financial management ,need ,scope ,objectives,evolution,long term sources of funds ,raising of long term funds

1. FINANCIAL MANAGEMENT
NEELAKSHI SAINI
ASSISTANT PROFESSOR

2. Contents
Introduction
Objectives
Function of financial management
Scope of financial management
Relationship of finance with other
Sources of long term finance
raising of long term finance

3. INTRODUCTION
Financial management refers to that part of
management activity which is concerned
with the planning and controlling of firms
financial resources. It deals with finding
out various sources for raising various funds
for the firm.

4. DEFINITION
According to solo man, Financial management
is concerned with the efficient use of
resources.
According to phillppatu,financial management
is concerned with the management decision
that result in acquisition and financing of
long term and short term credit for the firm

5. Objectives of financial
management
Profit maximization
Wealth maximization

6. Function of financial
management
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

7. Scope of financial management
Estimating financial requirement
Deciding the capital structure
Selecting the sources of funds
Selecting a pattern of investment
Proper cash management
Implementing financial control
Proper use of surpluses

8. Evolution of financial
management
Financial management emerged as a distinct
field of study at the turn of this century. Its
evolution may be divided into three broad
phases :
the traditional phase
the transitional phase
the modern phase.

9. Traditional phase
• The focus of financial management was mainly on certain
episodic events like formation, issuance of capital, major
expansion, merger, reorganization, and liquidation in the life
cycle of the firm.
• The approach was mainly descriptive and institutional. The
instruments of financing, the institutions and procedures
used in capital markets, and the legal aspects of financial
events formed the core of financial management.
• Financial management was viewed mainly from the point of
the investment bankers, lenders, and other outside interests

10. Transitional phase
The transitional phase begins around the early forties and
continues through the early fifties. Though the nature of
financial mgmt during this phase was similar to that of the
traditional phase, greater emphasis was placed on the day
to day problem faced by the finance managers in the area
of funds analysis, planning, and control. These problems
however were discussed within limited analytical
framework.

11. Modern phase
The modern phase begin in mid 50s and has witnessed an
accelerated pace of development with the infusion of ideas
from economic theories and applications of quantitative
methods of analysis. The distinctive features of modern
phase are:
The scope of financial management has broadened. The
central concern of financial management is considered to be
a rational matching of funds to their uses in the light of
appropriate decision criteria
The approach of financial management has become more
analytical and quantitative
The point of view of the managerial decision maker has
become dominant

12. Relationship of finance with
other business functions
Purchase function
Productivity function
Distribution function
Accounting function
Personnel function
Research and development
Financial management and economics

13. Sources of long term finance
Equity capital
Preference capital
Debentures
Term loans
Deferred credit
Lease financing
Hire purchase
New instrument

14. Equity shares
Equity shares are the ordinary shares, represent the
owner capital in a company. The holder of shares
are the real owner of the company. They have a
control over the working of a company. The rate
of dividend on these shares depend upon the profit
of the company. They may be paid higher rate of
dividend or they may not get anything. They take
risk both regarding dividend and return of capital.

15. Characteristics of equity capital
Maturity
Claims/right to income
Claim on assets
Voting rights
Limited liability

16. Preference capital
These shares are given two preferences. There is a
preference of dividend. Whenever the company
has distributable profits, the dividend is first paid
on preference share capital. other shareholders are
paid dividend only out of remaining profits. The
second preference for these shares is the repayment
of capital at the time of liquidation of the company.
A fixed rate of dividend is paid on preference capital.
They don't have voting rights.

17. Types of preference shares
Cumulative preference shares
Non cumulative preference shares
Redeemable preference shares
Irredeemable preference shares
Participating preference shares
Non participating preference shares
Convertible preference shares
Non convertible preference shares

18. Features of preference shares
Maturity
Claim on income
Claim on assets
Control
Hybrid form of security

19. Debentures
A debenture holder is a creditor of a company.
A fixed rate of interest is paid on
debentures. The debentures are generally
given a floating charge over the assets of
the company.

20. Types of debentures
Simple ,naked or unsecured debentures
Secured or mortgaged debentures
Bearer debentures
Registered debentures
Redeemable debentures
Irredeemable debentures
Convertible debentures

21. Features of debentures
Maturity
Claim on assets
Claim on income
Control
Call features

22. Term loans
Term loans also referred to as term finance
,represent a source of debt finance which is
generally repayable in more than 1 year but
less than 10 years . This source of finance is
more suitable to meet the medium term
demand of working capital. interest is
charged on fixed rate and amount of loan is
to be repaid by a way of installments in a
number of years.

23. Deferred credit
Income that is received by a business but not
immediately reported as income. Typically, this is
done on income that is not fully earned and,
consequently, has yet to be matched with a related
expense. Such items include consulting fees,
subscription fees and any other revenue stream that
is intricately tied to future promises. For example, a
book club might defer income from a two-year
membership plan until all the costs of procurement
and shipping are assessed. Also known as
deferred revenue or deferred income

24. Lease financing
Leasing is an arrangement that provides a firm
with the use and control over assets without
buying and owing the same. It is a form of
renting assets. The lessee pays the lease rent
periodically to the lessor as regular fixed
payments over a period of time.

