Unit 1

Finance defined as the provision of money at the time when it is required. It also refers to the management of flows of money through an organization.

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 efficient management of finance.

In general, finance may be defined as the provision of money at the time it is wanted. Procurement of funds and their effective utilization. Business finance: is concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of a business enterprise. Business finance: concerned with planning, raising, controlling and administering of the funds used in the business.

Financial Management refers to that part of the management activity which is concerned with planning and controlling of firms financial resources.

Finance + Management (from Planning to Controlling) Why ? Need Where? Available /Utilize How? To Collect/Utilize It is Combination of Finance with Planning, Organizing, Controlling and Decision-making.

Financial Management is concerned with the efficient use of an important economic resource, namely, capital funds.Solomon Financial Management is concerned with the managerial decisions that result in the acquisition and financing of long-term and short-term credits for the firm. An analysis of these decisions is based on the expected inflow and outflow of funds and their effects upon managerial objectives

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.

Financial planning and successful promotion of an enterprise Acquisition of funds as and when required a the minimum 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

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

Analysis of Financial Statements Investment Decisions & Capital BudgetingTime Value of Money, IRR, NPV, Profitability Index etc. Risk & Return- Certain, Uncertain risks, CAPM etc. Corporate Financing & Capital Structure Cost of Capital, Leverage, Dividend etc. Working Capital & Inventory Management International Finance & Foreign Exchange

Traditional approach: to only procurement of funds needed by a business on most suitable terms. The utilization of funds was considered beyond the purview of finance function. Modern approach: It views finance function in broader sense. It includes both rising of funds as well as their effective utilization under the preview of finance. The modern approach considers the three basic management decisions. i.e., Investment decisions, financing decisions and dividend decisions within the scope of finance function.

1.

2.

3.

Financial Decision: Source of raising fixed and non fixed cost-bearing securities. Investment decision: decision related to both capital and current assets. Dividend decision: proportion of profit payable to shareholders considering market price of shares, tax implications and other factors.

Financial manger is the person responsible for carrying out the finance function. He occupies the key position in an organization. 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 of optimum allocation of firms resources. There should be efficient allocation of resources Financial manger must find a rationale for answering the following questions 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 and dividend

External Factors

Internal Factors

State of economy Structure of capital and money markets Requirements of investors Government policy Taxation policy Lending policy of financial institutions.

Nature and size of business Expected return Composition of assets Structure of ownership Trend of earnings Age of the firm Liquidity position Working capital requirements Conditions of debt agreements

THE FINANCIAL SYSTEM

Meaning: Financial system comprises a variety of intermediaries, markets and instruments that are related to each other. It provides means by which savings are transformed into investments. Its role is allocation of resources. The efficient functioning of financial system is critical to a modern economy.

Financial System
A financial System is a complex, wellintegrated set of sub-systems of financial institutions, markets, instruments and services. It mobilizes and usefully allocate scarce resources of a company. It facilitates the transfer and allocation of funds, efficiently and effectively.

Indian Financial System

It broadly classified into the formal (Organized) and Informal (Unorganized) financial System. Formal System Comes under Ministry of Finance, RBI, SEBI and Other regulatory bodies Informal System consists of Individual Money Lenders, Group of persons, Partnership Firms etc.

Indian Financial System Formal (Organized)

Regulators MOF, RBI,SEBI,IRDA

Informal Unorganized) 1. 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

Components of Formal Financial System

1.

Financial Institutions Banks Commercial (Public, Private and Foreign Banks) Non-Banking Development Financial Institutions Like HFCs, IDBI, ICICI, SIDBI, SFC, EXIM, SIDC etc. Mutual Funds Insurance and Housing Finance Companies


2. Financial Markets Capital Market (Both Equity NSE, BSE, Bonds, Govt. Securities etc and Money Market Treasury Bills, Commercial Papers etc). 3. Financial Instruments Shares, Debentures, Mutual Fund units, Insurance Policies. 4. Financial Services Factoring, Merchant Banking, Leasing, Hire purchase, Guaranteeing etc.,

Function of Financial System and investors Link the savers

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