INTRODUCTION TO

THE WORLD OF
FINANCE
FORMS OF BUSINESS OWNERSHIP
 1. Sole Proprietorship
 2. Partnership
 Limited Liability Partnership
 3. Co-operative Society
 4. The Company Form of Business Ownership

 5. Government Company

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 Particulars Sole Partnership Limited Co-operative Company form of
Proprietorship Liability Society business ownership
Partnership

Members Single Mini: 2 Mini: 2 Mini: 10 Private: Mini: 2

Individual Max:20 Max: No limit Max: No Max: 200
limit Public: Mini:7
Max: No limit

Legal Status No Separate Not a Separate Legal Separate Separate Legal

Legal Entity Separate Entity Legal Entity Entity
from owner Legal Entity

Liability Unlimited Unlimited Limited Limited to Limited to

paid up subscribed capital
capital

Tax Liability Personal Partnership + Partnership + Personal Co-operative

Personal Personal + Society
income income
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EVOLUTION OF FINANCIAL
MANAGEMENT
 The Traditional Phase
 The Transitional Phase

 The Modern Phase

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DEFINITION
 Financial management mainly involves raising funds and their
effective utilization with the objective of maximizing
shareholders wealth.

 Financial management concerned with maximizing

shareholders value primarily through sound investment and
financing decisions, efficient working capital management,
judicious risk management and well designed performance
management system.

 Financial management concerned with the acquisition,

financing and management of assets with some overall goal in
mind. 6
FINANCIAL MANAGEMENT IS CONCERNED
WITH THREE ACTIVITIES
 Anticipating financial needs, which means estimation of funds required for
investment in fixed and current assets or long-term and short-term assets.

 Acquiring financial resources–once the required amount of capital is

anticipated the next task is acquiring financial resources i.e., where and
how to obtain the funds to finance the anticipated financial needs and

 Allocating funds in business – means allocation of available funds among

the best plans of assets, which are able to maximize shareholders’ wealth.

 Thus, the decisions of financial management can be divided into three viz.,
investment, financing and dividend decisions. 7
FINANCIAL DECISIONS
 As mentioned in the contents of modern approach the discussions
of financial management can be broken down into four major
decisions

 Investment decision
 Financing decision
 Dividend decision
 Working capital decisions

 A firm takes these decisions simultaneously and continuously in the

normal course of business.

 Firm may not take these decisions in a sequence, but decisions have
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to be taken with the objective of maximizing shareholders’ wealth.
 INVESTMENT DECISIONS
 These decisions are taken in the light of their probable impact on the
wealth of shareholders. It involves huge capital outlay, it has long-term
implications and these decisions are usually irreversible.

 It is also referred to as capital budgeting decisions and are critical for

long-term survival and growth.

 It aims at selecting the most productive avenues that maximizes the

Return On Investment.

 Examples include:
• Expansion
• Modernization and replacement
• R&D expenditure 9
FINANCING DECISIONS
 Vaguely referred to as capital structure decisions. It determines the
financial risk of a company and thrust is to bring down the cost of
financing.

 Financing decisions are mainly concerned with Identifying the

suitable sources of funds and Tapping of these sources

 The main issues involved are:

 Where to procure the requisite funds from?
 What should be the optimal mix of various sources of capital?
 How much should be the proportion of short-term and long-term funds?
 How do the expectations of providers of each source of capital changes
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with alteration in the capital mix?
DIVIDEND DECISIONS
 Dividend Decisions are mainly concerned with deciding the mix of
profits to be distributed as dividends and those to be ploughed back for
future financing needs of business.

 Dividend Decisions depends on trade off between future financing

needs of the firm and current consumption requirements of the
shareholders.

 Generally, firms in sectors with a high-growth rate follow a policy of

high retention and low payout.

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WORKING CAPITAL DECISIONS

 Working capital decisions are concerned with the

management of current assets.

 The two key decision points in working capital

management are:
 Level of investment in current assets
 Financing of current assets.

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FUNCTIONS OF FINANCE
MANAGER
 Treasurer:
 The main concern of treasurer is mainly financing activities
and investment activities.
 Capital Budgeting, Portfolio Manager, Investment Banking,
Fund Raising Manager, Credit Management.

 Controller:
 The function of controller are related to the management and
control of assets.
 Financial Accounting Manager, Cost Accounting Manager,
Tax Manager, Financial Statement Preparation, Budget
Preparation.
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GOALS OF FINANCIAL
MANAGEMENT
 Profit maximization:
 Profitis a positive and fruitful difference between revenue
and expenses, over a period of time.

