Nature of Financial Management and Financial Markets Chapter 01 PDF

# NATURE OF FINANCIAL MANAGEMENT AND FINANCIAL MARKETS ## Chapter 01 ### Shamika PM Department of Accountancy & Finance Faculty of Management Studies ## Lecture Outline - **1.1 Introduction to finance and financial markets** - **1.2 Objectives of Financial Management** - **1.3 The agency problem...

# NATURE OF FINANCIAL MANAGEMENT AND FINANCIAL MARKETS ## Chapter 01 ### Shamika PM Department of Accountancy & Finance Faculty of Management Studies ## 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 that describes two related activities: - The study of how money is managed. - The actual process of acquiring needed funds. - The study and practice of making money-denominated decisions. - A branch of economics concerned with resource allocation and resource management, acquisition or investment. - Simply, finance deals with matters related to money and the markets. ## Main Fields of Finance - **Business finance or Corporate finance** (e.g., raising and managing business funds) - **Personal finance** (e.g., managing individual wealth and savings) - **Public finance** (e.g., government revenue and expenditure) - **Financial markets and instruments** (e.g., stocks, bonds, derivatives) ## Business Finance "Business finance is the business activity which concerns with the acquisition and conversation of capital funds in meeting financial needs and overall objectives of a business enterprise". Business finance can broadly be defined as the activity concerned with planning, raising, controlling and administering of funds used in the business. ## What is Financial Management? Concerns the acquisition, financing, and management of assets with some overall goal in mind. ## Key Decisions of Financial Management - **Financial Management** - **Financing Decision** - **Investment Decision** - **Dividend Decision** ## Key Decisions Cont.. - **Financing decisions** relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby. - **Investment decisions** include investment in fixed assets (called as capital budgeting). Investment in current assets are also a part of investment decisions called as working capital decisions. - **Dividend decisions** comprise of decisions associated to the net profit distribution. Net profits are generally divided into two: - **Dividend for shareholders** - Dividend and the rate of it has to be decided. - **Retained profits** - Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise. ## Difference between Financial Management and Accounting? - **Finance** - generally about decision making; uses forecasts and therefore "forward-looking" - **Accounting** - is generally record keeping; historical ## Finance & Related Disciplines - **Financial Management and Accounting** - Accounting deals with recording, reporting and evaluating business transactions, whereas Finance is termed as a managerial or decision making process based on statements prepared by accountants. - In the past, both financial management and accounting were treated as the same discipline and then it has been merged as Management Accounting because this part is very helpful to finance managers to take decisions. But nowadays financial management and accounting disciplines are separated and interrelated. | Financial Management | Accounting | |:---|:---| | Focus | Managing financial resources strategically | Recording and reporting financial transactions | | Orientation | Forward-looking | Historical | | Purpose | Decision-making for maximizing value | Compliance, accuracy, and reporting | | Tools | Financial analysis, risk management | Bookkeeping, financial statements | - **Financial Management and Economics** - Investment decisions and micro and macro environmental factors are closely associated with the functions of financial managers. He must also be alert about the consequences of varying levels of economic activities, and recognize and understand the effect of monetary policy on the cost and availability of funds. - Microeconomics deals with the economic problems related to individual firms. Demand and supply analysis, profit maximization strategies, and pricing theories have practical applications in finance. - **Financial Management and Production Management** - The profit of an entity depends upon the production performance. - Production performance needs finance because the production department requires raw materials, machinery, wages, operating expenses etc. These expenditures are decided and estimated by the financial department and the finance manager allocates the appropriate finance to the production department. - The financial manager must be aware of the operational process and finance required for each process of production activities. - **Financial Management and Marketing** - Produced goods are sold in the market with innovative and modern approaches. - For this, the marketing department needs finance to meet their requirements. - The financial manager or finance department is responsible for allocating adequate finance to the marketing department. - Hence, marketing and financial management are interrelated and depends on each other. - **Financial Management and Human Resource** - The financial manager should carefully evaluate the requirement of manpower for each department and allocate the finance to the human resource department as wages, salary, remuneration, commission, bonus, pension and other monetary benefits to the human resource department. - Hence, financial management is directly related to human resource management.