessary to initiate
any new business. Second, and much
more important, it provides the basis for
continued operations.
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TYPES OF FINANCIAL DECISIONS

• The finance manager plays an important role

in
– Decision-making in three vital areas:
– Investment decisions;
– Financial decisions and
– Dividend decisions.

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 Risk-Return tradeoff
• Business risk is inherent in the
business operations of the
company. Financial risk refers to
the risk caused by the introduction
of debt into the capital structure of
a company.

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 Risk-Return tradeoff
• Business risk is usually the least
calculable and is caused by managerial
competence, competitive position, labour
relations and growth prospects of the
industry in the market. Financial risk is
also viewed as the probability of a
company going insolvent for want of its
ability to meet debt-servicing charges.
Financial Management 2nd Edition
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 Risk-Return tradeoff
• The general notation is ‘ the higher the
risk, the higher should be the rate of
return’,and therefore, risk and return go
hand-in-hand.

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ORGANIZATION CHART OF FINANCE FUNCTION
IN BIG ORGANIZATION

• Organization Chart of Finance

Management
– The chief finance executive may have
many officers under him to carry out his
function. Broadly, his functions are
divided in two types:
» 1. Treasury
Functions; and
» 2. Control Functions.
Financial Management 2nd Edition
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ORGANIZATION CHART OF FINANCE FUNCTION
IN BIG ORGANIZATION

• Acts of Treasurer
– Treasurer refers to a financial officer
concerned mainly with the task of
financing and activities related
thereto.
• Acts of a Controller
– Controller is a financial officer
responsible for accounting and
control.
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 Meaning Of Financial Planning
• Financial planning may be referred to as
the assessment of financial requirements
and a clear arrangement of various sources
of capital so as to optimize on the cost and
increase return to shareholders and
accommodate at all times the carrying of
the assets.

Financial Management 2nd Edition

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 Need And Importance Of Financial
Planning
• The need for financial planning arises due to the
following reasons:
– Timely availability of sufficient funds of cash to
meet the various expenses, emergencies and
contingencies.
– To ensure liquidity of funds throughout the year
– To outline the points of time where and when the
funds will be required and how much.
– To indicate whether there is likelihood of surplus
resources available for expansion and investment.

Financial Management 2nd Edition

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 Need And Importance Of
Financial Planning
– To anticipate future requirements of funds, if any.
– To generate confidence in the minds of suppliers
of funds by adopting prudent financial policies.
– The environment under which business firms
operate constantly changes. There is cut-throat
competition and the consequent narrow margin of
profit. Financial planning is one of the tools for
filling up the gap between the existing and desired
situation (goals).

Financial Management 2nd Edition

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 Steps In Financial Planning
• Financial planning involves the following
steps
– Determination of Financial Objectives
– Formulation of Financial Policies
– Designing financial procedures

Financial Management 2nd Edition

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 Nature Of Financial Planning
• Financial planning is one of the major
functions of a finance manager.
• Long-term financial planning focuses on
arrangements of the financing pattern, while
the short-term financial planning is related to
the management of working capital,
including cash forecasting.

Financial Management 2nd Edition

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Factors To Be Taken Into Consideration While
Formulating Financial Plans
– Nature of Business
– Desire of Risk
– Status of the firm
– Weighing alternative sources of finance
– Attitude of management
– Plans for future growth
– Government policies and control
– Inflation
Financial Management 2nd Edition
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 Characteristics Of A Sound
Financial Plan
– Simplicity
– Foresight
– Flexibility
– Liquidity
– Utility
– Completeness

Financial Management 2nd Edition

By Paresh Shah
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