Introduction to Finance PDF

Introduction to Finance Content Concept of Finance Relationship of finance with other disciplines Finance and Economics Finance and Marketing Finance and Production Finance and Human Resource Concept of Indian financial system Financial Institutions Financial Markets Functions of Financia...

Introduction to Finance Content Concept of Finance Relationship of finance with other disciplines Finance and Economics Finance and Marketing Finance and Production Finance and Human Resource Concept of Indian financial system Financial Institutions Financial Markets Functions of Financial Management Financial decisions Investment decisions Financing decisions Dividend decisions Role of Finance Manager  CONCEPT OF FINANCE Finance is defined as the availability of money at the time when it is required. Every enterprise, whether Big, Medium, Small, needs Finance to carry on its operations and to achieve its target. In fact, finance is so indispensable today that it is rightly said to be the blood of an Enterprise. FINANCE PUBLIC PRIVATE FINANCE FINANCE Government Personal Finance institutions Business Finance State Government Finance of Non- Local self profit Government organisations Central Government  Finance and Economics Economics has two broad areas, viz. Macroeconomics and Microeconomics. Macroeconomics is concerned with overall institutional and international environment in which the firm must operate. They are the external factors, which are beyond the control of the company. They relate primarily to: State of the Economy Government Policy Cont…. To raise the financial resource as per requirements , macro economic influences are considered : Banking system Money and capital markets Financial intermediaries Monetary and credit policies Finance and Marketing These two are disciplines are interrelated to plan for introduction of new product. Introduction of new product normally warrants huge sum of money for research and development; needs immense planning and execution to succeed over the other competitors Finance and Production The changes in the production policy of the organization will impact the capital expenditures. The fixed assets of the organization should be effectively utilized which neither over capitalization nor under capitalization Finance and Human Resource Human Resources relates to management of employees/personnel/labour/workforce of a company. Corporate nowadays focus on developing of its human resources by investing in training of employees, incentive schemes, retirement schemes, employee stock options, etc.  Indian Financial System The Indian financial system is a complex network of financial institutions, markets, instruments, and services that facilitate the flow of funds between savers and investors. It comprises various entities such as banks, non-banking financial companies (NBFCs), insurance companies, stock exchanges, mutual funds, pension funds, and other financial intermediaries.  Formal Financial System comes under the preview of Ministry of Finance (MOF) headed by Smt. Nirmala Sitharaman, Union Finance Minister. Reserve Bank of India (RBI) by Mr. Shaktikanta Das, Governor of RBI. Securities Exchange Board of India (SEBI) Mr.Ajay Tyagi and other regulatory bodies. Informal Financial System consists of: ▫ Individual money lenders such as neighbours, relatives, land lords, traders, store owners etc.  FINANCIAL INSTITUTIONS: Financial institutionsare intermediaries that mobilizesavings & facilitate the allocation of funds in an efficient manner. Performs the role of efficient allocation of funds, when there are conditions that make it difficult for lenders or investors of funds to deal directly with borrowers of funds in financial markets Financial institutionscan be classified majorly as banking & non-banking financial institutions. Banking institutions are creators of credit FINANCIAL MARKETS: Financial markets are a mechanism enabling participants to deal in financial claims. The markets also provide a facility in which their demands and requirements interact to set a price for such claims. The main organized financial markets in India are the Money Market and Capital Market. Agency The business world is full of conflicts of interest. These normally take place when people or entities serve their personal interests rather than keeping up with their professional responsibilities The agency problem is a conflict of interest that occurs when agents don't fully represent the best interests of principals.  FUNCTIONS OF FINANCIAL MANAGEMENT Estimating Financial Requirements: The first task of the financial manager is to estimate short term and long-term financial requirement of his business. For this purpose, he will prepare a financial plan for present as well as future. The amount required for purchasing fixed assets as well as the needs of funds for working capital has to be ascertained. Deciding Capital Structure: The capital structure refers to the kind and proportion of the different securities for raising funds. Decision about various sources of funds should be linked to cost of raising funds. If cost of rising funds is high, then such sources may not be useful. Selecting a Source of Finance: After preparing a capital structure, an appropriate source of finance is selected. Various sources from which finance may be raised, includes share capital, debentures, financial deposits etc. If finance is needed for short periods then banks, public’s deposits, financial institutions may be appropriate. If long-term finance is required the share capital, debentures may be useful.  Selecting a Pattern of Investment: When fund have been procured then a decision about investment pattern is to be taken. A decision has to be taken as to which assets are to be purchased? The fund will have to be spent first. Fixed asset and the appropriate portion will be retained for the working capital. Proper Cash Management: Cash management is an important task of financial manager. He has to assess the various cash needs at different times and then make arrangements for arranging cash. Cash may be required to make payments to creditors, purchasing raw material, meet wage bills, and meet day to day expenses. Proper use of Surpluses: The utilization of profits or surpluses as also an important factor in financial management. A judicious use of surpluses is essential for the expansion and diversification plans and also protecting the interest of the shareholders.  Financial decisions Investment Financing Dividend decision decision decision ✔ Investment decision Investment decisions reveal how the firm’s funds are invested in different assets. Investment decisions are of two types: Capital Budgeting Capital budgeting is the process of evaluating and selecting long-term investment projects or capital expenditures. Working Capital Management Working capital management is the process of managing a company's short-term assets and liabilities to ensure its smooth operations and financial health.  Cont… ✔ Financing decision Financing decisions are concerned with the determination of financial sources, the amount to be obtained from each source, and the value of each source of finance from various long-term sources( debt and equity). ✔ Dividend decision Dividend decision relates to how much of the company's net profit is to be distributed to the shareholders and how much of it should be retained in the business for meeting the investment requirements. Role of Finance Manager Financial managers are responsible for taking decision on acquiring the funds for business and appropriately investing those funds. The key challenges are, intern in the areas specified below: Financial Structure, Foreign Exchange Management, Treasury Operations, Investor Communication, Management Control and Investment Planning