The document provides an introduction to financial management. It defines finance as the management of money and discusses how financial managers are responsible for raising and allocating business funds. The document outlines different goals of financial management like profit and wealth maximization. It also describes various long-term sources of financing like shares, debentures, and loans. Short-term financing options like bank loans, commercial paper, and trade credit are also summarized. The key aspects and features of different financing instruments are defined.
2. Introduction
โข The raising and management of funds by the
business organizations is called business finance.
Planning the financial need, analyzing the
requirement, controlling the operations are the
responsibilities of the financial manager, this person
is closely related to the top-level management team.
โข DEFINITION OF FINANCE According to Khan and Jain,
"Finance is the art and science of managing money".
โข Guthumann and Dougall, "Business finance can
broadly be defined as the activity concerned with
planning, raising, controlling, administering of the
funds used in the business".
3. โข Business finance refers to the funds needed to start
a business, operate it, and expand it in the future.
Funds are needed to acquire tangible assets like
furniture, machinery, buildings, offices, and factories,
as well as intangible assets such as patents,
technical experience, and trademarks, among other
things.
โข Aside from the assets listed above, the day-to-day
operational operations of a corporation also require
cash. Purchasing raw goods, paying employees, bills,
and collecting money from clients are all examples of
this activity. To sustain and expand a business, you
must have a significant quantity of money.
4. Goals &
Objectives of
Financial
Management
โข Profit Maximization: Maximization of
profits is very often considered as the
main objective of a business enterprise.
The objective of financial management is
the same as the objective of a company
which is to earn profit. The shareholders,
the owners of the business, invest their
funds in the business with the hope of
getting higher dividend on their
investment.
โข Moreover, the profitability of the business
is an indicator of the sound health of the
organization, because it safeguards the
economic interests of various social groups
which are directly or indirectly connected
with the company e.g. shareholders,
creditors and employees.
5. โข Profit Maximisation Profit /EPS maximisation should
be undertaken and those that decrease profits or EPS
are to be avoided. Profit is the test of economic
efficiency. It leads to efficient allocation of resources,
as resources tend to be directed to uses which in
terms of profitability are the most desirable. Financial
management is mainly concerned with the efficient
economic resources namely capital.
6. โข Wealth Maximization: The wealth maximization (also
known as value maximization or Net Present Worth
Maximization) is also universally accepted criterion
for financial decision making. The value of an asset
should be viewed in terms of benefits it can produce
over the cost of capital investment.
โข The value of a firm is represented by the market price
of the company's stock. The market price of a firm's
stock represents the assessment of all market
participants as to what the value of the firm is.
7. Sources of financing
โข Sources of capital are the most explorable area,
especially for the entrepreneurs who are about to
start a new business. It is perhaps the most
challenging part of all the efforts. There are various
capital sources we can classify on the basis of
different parameters.
On the basis of a time period, sources are classified
as
โข long-term
โข short-term
8. Long-
Term
Financing
โข Long-term financing means
capital requirements for a
period of more than 5 years to
10, 15, 20 years or maybe
more depending on other
factors. Capital expenditures in
fixed assets like plant and
machinery, land and building,
etc. of business are funded
using long-term sources of
finance.
9. Long Term
Financing
The long term sources of
finance are as under
โข Shares
โข Debentures
โข Term Loans
โข Lease
โข Hire Purchase
โข Retained Earnings,
โข Public Deposits
โข Bonds
10. Shares
โข A share represents a unit of equity
ownership in a company.
Shareholders are entitled to any
profits that the company may earn
in the form of dividends. They are
also the bearers of any losses that
the company may face.
โข In simple words, if you are a
shareholder of a company, you hold
a percentage of ownership of the
issuing company in proportion to
the shares you have bought.
โข Shares can be further categorized
into two types. These are:
โข Equity shares
โข Preference shares
11. Debentures
โข A debenture is a type of bond
or other debt instrument that is
unsecured by collateral. Since
debentures have no collateral
backing, they must rely on the
creditworthiness and
reputation of the issuer for
support. Both corporations and
governments frequently issue
debentures to raise capital or
funds
12. Term loan
โข A term loan provides borrowers with a
lump sum of cash upfront in exchange for
specific borrowing terms.
โข Borrowers agree to pay their lenders a
fixed amount over a certain repayment
schedule with either a fixed or floating
interest rate.
โข Term loans are commonly used by small
businesses to purchase fixed assets, such
as equipment or a new building.
โข Borrowers prefer term loans because they
offer more flexibility and lower interest
rates.
โข Short and intermediate-term loans may
require balloon payments while long-term
facilities come with fixed payments.
