- Finance Concept:
- The concept of Finance originated from Economics.
- Limited Money, Unlimited Requirements of Money.
- Finance refers to Cash, banks, Investments, Loans, and funds, etc.
- Saving, Forecasting, borrowing, investing, Budgeting.
- Finance is the science and art of Managing Money.
Categories of Finance:
Personal Finance
- Income
- Spending’s
- Savings
- Borrowings
- Tax
- Retirement
- Planning
Business Finance
- Sources
- Application
- Finance Decisions
- Dividend Decisions
- Taxes
- Operations
- Marketing
- Accounting
- CSR
Public Finance
- Demand
- Supply
- Price
- Inflation
- GDP
- Budgeting
- Foreign Trade
- Reserves
Financial Management in Business:
Application of Management principles to financial activities.
Financial Management is the art and science of managing money to meet predefined objectives.
It is the process of planning, organizing, controlling, and managing financial resources to achieve organizational goals and objectives.
In a business, financial management is the process of handling a company’s finances in a way that generates value for the overall business.
Organic Function
Dedicated Departments and designated Managers.
At the strategic level, Financial Management is all about planning cash inflows and outflows in a way that enhances the business value.
At the tactical level, Financial management is all about how financial transactions are recorded, Analyzed, and reported to the higher-level management for business decisions.
Goals of Financial Management:
(1) Profit Maximization (2) Wealth Maximization (3) Improve the Market Share of the Company.
Profit Maximization
- One of the traditional yet most important goals.
- Excess of revenue over the cost.
- PBT, PAT, EBIT, EBITA
- Increasing units sold
- Increasing the price
- Cost Minimization
- Locating opportunities to invest, acquire, and expand Business.
Arguments in Favor of Profit Maximization:
- The basic Purpose of Business is to earn Profit.
- Profit is the meter for success.
- Profits are essential for survival. Only profit-making entities can think of tomorrow and beyond.
- Accepted By Society.
- Profit is not sin
- Loss-making Business is burdened with profits.
Argument Against Profit Maximization
- The Concept of profit is not clear – GP, NP, PBT, PAT, EBIT, PRBITA, etc.
- Duration (long run/ Short run)
- Scale factor – Synchronization between the size of the business and volume of Profit.
- Consideration of time factor.
- Under aggression towards profit, maximization may lead to social evils.
- Ignore risk associated with profits.
Wealth Maximization
- Most Popular
- Modern Approach
- More Superior to Profit Maximization
- Also called Value Maximization.
Stakeholders to the Business
External Stakeholders
- Creditors
- Governments
- Suppliers
- Tax Authorities
- Customers
- Media
- Society
Internal
- Shareholders
- Managers
- BODs
- Employers
Wealth Maximization Count
- Maximizing Stakeholder’s Wealth.
- Improving the market price of the share/ dividend
- What is Wealth? How to Calculate Wealth?
- NPV = Net Present Values- Present Value of Costs
Arguments in Favor of Wealth Maximization
- Takes care of the larger interests of the stakeholders.
- Based on cash flow and not on profits.
- Long-run perspectives rather unlike profit maximization goals focus on the short term.
- Consideration of time value of money
- Consideration of uncertainty factor.
- Help board members to create consistent dividend policies.
Criticisms of Wealth Maximization
- It is a perspective idea, not a top descriptive one
- Not socially desirable
- Maximizing stakeholder’s value is a vague term (debenture).
- The decision to maximize wealth may lead to employee exploitation.
Improving Market Share
- Percentage of Total sales in the industry.
- Market Share price gives a general idea of the size of a company about its market and its competitors.
- Economics of Scale
- Growth in market share grows revenue too.
- Growing market share reduces competitors and Competition.
How to Companies Increase Market share?
- Reducing Costs
- Increase the Volume of Sales
- Promotion
- Improving efficiency
- Introducing New Products
- Customization and Standardization
- Customer Loyalty
- New Technologies
- Talent Retention
- Acquisition
Criticisms to Market Share Improvements
- Acquisition leads to monopoly and duopoly
- Fewer Alternatives
- Higher Prices
- Unethical Practices
Scope of Financial Management
- Financing
- Investing
- Dividend
Functions of Financial Manager
Estimation of Capital Requirement
Procurement of Funds
Capital Structure Decision
Resource Allocation
Disposal of Surplus
Management of Cash.
Principal – Agent Relationship in Business
Agency Theory
It is a fiduciary and consensual relationship between two persons.
Duties and Responsibilities
Conflict of Interest
Agency Relationship in Business
An agency relationship exists in business. The principal appoints or authorizes an agent. Board of Directors / Shareholders. Separation between ownership and control.
Financial System in India
It consists of
(1) Financial Institutions (2) Financial Markets (3) Financial Instruments (4) Financial Services.
Financial Institutions
Financial Intermediaries Regulatory Bodies Non-Banking Financial Intermediaries
Functions of Financial Institutions
Mobilizing Savings Allocating resources efficiently Price discovery Risk management Provision of liquidity
Types of Financial Institutions
- Banking Institutions
- Non-Banking Institutions
Financial Markets
Markets where Financial Instruments are traded.
Money Market Capital Market Primary Market Secondary Market Derivative Market
Financial Instruments
Securities (debt and equity) Derivatives Bonds Shares Mutual Funds Venture Capital
Financial Services
Banks Insurance Stock Broking Credit Rating Venture Capital Foreign Exchange Factoring
Emerging Trends in Financial Management
- Internationalization
- Capital Market Reforms
- Information Technology
- Financial Engineering
- Derivatives
- Green Banking
Summary
Finance is the science and art of managing money. It involves saving, forecasting, borrowing, investing, and budgeting.
Financial management in business includes planning, organizing, controlling, and managing financial resources to achieve organizational goals. The goals of financial management can include profit maximization, wealth maximization, and improving market share.
Financial management also involves managing stakeholder interests and maximizing shareholder wealth. Financial managers perform functions such as estimating capital requirements, procuring funds, making capital structure decisions, allocating resources, and managing cash.
The financial system in India comprises financial institutions, financial markets, financial instruments, and financial services. Emerging trends in financial management include internationalization, capital market reforms, information technology, financial engineering, derivatives, and green banking.
