Financial Management


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Financial Management

  1. 1. INTRODUCTIONFinance is the study of funds and management. Itsgeneral areas are business finance, personalfinance, and public finance. It also deals with theconcepts of time, money, risk, and the interrelationbetween the given factors. It is basically focused on how the money is spentand budgeted. It is one of the most important aspectsin handling business.Finance addresses the methods where businessentities used there financial resources on a certainperiod of time. It is the application of a set oftechniques used by organizations in managing theirfinancial affairs.
  2. 2. FINANCIAL MANAGEMENT? Financial management is concerned with the acquisition, financing and management of assets with some overall goal in mind. The decision function of financial management can be broken into three major areas: the investment financing and asset management decisions.
  3. 3. Approaches to the Finance According to the first approach, the term finance was interpreted to mean the procurement of funds by corporate enterprises to meet their financing needs.Failures(a)It is too narrow and restrictive in nature. Procurement of the funds is only one of the functions of finance and other functions are ignored by this approach.(b) It considers the financial problems only of corporate enterprises. In that sense, it ignore the financial problem of non corporate entities like proprietary concerns , partnership firms etc.(c) It consider only the basic and non-recurring problems relating to the business. Day-to-day financial problems of a normal company do not receive any attention .
  4. 4. Approaches to the Finance The second approach holds that finance is concern with cash . As all . the transactions are ultimately expressed in terms of cash , the term finance will be concerned with every activity of the enterprise. Thus , according to this approach , the finance functions is concerned with the all the functional areas of the business. The third approach , which is a more balanced one and hence the acceptable one to the modern scholars , interprets the term finance as being concerned with procurement of funds and wide application of funds . This approach is supposed to be more acceptable as it gives equal weightage to both procurement of funds as well as utilization of the funds . This approach is called the managerial approach to the term finance.
  5. 5. Role of finance in Indiaand developed countries Understanding mechanisms that promote sustainable long-term economic growth has long been a central mission for economists. Despite many cross-country studies, whether developing law, legal institutions, banks and markets is a necessary condition for economic growth remains an open question. . Compared to large and diverse countries (e.g., India), small homogeneous countries (e.g., Singapore) may have more effective legal and financial institutions because they can be tailored to the needs of the domestic economy at relatively low costs.
  6. 6. Role of finance in India and othercountries: Backed by legal institutions (law and courts), banks and markets are more accessible to large and listed firms than to small and private firms in most countries. This approach thus obscures possibly considerable variations among corporate sectors and firms, and ignores other financing and alternative options to the legal system.
  7. 7. Role of finance in India and othercountries: In contrast to most existing research, our paper uses a single-country setting, India, one of the largest and fastest growing economies in the world, and provides a comprehensive examination of the complex linkages among legal and business environments, financing channels and growth patterns of different legal system.
  8. 8. IMPACT OF FINANCEOVER ECONOMY There has been a steep fall in GDP growth rate as compared to previous financial quarters.
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  10. 10. Role of Finance Start a business Depending on the type of business, it will need to finance thepurchase of assets, materials and employing people. There will alsobe a need for money to cover the running costs. It may be sometime before the business generates enough cash from sales to payfor these costs. Link to cash flow forecasting. Finance expansions to production capacity As a business grows, it needs higher capacity and new technology to cut unit costs and keep up with competitors. New technology can be relatively expensive to the business and is seen as a long term investment, because the costs will outweigh the money saved or generated for a considerable period of time. And remember new technology is not just dealing with computer systems, but also new machinery and tools to perform processes quicker, more efficiently and with greater quality.
  11. 11. Role of finance To develop and market new products In fast moving markets, where competitors are constantly updating their products, a business needs to spend money on developing and marketing new products e.g. to do marketing research and test new products in “pilot” markets. These costs are not normally covered by sales of the products for some time (if at all), so money needs to be raised to pay for the research. To enter new markets When a business seeks to expand it may look to sell their products into new markets. These can be new geographical areas to sell to (e.g. export markets) or new types of customers. This costs money in terms of research and marketing e.g. advertising campaigns and setting up retail outlets.