 Shareholder’s Wealth Maximization:

 Maximizing NPV of a course of action to shareholders.

 Alternative Motives:
 Maximization of ROE
 Maximization of EPS
 Management of Reserves for growth and expansion

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IDENTIFY THE PERSON???

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AGENCY PROBLEM
 In company (public ltd) form of business organization,
shareholders (equity) are the owners of the company. They
may be in crores and they spread out through the country, (or
some cases through the world).

 Due to this they cannot control or manage the company. They

elect board of directors (BoDs) as their representative or
agent and assign the responsibility to the management.

 Once BoDs are elected the actual power of shareholders is

restricted, except in certain companies where the shareholders
are also the directors. 17
 If they want to know the future prospects of their company
they can collect from the annual report, accounts, stock
brokers, journals, and daily newspapers.

 In this circumstances, the (BoDs) management act in the

interest of the shareholders or they may try to achieve their
personal goals at the cost of the shareholders.

 Conflict of interest between the Principle and Agent causes

agency problems.

 To resolve such agency problems monitoring and control

mechanisms become imperative.
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HOW TO OVERCOME AGENCY
PROBLEM
 Connecting pay to the profit earned
 Rewarding managers with shares

 Direct intervention by owners

 Threat of firing

 Threat of takeover

 Readings
 https://www.forbesindia.com/article/iim-calcutta/governa
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nce-conflicts-in-companies-how-structural-overhaul-can-
help/81785/1
INTRODUCTION TO FINANCIAL
SYSTEM
 The term financial system is a set of inter-related
activities/services working together to achieve some
predetermined purpose or goal.

 Financial System is a complex and well-integrated set of sub-

systems of the financial institution, financial markets,
financial instrument, & financial services which facilitates
the transfer and allocation of funds effectively and efficiently.

 The financial system is the process by which money flows

from savers to users.
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FUNCTION OF FINANCIAL
SYSTEM
 Mobilizing & allocating saving
 Monitor corporate performance

 It provides payment & settlement system

 It provides investor education.

 It provides a low cost of transactions.

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STRUCTURE OF FINANCIAL SYSTEM

Financial System

Financial Financial Financial Financial

Institutions Markets Instrument Services

Banking Non-banking Money Market Capital Market

institutions Institutions

New Issue
Stock Market
Market
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FINANCIAL INSTITUTIONS
 Financial institutions are the business organization that
mobilizes savings & depositories of savings.

 Banking Institutions which include central bank, commercial

banks & co-operative banks.

 Non-Banking Institution which includes development

financial institution such as development banks, investment
institution like LIC, GIC, UTI.

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FINANCIAL MARKETS
 Financial Markets are a mechanism enabling participants to deal with financial
claims.

 This market also provides a facility in which their demands and requirements interact
to set a price for such claims. In other words, it is a place that allows people to easily
buy & sell financial securities.

 Financial markets are of two types:

 Money Market
 The money market is a market for short-term funds having maturities of one year
or less. Short-term marketable securities are traded in the money market.

 Capital Market
 The capital market is the market for long-term funds. The backbone of the market
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is formed by the securities markets/exchanges comprising the new issue markets
and the stock exchanges.
CAPITAL MARKET
 The new issue market also known as primary market and
secondary market also known as stock exchange, both differ
from each other organizationally as well as in the nature of
functions performed by them.

 Primary market deals in new securities, that is, securities

which were not previously available and are offered to the
investors for the first time.

 The new issue market does not have any organizational set up
in any particular place and is recognized only by the specialist
institutional services that it renders to the lenders/borrowers of
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capital funds at the time of any particular operation.
 Stock market is a market for old securities defined as those
already issued and granted stock exchange quotations/listing.

 Functionally, it differs from the new issue market, that

supplies funds to corporate enterprise directly but the
secondary markets play only an indirect role in industrial
financing by providing liquidity to investments already made.

 The stock exchange has a physical existence and is located in

a particular geographical area.

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FINANCIAL INSTRUMENT
 A financial instrument/asset/security represents claims
against the future income/wealth of an entity.

The financial assets are:

 Direct (e.g. shares and debentures of manufacturing
companies),
 Indirect (e.g. units of mutual funds)

 Derivatives (e.g. futures and options)

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FINANCIAL SERVICES

 Financial system provides advices and services to both savers

and investors.

 Professional services involving the investment, lending, and

management of money and assets are included in financial
services.

 Various firms provides a range of financial services,

including tax preparation, insurance coverage, and
investment portfolios

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