INTRODUCTION TO FINANCIAL MANAGEMENT

MODULE - 1

In this chapter ....

Familiarize with the financial objectives & goals of a firmDevelop conceptual framework of financial management.Focus on nature, scope & functions of financial management.

What is finance??

What is Finance???

Finance is the art & science of managing 'MONEY'.

Finance is the life blood of Business (funds).

“Finance v/s Money”

FINANCE

Financial services

Financial Mgt

Advisory services

Designing Financial products

Investments, real estate & insurance

Personal Financial planning

Mgt of finance dept in a firm

Financial/ non-financial/public/private/NGO

BudgetingForecastingCash & credit mgtInvst analysis etc

Financial Management

•According to Ezra Solamn “Financial management is concerned with the efficient use of an important economic resources viz capital funds”.

•Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise.

Nature of Financial Management

Financial management is mainly concerned with the proper management of funds.

The financial manager must see that the funds are procured in a manner that there is risk, cost and control considerations are properly balanced in a given situation and there is optimum utilization of funds.

Scope of Financial Management

Scope covers both acquisition & utilisation of funds – efficient and wise allocation of funds to various uses.

Financial mgt involves providing solutions for major financial operations of a firm- Investment decisions - Financing decisions- Dividend policy decisions

Investment decision/ function

Investment decisions relates to the selection of assets (fixed & current assets) in which funds will be invested by a firm.

Invst in fixed & long term assets & projects is called capital budgeting – volume of invst , risk & returns , cost of capital.

Invst & mgt of current assets is called working capital mgt –mgt of cash, inventory & receivables, profitabilty & liquidity.

Financing Decision / Function

Financing decisions are concerned with the Capital structure decisions of a firm ( proportion of debt & equity).

Creating proper mix between debt & equity – optimum capital structure.

Tradeoff between risk & return.

Dividend policy decisions / functions

Deciding the Dividend payout ratio considering the benefit of shareholders & firm both.

Dividend decision should be analysed in relation to the financing decisions of the firm.

Duties / Roles / Responsibilities of a Financial manager

Performing Financial Analysis

Making Investment decisions

Making Financing decisions

Performing financial analysis & planning

Transforming financing data into form which can be used for decision making.Determing need for additional (reducing) finance.

Making investment decisions

Determine the mix of current assets & fixed assets to be held by a firm.

Determine the type of asset in each category

Making Financing decisions

Determining mix of short term & long term financing.

Indepth analysis of available financing alternatives , their costs & long term implications.

Objectives of financial mgt

a. Financial objectivesb. Non-Financial Objectives

Financial objectives or Financial Goals

Profit maximization (profit after tax)Maximizing EPS(earnings Per Share)Wealth Maximization.

Profit Maximization

•Maximizing the Rupee Income of Firm Resources are efficiently utilizedAppropriate measure of firm performanceServes interest of society also

Objections to Profit Maximization

•It is Vague•It Ignores the Timing of Returns•It Ignores Quality of benefits

Shareholders’ Wealth Maximization

•Maximizes the net present value.•Fundamental objective — maximize the market value of the firm’s shares

Maximizing EPS

•Ignores timing and risk of the expected benefit.•Maximizing EPS will not result in highest price for company's shares.

Non financial Objectives

General welfare of employeesGeneral welfare of societyFulfillment of responsibilities towards customers, suppliers etc.Leadership in R&D.Effective utilization of funds

Finance function

Finance function involves the task of procurement of funds needed by the enterprise and its effective utilization.

Organisation of Finance function

Board of Directors

Managing Director / Chairman

VP/ Director (Finance)/ Chief Finance officer (CFO)

Treasurer Controller

Cash Manager

Credit Manager

Foreign Exchange Manager

Financial planning & fund raising manager

Capital Budgeting manager

Portfolio manager

Cost Accounting Manager

Tax Manager

Financial accounting mgr

Data processing mgr

Internal Auditor

Functions of a Treasurer

Treasurer is mainly responsible for financing & Investment activities.The main functions of a treasurer are- Obtaining finance - Investor relationship- short term financing - cash & credit mgt - Investments & insurance

Functions of a Controller

Controller is concerned with Accounting & Control.The main functions of a Controller are - Financial Accounting - Internal audit - Taxation - Management accounting & control- Budgeting & planning

Emerging / Changing role of Finance managers in India

Post liberalisation the role of finance manager has become more important, complex & demanding.

Industrial licensing abolished and scope of private sector investment has increased.

Abolition of MRTP

Abolition of Capital issues control act – freedom in designing and issuing securities.

Market determined interest rate and exchange rate volatality.

Globalisation, FDI.

Investors have become more demanding and assertive.

Interface of Financial Mgt with other functional areas

Finance and ProductionFinance and Marketing

Finance and Personnel ( Human resource)Finance and Research & Development

Finance and Production

Finance is the basis of production and is needed at every stage of production•Planning & preparation of project report•Acquiring raw materails, plant & machinery, tools & spares, technological know how etc.•Hold stocks of RM, WIP and FG .

Finance and Marketing

Finance is needed in all vital areas of marketing such as •Sales promotion & Advertising•Introduction of new products, diversification of existing lines to satisfy customers changing needs.•Physical distribution of goods.

