Nature of Financial Management and Markets

Nature of Financial Management and Financial Markets

• Financial management is a broad term encompassing the study of how money is managed and the actual process of acquiring needed funds.
• It deals with acquiring funds, making money-denominated decisions, resource allocation, and resource management.
• It includes matters related to money and markets.

Lecture Outline

• 1.1 Introduction to finance and financial markets
• 1.2 Objectives of financial management
• 1.3 The agency problem and functions of financial organizations
• 1.4 Financial Markets, instruments and institutions
• 1.5 The Cost of Money/Interest Rates (expressed in percentages)

What is Finance?

• Finance is a broad term describing two related activities: managing money and acquiring funds.
• It encompasses the study and practice of making money-denominated decisions.
• A branch of economics concerned with resource allocation and investment.

Main Fields of Finance

• Business finance (Corporate finance): raising and managing business funds
• Personal finance: managing individual wealth and savings
• Public finance: government revenue and expenditure
• Financial markets and instruments: stocks, bonds, derivatives

Business Finance

• Business finance is the business activity concerned with the acquisition and conversation of capital funds in meeting financial needs and overall objectives of a business enterprise.
• It broadly involves planning, raising, controlling, and administering funds used within a business.

What is Financial Management?

• It encompasses the acquisition, financing, and management of assets with some overall goal in mind.

Key Decisions of Financial Management

• Financing decisions: relate to raising finance from different sources.
• Investment decisions: include investment in fixed assets and working capital.
• Dividend decisions: relate to decisions regarding profits distribution to shareholders.

Key Decisions Continued

• Financing decisions: involve determining the type of resources, period, cost and returns of the source for raising finance.
• Investment decisions (capital budgeting): includes investment in fixed assets (long-term assets). Investment in current assets are also a part of investment decisions.
• Dividend decisions: relate to how much profits are distributed to the shareholders. Retained profits also part of dividend decisions.

Difference between Financial Management and Accounting

• Accounting is primarily record-keeping (historical data).
• Finance is about decision-making, utilizing forecasts (forward-looking).

Finance & Related Disciplines

• Financial Management and Accounting: Accounting records and reports transactions, while Finance uses accounting statements for managerial decision-making. Now, both are separate but interconnected disciplines.
• Financial Management and Economics: Investment decisions are closely tied to economic factors like market conditions, interest rates, and monetary policy.
• Financial Management and Production Management: The production department relies on finance for raw materials, machinery, wages, and operating expenses.
• Financial Management and Marketing: Marketing departments need finance for resources to sell goods in the market. Finance and Marketing are interrelated.
• Financial Management and Human Resource: Financial managers allocate resources in the form of wages, salaries, benefits etc., to the Human Resource department.

This quiz explores the foundational concepts of financial management and financial markets. It covers essential topics such as the objectives of financial management, the agency problem, and the functions of financial organizations. Test your knowledge on the principles guiding resource allocation and financial decision-making.