  12. 12. . Role of Finance  Take-over or acquisition  When a business buys another business, it will need to find money to pay for the acquisition (acquisitions involve significant investment). This money will be used to pay owners of the business which is being bought.  To pay for the day to day running of business  A business has many calls on its cash on a day to day basis, from paying a supplier for raw materials, paying the wages through to buying a new printer cartridge
  13. 13. Role of Stock exchange Stock Exchange: A stock exchange is a form of exchange which provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and dividends. Securities traded on a stock exchange include shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it must be listed there. Usually, there is a central location at least for record keeping, but trade is increasingly less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of increased speed and reduced cost of transactions. Trade on an exchange is by members only.
  14. 14. Role of Stock exchange Raising capital for businesses The Stock Exchange provide companies with the facility to raise capital for expansion through selling shares to the investing public. Common forms of capital raising Besides the borrowing capacity provided to an individual or firm by the banking system, in the form of credit or a loan, there are four common forms of capital raising used by companies and entrepreneurs. Most of these available options, might be achieved, directly or indirectly, involving a stock exchange.
  15. 15. Role of Stock exchange Going public Capital intensive companies, particularly high tech companies, always need to raise high volumes of capital in their early stages. After the 1990s and early-2000s hi-tech listed companies boom and bust in the worlds major stock exchanges, it has been much more demanding for the high-tech entrepreneur to take his/her company public, unless either the company already has products in the market and is generating sales and earnings, or the company has completed advanced promising clinical trials, earned potentially profitable patents or conducted market research which demonstrated very positive outcome.
  16. 16. Role of Stock exchange Mobilizing savings for investment When people draw their savings and invest in shares (through a IPO or the issuance of new company shares of an already listed company), it usually leads torational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to help companies management boards finance their organizations. Facilitating company growth Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion.
  17. 17. Role of stock exchange Profit sharing Both casual and professional stock investors, as large as institutional investors or as small as an ordinary middle class family, through dividends and stock priceincreases that may result in capital gains, share in the wealth of profitable businesses. Unprofitable and troubled businesses may result in capital losses for shareholders. Creating investment opportunities for small investors As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors.
  18. 18. Major stock exchanges Market Stock Capitalizatio Trade Value Rank Economy Exchange Location n (USD (USD Billion Billions) s) United States NYSE 1 Euronext (US & New York City 14,242 20,161 Europe Europe) United States NASDAQ 2 OMX (US & New York City 4,687 13,552 Europe North Europe) 3 Japan Tokyo Stock Tokyo 3,325 3,972 Exchange 4 United London Stock London 3,266 2,837 Kingdom Exchange 5 China Shanghai Stock Shanghai 2,357 3,658 Exchange Hong Kong 6 Hong Kong Stock Hong Kong 2,258 1,447 Exchange
  19. 19. 7 Canada Toronto Stock Toronto 1,912 1,542 Exchange8 Brazil BM&F São Paulo 1,229 931 Bovespa Australian9 Australia Securities Sydney 1,198 1,197 Exchange10 Germany Deutsche Frankfurt 1,185 1,758 Börse11 Switzerland SIX Swiss Zurich 1,090 887 Exchange Shenzhen12 China Stock Shenzhen 1,055 2,838 Exchange
  20. 20. 13 Spain BME Spanish Madrid 1,031 1,226 Exchanges14 India Bombay Stock Mumbai 1,007 148 Exchange15 South Korea Korea Exchange Seoul 996 2,029 National Stock16 India Exchange of Mumbai 985 589 India17 Russia MICEX-RTS Moscow 800 51418 South Africa JSE Limited Johannesburg 789 372
  21. 21. Financial Managementand its Future Prospects It was early 19th century when Financial Management came out as an independent area of study. At that time financial management was used in, understanding and managing mergers, preparing feasibilities of new companies or products, and raising finances for new ventures. Value maximization has been the focus of financial management, since the beginning of 21st century. Both trends of globalization and fast progress of information technology have played their roles in adding on to the role of financial management. l financial management continue to play for companies in future? This is certainly not one of the difficult questions to answer, as the goal of financial management will continue to facilitate companies in setting their visions and preparing for future. Such an objective suggests that finance is no longer just an operational activity, but it’s now more strategic in nature.