Finance and Personnel ( Human resource)

Finance in personnel is required for•Recruitment•Selection•Training•Promotion Schemes.

Finance and Research & Development

Finance in R& D is used for•Innovation•Technological urgradation•To meet and cater the demands of changing needs & preferences of customers•To stay competitive

Financial System

Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products

Suppliers of funds(Mainly households)Flow of financial services

Incomes , and financial claims

Seekers of funds (Mainly business firms

and government)

Flow of funds (savings)

Indian Financial System

Non- Organized Organized

Money lenders

Local bankers

Traders

Landlords

Pawn brokers

Chit Funds

Regulators

Financial Institutions

Financial Markets

Financial services

Organized Indian Financial System

Money Market Instruments

Capital Market Instruments

Forex Market

Capital Market

Money Market

Credit Market

Primary Market

Financial Instruments

FinancialMarkets

FinancialIntermediaries

Secondary Market

Regulators

Financial markets

A place where individuals are involved in any kind of financial transaction refers to financial market. Financial market is a platform where buyers and sellers are involved in sale and purchase of financial products like shares, mutual funds, bonds and so on.

Types of financial markets

Capital markets

Money markets

FOREX markets

Credit markets/ Bond markets

Capital Market

A market where individuals invest for a longer duration i.e. more than a year is called as capital market. In a capital market various financial institutions raise money from individuals and invest it for a longer period.Stock market & bond market etc

Capital Market is further divided into:

Primary Market: Primary Market is a form of capital market where various companies issue new stock, shares and bonds to investors in the form of IPO’s (Initial Public Offering). Primary Market is a form of market where stocks and securities are issued for the first time by organizations.Secondary Market: Secondary market is a form of capital market where stocks and securities which have been previously issued are bought and sold.

Types of Capital markets

Stock marketBond marketCommodity marketInsurance marketDerivatives marketPrivate marketMortgage market

Stock market

Stock Market is a type of Capital market which deals with the issuance and trading of shares and stocks at a certain price.

Bond market

Bond Market is a form of capital market where buyers and sellers are involved in the trading of bonds.A Bond is simply an 'IOU' document in which an investor agrees to loan money to a company or government in exchange for a predetermined interest rate.

Commodity market

A market which facilitates the sale and purchase of raw goods or primary products is called a commodity market.Trade in agro based commodities,live stock, metals, energy.Traded in standardized contracts in regulated markets.

Insurance market

Insurance market deals with the trading of insurance products. Insurance companies pay a certain amount to the immediate family members of owner of the policy in case of his untimely death.

Derivatives market

The market which deals with the trading of contracts which are derived from any other asset is called as derivative market.Trading of forwards & futures of stocks and commodities.

Money Market

Money market involves individuals (participants) who deal with the lending and borrowing of money for a short time frame,from several days to just under a year.financial instruments with high liquidity and very short maturities are traded.Commercial papers, certificate of deposits, treasury bonds etc

Money market instruments

Treasury BillsCertificate of depositsCommercial papersRepurchase agreementsBankers Acceptance

Treasury bills began being issued by the Indian government in 1917. They are short-term instruments issued by the Reserve Bank of India. They are one of the safest money market instruments because they are risk free, but the returns from this instrument are not very large. The primary as well as the secondary markets circulate this instrument. They have 3-month, 6-month and 1-year maturity periods. T-bills are issued with a separate price from their face value. The face value is achieved upon maturity, as is the interest earned on the buy value.

A certificate or deposit is a short-term borrowing note, like a promissory note, in the form of a certificate. It enables the bearer to receive interest. It has a maturity date, a fixed rate of interest and a fixed value. It usually has a term between 3 months and 5 years. The funds cannot be withdrawn on demand, but it can be liquidated on payment of a penalty. The returns are higher than T-bills as the risk is higher.

Commercial papers are promissory notes that are unsecured and issued by companies and financial institutions with strong credit ratings. They are issued at a discounted rate of their face value. They have a fixed maturity of 1 to 270 days. They are usually issued by corporations to raise working capital and are actively traded in the secondary market.

Repurchase agreements are also known as repos. Repurchase agreements are sold by sellers with a promise of purchasing them back at a given price and on a given date in the future. The buyer will also purchase the securities and other instruments in the repurchase agreement with a promise of selling them back to the seller.

FOREX markets

The market in which participants are able to buy, sell, exchange and speculate on currencies. Foreign exchange markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. The forex market is considered to be the largest financial market in the world.

Financial intermediaries

An entity that acts as the middleman between two

parties in a financial transaction(to transfer money from

lenders to borrowers)

financial institutions such as commercial banks,

investment banks, insurance companies.

Individuals like investment brokers and investment

bankers, sub brokers and dealers.

Mutual fund & pension funds co’s

ASSIGNMENT - 1

Write the differences between primary market and secondary market.What are the advantages and disadvantages of primary and secondary markets?Who are the different participants in the primary and secondary markets?List out the different money market instruments & capital market instruments

Continued…

Write a note on financial institutions in India.Write a note on financial services and its types.

THANK YOU FOR ur AttenTION !!!!!!!!!