25. advantages
• Full security
• Financing of capital goods
• Additional source of finance
• Less cost
• Tax benefits
• High profitability

26. Hire purchase
Hire purchase means a transaction where goods are
purchased and sold on the terms that
• Payment will be made in installments
• The possession of goods given to buyers
immediately.
• The property in the goods remains with the
vendors till the last installments is paid
• Each installment is treated as hire charges till the
last installment is paid.s

27. Advantages
Higher realized income
Low NPAs
Fewer defaulter
Recycle recovered funds

28. New instruments
Bonds
Any security that promises to pay fixed coupon at regular
intervals until medium- or long-term maturity is considered
a bond. There are however many different forms of bonds
which are modifications of the basic principles.
Domestic, foreign and Eurobonds
There is a general distinction between domestic bonds,
(issued in the issuer’s own country), foreign bonds (issued
in a foreign country), and Eurobonds (issued in the
currency of one country but sold internationally).

29. A floating rate note (FRN) is a bond with a variable coupon.
Interest payments are based on floating interest rates, for
example EURIBOR, which are used as a reference rate at
periodically set ‘refix’ dates. Typically the interest payment
is a fixed spread over a three-month or six-month reference
rate. At the beginning of the coupon period, the spread is
added to the reference rate of that particular day to determine
the coupon. While the spread is variable. Some special FRNs
have maximum or minimum coupons, called capped and
floored FRNs.

30. Zero-coupon bonds
zero-coupon bonds do not have a coupon. The return for the
investor is achieved by selling the bond at a significant
discount to the nominal value of the bond which is due at a
fixed maturity.
perpetual bonds
A perpetual bond does not have a redemption date and is
redeemed only if the issuer goes into liquidation. This
means perpetual bonds pay coupons indefinitely. Interest is
fixed for the initial period or for the life of the bond.
Perpetual bonds tend to have a call option, but in most
cases this option can only be exercised after 10 years or
more.

31. Hybrid securities
Hybrid securities are a combination of debt
and equity features. Hybrids are a source of
capital that aims to provide the flexibility of
equity, but avoid the dilution of shareholder
value that may result from raising additional
equity.

32. Raising of long term finance
Venture capital
Initial public offering
Public issued by listed companies
Right issues
Preferential allotment
Private placement
Term loans

33. Venture capital
The capital which is available for financing
the new business ventures is called venture
capital.
Venture capital is the investment of long term
equity finance where the venture capitalist
earns his return primarily in the form of
capital gain.

34. Advantages
They can provide large sums of equity
finance, bring a wealth of expertise to
business.
They could also be a part of economic
growth.
The venture capitalist could take part in
promoting innovative ideas.
It could encourage new breed of
entrepreneurs to take up risk

35. Initial public offering (IPO)
Public offering is the first sale of stock by a
private company to the public.IPO are often
issued by smaller ,younger companies
seeking capital to expand ,but can also be
done by large privately owned companies
looking to become publicly traded.

36. Advantages of IPO
Increase in capital
Liquidity
Valuation
Increased wealth

37. Public issues
A public issues involves sale of securities to
the public at large. public issues in India
are governed by the provision of the
companies act 1956,SEBI guidelines on
investor protection and the listing
agreement between the issuing company
and the stock exchanges.

38. Advantages of public issues
The entire issue process become transparent
to the public and the authorities.
The issue get widely distributed and thus
help in reducing concentration of wealth
and economic power.
The issue is allotted among the applicants
on non discriminatory basis.

39. Right Issue
A right issue involves selling securities in the
primary market by issuing rights to the
existing shareholders. when a company
issues additional equity capital, it has to be
offered in the first instance to the existing
shareholders on a pro rata basis. This is
required under 81 of the companies act
1956.

40. Advantages
It is an economical method of raising capital.
Existing shareholding pattern is not
disturbed.
Raising of capital through right is more
certain than the public issues.
It is an opportunity to the existing
shareholders to invest in that company which
they are well conversant.

41. Preferential allotment
The ‘Preferential Offer’ means an issue of
shares or other securities, by a company to
any select person or group of persons on a
preferential basis and does not include shares
or other securities offered through a public
issue, rights issue, employee stock option
scheme, employee stock purchase scheme or
an issue of sweat equity shares or bonus
shares or depository receipts issued in a
country outside India or foreign securities.

42. Advantages
• It helps in save costs and time involved in a
public issues.
• There is no requirement of filling any offer
documents/notice to SEBI in case of
preferential allotment.
• Preferential allotment the shares are issued in
bulk and hence when huge fund requirement
is there without incurring much costs and
without investing much time .

43. Private placement
It involves sale of securities to a limited
number of sophisticated investors such as
financial institutions, mutual funds, venture
capital funds, banks and so on.

44. Advantages
Cost effective
Time effective
Access effective