  22. 22. Responsibilities ofFinance manager? A financial manger is a person who takes care of all the important financial functions of an organization. The person in charge should maintain a far sightedness in order to ensure that the funds are utilized in the most efficient manner. His actions directly affect the Profitability, growth and goodwill of the firm. Following are the main functions of a Financial Manager: Raising of Funds A firm can raise funds by the way of equity and debt. It is the responsibility of a financial manager to decide the ratio between debt and equity. It is important to maintain a good balance between equity and debt.
  23. 23. Responsibilities of financemanager Allocation of Funds Once the funds are raised through different channels the next important function is to allocate the funds. The funds should be allocated in such a manner that they are optimally used. In order to allocate funds in the best possible manner the following point must be considered The size of the firm and its growth capability Status of assets whether they are long term or short term Mode by which the funds are raised.
  24. 24. Responsibilities of financemanager Profit Planning Profit earning is one of the prime functions of any business organization. Profit earning is important for survival and sustenance of any organization. Profit planning refers to proper usage of the profit generated by the firm. Profit arises due to many factors such as pricing, industry competition, state of the economy, mechanism of demand and supply, cost and output
  25. 25. Scope of Finance Estimating the Requirement of Funds The finance department must estimate the capital requirements of the firm accurately for long term and short term needs. In estimating the capital requirements of the business, the finance department must take help of the budgets of various activities of the business e.g. sales budget, production budget, expenses budget etc. prepared by the concerned dept. In the initial stage, the estimate is done by promoters but in a growing concern, it is done by the finance dept. In estimating the requirement of funds, nature and size of the business, modernization and expansion plan should be given due consideration.
  26. 26. Scope of Finance Investment of Funds In taking decisions for the investment of long term funds, a careful assessment of various alternatives should be made through capital budgeting, opportunity cost analysis and many other techniques used to evaluate the investment proposals. Determining the Capital Structure By capital structure refers to the kind and proportion of different securities used for raising the required funds. Once the total requirement of funds is determined, a decision regarding the type of securities to be issued and the relative proportion between them is to be taken. In determining these ratios, cost of raising finance from different sources, period for which funds are required and several other factors should be considered.
  27. 27. Scope of Finance Choice of Sources of Finance A company can raise funds from different sources e.g. shareholders, debenture holders, banks, financial institutions, public deposits etc. Before raising the funds, it has to decide the source from which funds are to be raised. The choice of the source of finance should be made very carefully by taking a number of factors into account such as cost of raising funds, conditions attached, charge on assets, burden of fixed charges, dilution of ownership and control etc.
  28. 28. Scope of Finance Management of Cash It is the prime responsibility of the finance manager to see that an adequate supply of cash is available at proper time for the smooth running of the business. Availability of cash is necessary to maintain liquidity and credit- worthiness of the business. Excess cash must be avoided as it costs money. Financial Controls The financial manager is under an obligation to check the financial performance of the funds invested in the business. There are a number of techniques to evaluate the performance viz. Return on Investment (ROI), budgetary control, cost control, internal audit, ratio analysis and break-even point analysis. The financial manager must lay emphasis on financial planning as well.
  29. 29. Sources of Finance External sources of finance A)Short Term sources- Bank overdraft: Bank overdraft is a facility given by banks to its business customers, people having current accounts. Through this facility the customers can overdraw their accounts to a greater value than the balance in the account.
  30. 30. Advantage Disadvantage No need for collaterals  Interest rates are or security. usually variable and More flexible and the higher than bank overdraft amount can loans be adjusted every  Cash flow problems month according to can arise if the bank needs. asks for the overdraft to be repaid at a short notice.
  31. 31. Source of Finance Trade Credit: Usually in business dealing supplier give a grace period to their customers to pay for the purchases. This can range from 1 week to 90 days depending upon the type of business and industry. Advantage No interest has to be paid. Disadvantage The business may not get cash discounts. By delaying the payment of bills for goods or services received, a business is in effect obtaining finance which can be used for more important expenditures.
