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Environment of Business Finance: Unit 1
Environment of Business Finance: Unit 1
Environment of
Business Finance
1.1 Business Finance
1.2 Financial Management
1.3 Functions of Finance
Manager
Introduction
Business needs finance to meet their requirements in the economic world.
Any kind of business activity depends on finance. Hence, it is called as
lifeblood of business organisation.
Finance, in a real sense, is the cornerstone of the enterprise system good. It
is vitally important to the economic health business firms, and hence to the
nation and the world.
All of this makes finance stimulating and exciting but also challenging and
sometimes confusing. Thus study of finance will helps for better
understanding of our financial system.
Meaning :
Definitions :
1)
Wheeler :
Business finance is that business activity which concerns with the acquisition and
conversation of capital funds in meeting financial needs and overall objectives of a
business enterprise.
2)
Business finance consists of the raising, providing, managing of all the money, capital or
funds of any kind to be used in connection with the finance.
Nature of Finance :
The nature of finance is as follows:
Life-Blood of Business :
Finance is the foundation stone of
every business. It is life blood of every
corporate.
2) Scarce and Limited :
The financial resources are always
scarce and limited. It needs proper
planning and control in order to
achieve the best result out of
the complex situation of risk and uncertainty
prevailing in the business world.
4)
1)
2)
3)
4)
Management of Earnings
5)
Cash Flow
6)
Assets
7)
Debt
1.2 FINANCIAL
MANAGEMENT
A) Meaning :
Management means planning, organising, directing and controlling the financial
activities such as procurement and utilisation of funds of the enterprise. It means
applying general management principles to financial resources of the enterprise.
B) Definitions :
1) Dr. S. N. Maheshwari :
"Financial management is concerned with raising financial resources and their effective
utilisation towards achieving the organisational goals."
2) Richard A. Brealey :
"Financial management is the process of putting the available funds to the best
advantage from the long term point of view of business objectives.
3) Howard and Uptron :
Financial management is an application of general managerial principles to the area
of financial decision- making.
1.2 FINANCIAL
MANAGEMENT
C) Goals of Financial Management :
The financial objectives of the firm can be grouped in two parts :
1) Short-term Goals / Objectives :
a) Financial Discipline:
The basic objective of financial management is to create financial discipline among
employees in the organisation and to minimise the chances of misuse of funds.
b) Procedure and Practice :
To develop some procedure and practice, for systematic payments to outside parties
and the procedure as to appropriate handling of cash balances, cash receipts every
day.
c) Proper Accounting :
Another short-term objective of financial management may be proper accounting of
receipts and payments of cash and payments in the form of cheques.
1.2 FINANCIAL
MANAGEMENT
2) Long-term Goals/Objectives:
a) Profit Maximisation :
According to this approach the actions which increases profits should be undertaken
and those which decrease the profits should he avoided
b) Wealth Maximisation :
Wealth maximisation means maximising the net present value of a course of action.
c) Regulation and Control :
Regulation and control in respect of use of funds may be regarded as long-term
objective of financial management
d) Proper Estimation of Total Financial Requirements
Proper estimation of total financial requirements is a very important objective of financial
management.
e) Proper Mobilisation of Funds :
Mobilisation (collection) of finance is an important objective of financial management.
f) Proper Utilisation of Finance :
Proper utilisation of finance is an important objective of financial management.
1.2 FINANCIAL
MANAGEMENT
g) Maintaining Proper Cash Flow :
Maintaining proper cash flow is a short-term objective of financial management.
h) Survival of Company :
Survival is the most important objective of financial management
i) Creating Reserves :
One of the objectives of financial management is to create reserves
j) Proper Coordination :
Financial management must try to have proper co-ordination between the finance
department and other departments of the company.
k) Create Goodwill :
Financial management must try to create goodwill for the company.
l) Increase Efficiency :
Financial management also tries to increase the efficiency of all the departments of the
company.
m) Financial Discipline :
Financial management also tries to create a financial discipline
1.2 FINANCIAL
MANAGEMENT
D) Elements of Finanacial Management :
There are four key elements to the process of financial management:
1) Financial Planning :
Management need to ensure that enough funding is available
at the right time to meet the needs of the business.
2) Financial Control :
Financial control is a critically important activity to
help the business ensure that the business is
meeting its objectives.
3) Organizing and Directing :
When organizing, the financial manager decides how to use
the resources of the organization to most effectively carry out
the plans that have been established.
4) Financial Decision-making :
The key aspects of financial decision-making relate to investment,
financing and dividends.
1.2 FINANCIAL
MANAGEMENT
1.2 FINANCIAL
MANAGEMENT
b)
1.2 FINANCIAL
MANAGEMENT
F) Approaches to Financial Management :
Theoretical points of view, financial management approach may be broadly divided
into two major parts.
1) Traditional Approach :
The traditional approach to the scope of financial management refers to its subject
matter, in academic literature in the initial stages of its evolution, as a separate
branch of academic study. the field of study dealing with finance was treated as
encompassing three interrelated aspects of raising and administering resources from
outside:
a) Institutional Arrangement :
The institutional arrangement in the form of financial institutions, which comprise the
organisation of the capital market;
b) Fund Raising through Financial Instruments :
The financial instruments through which funds are raised from the capital markets and
the related aspects of practices and the procedural, aspects of capital markets; and
1.2 FINANCIAL
MANAGEMENT
c)
1.2 FINANCIAL
MANAGEMENT
b)
c)
Financial Decisions :
This decision is concerned with the mobilization of finance for investment. There
are two aspects of financing decision.
A proper balance between debt and equity to ensure a tradeoff between risk and
return to shareholders is necessary. A capital structure with a reasonable proportion
of debt and equity is called the optimum capital structure.
Aspect is the determination of an appropriate capital structure. Once the financial
manager is able to determine the best combination of debt and equity, he must
raise the appropriate amount through the best available sources.
Dividend Decision :
The dividend decision involves the determination of the percentage of profit earned
by the enterprise which is paid to the shareholders. The dividend payout ratio must
be evaluated in the light of the objective of maximizing shareholders wealth. Thus,
the dividend decision has become a vital aspect of financial decision.
G)
1.2 FINANCIAL
MANAGEMENT
1.2 FINANCIAL
MANAGEMENT
1) Determining Financial Needs :
One of the most important functions of the financial manager is to ensure availability
of adequate financing.
2) Determining Sources of Funds :
The financial manager has to choose sources of funds.
3) Financial Analysis :
It is the evaluation and interpretation of a firms financial position and operations, and
involves a comparison and interpretation of accounting data.
4) Optimal Capital Structure :
The financial manager has to establish an optimum capital structure and ensure the
maximum rate of return on investment.
5) Cost-Volume-Profit Analysis :
This is popularly known as the CVP relationship. For this purpose, fixed costs,
variable costs and semi-variable costs have to be analysed.
1.2 FINANCIAL
MANAGEMENT
6)
Finance manager is one of the department managers and he performs his role at
the middle management level. For the sake of convenience, his functions may be
subdivided in to two parts:
Executive Finance Functions