13. Lease
โข Lease financing is a
contractual agreement
between the owner of the
asset who grants the other
party the right to use the asset
in return for a periodic
payment and the other party
who is the user of such assets.
โข The owner of the party is
known as Lessor and the user
of the asset under such
agreement is known as lessee
and the rental paid is known
as lease rental.
14. Hire
purchase
โข Hire purchase is an arrangement for
buying expensive consumer goods,
where the buyer makes an initial
down payment and pays the balance
plus interest in installments. The
ownership is transferred only after
paying all installments
โข Hire Purchase is one of the most
used modes of financing for
acquiring various assets. It aids by
spreading the huge cost of an asset
over a longer period. Thus, it frees a
lot of capital to be directed to other
important purposes.
15. Retained
Earnings:
โข In most cases, a firm does not pay
out all of its profits as dividends to
its shareholders. A part of the net
earnings may be kept in the
company for future use. This is
referred to as "retained profits."
โข It is a source of internal finance,
self-financing, or 'profit plowing.'
The amount of profit available for
reinvestment in a company is
determined by a variety of factors,
including net profits, dividend
policy, and the company's age.
16. Public
Deposit:
โข Public deposits are deposits raised
directly from the general public by
organizations. Public deposit
interest rates are often greater
than those provided on bank
deposits. Anyone interested in
making a monetary contribution to
an organization might do so by
completing a designated form. In
exchange, the organization gives a
deposit receipt as proof of
payment. While depositors receive
a greater interest rate than banks,
the cost of deposits to the firm is
lower than the cost of bank
borrowings.
17. Bonds
โข Bonds refer to high-security debt
instruments that enable an entity to
raise funds and fulfil capital
requirements. It is a category of
debt that borrower's avail from
individual investors for a specified
tenure.
โข Organizations, including companies,
governments, municipalities and
other entities, issue bonds for
investors in primary markets. The
corpus thus collected is used to
fund business operations and
infrastructural development by
companies and governments alike.
18. Types of Bonds
โข Fixed- interest Bonds - Fixed-interest bonds are
debt instruments which accrue consistent coupon
rates throughout their tenure.
โข Floating interest bonds - These bonds incur coupon
rates which are subject to market fluctuations and
elastic within their tenures
โข Inflation- linked bonds - designed to curb the
impact of economic inflation on the face value and
interest return.
โข Perpetual bonds - This investment type does not
have any maturity period, and customers benefit
from steady interest payments for perpetuity.
19. Features of Bonds
โข Face value - Principal, nominal, or par value is used
alternatively to refer to the price of bonds. Issuers are under
a legal obligation to return this value to the investor after a
stipulated period.
โข Interest or coupon rate - Bonds accrue fixed or floating
rates of interest across their tenure, payable periodically to
creditors.
โข Tenure of bonds - Tenure or term refers to the period after
which bonds mature. These are financial debt contracts
between issuers and investors. Financial and legal
obligations of an issuer to the investor or creditor are valid
only until the tenure's end.
โข Credit quality - Credit rating agencies classify bonds based
on the risk of a defaulting on debt repayment.
โข Tradable bonds - Bonds are tradable in the secondary
market.
20. Short Term
Financing
โข Short-term finance refers
to sources of finance for a
small period, normally less
than a year. In businesses, it is
also known as working capital
financing.
โข This type of financing is
usually needed because of
the uneven cash flow into the
business, the seasonal
pattern of business, etc.
21. Short Term
Financing
Some of the Short- term
sources of finance are as
under:
โข Bank Financing
โข Trade Credit
โข Commercial paper
22. Bank
financing
โข Loans are the most traditional type of
bank financing. The bank loans you a
specific amount, which you repay with
interest over a predetermined period. If
you fail to repay the loan, the bank can
take any assets you have put up as
collateral.
โข Banks have become very picky in
approving businesses for traditional
loans.
โข A bank loan is best for business owners
who have exceptional credit and a rock-
solid business.
โข Loans are more likely to be approved if
the money is being used to expand an
already successful business rather than
to help a struggling business.
23. Commercial
paper:
โข Commercial paper is an
unsecured promissory note
that a company issues to
generate capital for a limited
period, usually 90 to 364 days.
โข It is distributed to other
businesses, insurance
companies and banks.
โข large well-known companies
with a solid credit rating may
issue a CP to raise fund
โข The Reserve Bank of India is
responsible for its regulation.
24. Trade
Credit
โข A trade credit account is a line of
credit given by one business to
another for the purchase of
products and services. Trade credit
allows you to buy supplies without
having to pay right away. Such credit
shows up in the buyer of goods'
records as sundry creditors' or
'accounts due.'