  32. 32. Sources of Finance Factoring of debts: It involves the business selling its bills receivable to a debt factoring company at a discounted price. In this way the business get access to instant cash. Medium Term sources:- Hire purchase: It involves purchasing an asset paying for it over a period of time. Usually a percentage of the price is paid as down payment and the rest is paid in instalments for the period of time agreed upon. The business has to pay an interest on these instalments. Leasing: Leasing involves using an asset, but the ownership does not pass to the user. Business can lease a building or machinery and a periodic payment is made as rent, till the time the business uses the assets. The business does not need to purchase the asset.
  33. 33. Sources of Finance Long term sources:- Long term Bank loan: borrowing from bank for a limited period of time. The business has to pay an interest on the borrowing. This interest may be fixed or variable. Businesses taking loan will often have to provide security or collateral for the loan. Issue of share: It is a permanent source of finance but only available to limited companies. Public limited companies can sell further shares up to the limit of their authorized share capital. Private limited companies can sell further shares to existing shareholders.
  34. 34. Sources of finance Debentures A debenture is defined as a certificate of acceptance of loans which is given under the companys stamp and carries an undertaking that the debenture holder will get a fixed return (fixed on the basis of interest rates) and the principal amount whenever the debenture matures. It is issued for a long periods of time. Debentures are generally freely transferrable by the debenture holder. Debenture holders have no voting rights and the interest given to them is a charge against profit.
  35. 35. Procedure of Finance A statement of assets, liabilities and capital on a given dateAssets:Fixed: land, building, equipments etcCurrent: Cash in hand or in bank, stocks, debtorsLiabilitiesLong term: Loans > 1 yrCurrent/ short term: overdraft, taxesCapital= Assets -Liabilities
  36. 36. FINANCE FUNCTION IN RELATIONWITH OTHER FUNCTIONS Other than finance,every business generally operates in three main functional areas viz. Production,Marketing and Personnel. All these functions are closely related to finance as all of them need funds;which is the area covered by finance function. To market the finished goods properly in the market,the business has to have a proper investment in the finished goods to guarantee regular flow of goods in the market. It may be required to have good distribution systems which may call for investment in terms of fixed assets or labour force. To conclude,it may be stated that all the functions or activities of the business are ultimately related to finance.
  37. 37. Balance sheetA statement of assets, liabilities and capital on agiven date Assets:Fixed: land, building, equipments etcCurrent: Cash in hand or in bank, stocks, debtors LiabilitiesLong term: Loans > 1 yrCurrent/ short term: overdraft, taxesCapital= Assets -Liabilities
  38. 38. Risk and Return Return:Income received on an investment plus any change in market price,usually expressed as a percent of the beginning market price of the investment. Risk: The variability of the returns from those that are expected.
  39. 39. Prevention and cure for financial crises. Export-oriented development policy Countries with an export-oriented development strategy have experienced more rapid export and economic growth than those with import-substitution policies, and have avoided debt problems better. Export-led growth requires import liberalization and increasing openness of the economy, which expose a country to larger markets but severe international competition. The competition enhances economic efficiency, technology and productivity, which, in turn, results in higher economic growth and a larger capacity to absorb external debt.
  40. 40. Economic reform and opening Many Asian economies still suffer from excessive government intervention, over-regulations and large protected segments in the economy, which together yield low productivity and low product quality.
  41. 41. Structure of finance:The way in which a companys assets are finance, such as short-term borrowings, long-term debt,and owners equity. Financial structurediffers from capital structure in thatcapital structure accounts for long-term debt and equity only.
  42. 42. This financial structure is a mixture that directly affects therisk and value of the business. The main concern for the financialmanager of the company is deciding how much money should beborrowed and the best mixture of debt and equity to obtain. Thefinancial manager also has to find the least expensive sources offunds for the company to use. Financial structure is divided into the amount of thecompanys cash flow that goes to creditors and the amount that goesto shareholders. Each business will have a different mixturedepending on its needs and expenses. Therefore, each company willhave its own particular debt-equity ratio. For example, a companycould issue bonds and use the proceeds to buy stock or it could issuestock and use the proceeds to pay its debt.