Meaning of finance, scope, objectives of financial management , duties , roles & responsibilities of a financial manager, organisation of finance function, Indian financial system, types of financial markets

1. INTRODUCTION TO
FINANCIAL MANAGEMENT
MODULE - 1

2. In this chapter ....
• Familiarize with the financial objectives
& goals of a firm
• Develop conceptual framework of
financial management.
• Focus on nature, scope & functions of
financial management.

3. What is finance??

4. What is Finance???
• Finance is the art & science of
managing 'MONEY'.
• Finance is the life blood of Business
(funds).
• “Finance v/s Money”

5. 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
Budgeting
Forecasting
Cash & credit mgt
Invst analysis etc

6. 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.

7. 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.

8. 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

9. 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.

10. 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.

11. 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.

12. Duties / Roles / Responsibilities
of a Financial manager
• Performing Financial Analysis
• Making Investment decisions
• Making Financing decisions

13. Performing financial analysis &
planning
• Transforming financing data into form
which can be used for decision making.
• Determing need for additional
(reducing) finance.

14. 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

15. Making Financing decisions
• Determining mix of short term & long
term financing.
• Indepth analysis of available financing
alternatives , their costs & long term
implications.

16. Objectives of financial mgt
a. Financial objectives
b. Non-Financial Objectives

17. Financial objectives or Financial Goals
 Profit maximization (profit after tax)
 Maximizing EPS(earnings Per Share)
 Wealth Maximization.

18. Profit Maximization
• Maximizing the Rupee Income of Firm
 Resources are efficiently utilized
 Appropriate measure of firm performance
 Serves interest of society also

19. Objections to Profit Maximization
• It is Vague
• It Ignores the Timing of Returns
• It Ignores Quality of benefits

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

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

22. Non financial Objectives
 General welfare of employees
 General welfare of society
 Fulfillment of responsibilities towards
customers, suppliers etc.
 Leadership in R&D.
 Effective utilization of funds

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

24. Organisation of Finance function

25. 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

26. 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

27. 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

28. 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.

29. • Market determined interest rate and
exchange rate volatality.
• Globalisation, FDI.
• Investors have become more
demanding and assertive.

30. Interface of Financial Mgt with
other functional areas
• Finance and Production
• Finance and Marketing
• Finance and Personnel ( Human resource)
• Finance and Research & Development

31. 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 .

32. 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.

33. Finance and Personnel ( Human resource)
• Finance in personnel is required for
• Recruitment
• Selection
• Training
• Promotion Schemes.

34. 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

35. 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)

36. Indian Financial System
Non- Organized
Organized
Money lenders
Local bankers
Traders
Landlords
Pawn brokers
Chit Funds
Regulators
Financial Institutions
Financial Markets
Financial services

37. Organized Indian Financial System
Money Market
Instruments
Capital Market
Instruments
Forex
Market
Capital
Market
Money
Market
Credit
Market
Primary Market
Financial
Instruments
Financial
Markets
Financial
Intermediaries
Secondary Market
Regulators

38. 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.

39. Types of financial markets
Capital markets
Money markets
FOREX markets
Credit markets/ Bond markets

40. 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

41. 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.

42. Types of Capital markets
• Stock market
• Bond market
• Commodity market
• Insurance market
• Derivatives market
• Private market
• Mortgage market

43. 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.

44. 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.

45. 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.

46. 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.

47. 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.

48. 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

49. Money market instruments
• Treasury Bills
• Certificate of deposits
• Commercial papers
• Repurchase agreements
• Bankers Acceptance

50. • 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.

51. • 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.

52. • 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.

53. • 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.

54. 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.

55. 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

56. 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

57. Continued…
• Write a note on financial institutions in
India.
• Write a note on financial services and
its types.

58. THANK YOU FOR
ur AttenTION !!!!!!!!!