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Module I Financial management Introduction to financial management, objectives of financial management profit maximization and wealth maximization. Changing role of finance managers. Interface of Financial Management with other functional areas. Indian financial system Primary market, Secondary market stocks & commodities market, Money market, Forex markets. (Theory Only) INTRODUCTION TO FINANCIAL MANAGEMENT Finance is defined as the provision of money at the time, it is required. Finance is the art and science of managing money. There is no human being, without blood. Similarly, there is no organization that does not require finance, irrespective of the activity, it is engaged in. The way blood is needed for a person to live, so is the requirement of finance to any firm for its survival and growth. Without adequate finance, no organization can possibly achieve its objectives. Financial management is concerned with management of fund. It may be defined as acquisition of fund at optimum cost and its utilization with minimum financial risk. The management and recording of the flow of money. Planning the future use of money Ensuring that the money is well spent and not misused Is essential to building financial sustainability

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise. Scope/Elements of Financial Management 1. Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets are also a part of investment decisions called as working capital decisions. 2. Financial decisions - They 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. 3. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two: a. Dividend for shareholders- Dividend and the rate of it has to be decided. b. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise. Objectives of Financial Management
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The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be1. To ensure regular and adequate supply of funds to the concern. 2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders. 3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost. 4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved. 5. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital. Functions of Financial Management 1. Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise. 2. Determination of capital composition : Once the estimation have been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties. 3. Choice of sources of funds: For additional funds to be procured, a company has many choices like-Issue of shares and debentures, Loans to be taken from banks and financial institutions, Public deposits to be drawn like in form of bonds. Choice of factor will depend on relative merits and demerits of each source and period of financing. 4. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible. 5. Disposal of surplus: The net profits decisions have to be made by the finance manager. This can be done in two ways: Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus. Retained profits - The volume has to be decided which will depend upon expansional, innovational, diversification plans of the company. 6. Management of cash: Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and
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water bills, payment to creditors, meeting current liabilities, maintainance of enough stock, purchase of raw materials, etc. 7. Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.

Profit Maximisation & wealth Maximisation Profit maximization

Profit maximization is the main aim of any business and therefore it is also an objective of financial management. Profit maximization, in financial management, represents the process or the approach by which profits (EPS) of the business are increased. In simple words, all the decisions whether investment, financing, or dividend etc are focused to maximize the profits to optimum levels. Profit maximization is the traditional approach and the primary objective of financial management. It implies that every decision relating to business is evaluated in the light of profits. All the decision with respect to new projects, acquisition of assets, raising capital, distributing dividends etc are studied for their impact on profits and profitability. If the result of a decision is perceived to have positive effect on the profits, the decision is taken further for implementation.

Profit Maximization Theory / Model: The Rationale / Benefits:

Profit maximization theory of directing business decisions is encouraged because of following advantages associated with it. Economic Survival: Profit maximization theory is based on profits and profits are a must for survival of any business. Measurement Standard: Profits are the true measurement of viability of a business model. Without profits, the business losses its primary objective and therefore has a direct risk on its survival. Social and Economic Welfare: The profit maximization objective indirectly caters to social welfare. In a business, profits prove efficient utilization and allocation of resources. Resource allocation and payments for land, labor, capital and organization takes care of social and economic welfare. Limitations of Profit Maximization as an objective of Financial Management: Profit maximization is criticized for some of its limitations which are discussed below:

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Haziness of the concept Profit: The term Profit is a vague term. It is because different mindset will have different perception about profit. For e.g. profits can be the net profit, gross profit, before tax profit, or the rate of profit etc. There is no clear defined profit maximization rule about the profits. Ignores Time Value of Money: The profit maximization formula simply suggests higher the profit better is the proposal. In essence, it is considering the naked profits without considering the timing of them. Another important dictum of finance says a dollar today is not equal to a dollar a year later. So, the time value of money is completely ignored. Ignores the Risk: A decision solely based on profit maximization model would take decision in favor of profits. In the pursuit of profits, the risk involved is ignored which may prove unaffordable at times simply because higher risks directly questions the survival of a business. Ignores Quality: The most problematic aspect of profit maximization as an objective is that it ignores the intangible benefits such as quality, image, technological advancements etc. The contribution of intangible assets in generating value for a business is not worth ignoring. They indirectly create assets for the organization.

Wealth maximization
Wealth maximization is a modern approach to financial management. Maximization of profit used to be the main aim of a business and financial management till the concept of wealth maximization came into being. It is a superior goal compared to profit maximization as it takes broader arena into consideration. Wealth or Value of a business is defined as the market price of the capital invested by shareholders. Finance managers are the agents of shareholders and their job is to look after the interest of the shareholders. The objective of any shareholder or investor would be good return on their capital and safety of their capital. Both these objectives are well served by wealth maximization as a decision criterion to business. Criticism of Wealth Maximization. The wealth maximization objective has also been criticized by certain financial theorists mainly on following accounts; It is a prescriptive idea. The objective is not descriptive of what the firms actually do. The objective of wealth maximization is not necessarily socially desirable. There is some controversy as to whether the objective is to maximize the stockholders wealth or the wealth of the firm which includes other financial claimholders such as debenture holders, preferred stockholders, etc., The objective of wealth maximization may also face difficulties when ownership and management are separated as is the case in most of the large corporate form of organizations.
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In spite of all the criticism, we are of the opinion that wealth maximization is the most appropriate objective of a firm and the side costs in the form of conflicts between the stockholders and debenture holders, firm and society and stock holders and managers can be minimized. Why wealth maximization model is superior to profit maximization? Wealth maximization model is a superior model because it obviates all the drawbacks of profit maximization as a goal to financial decision. Firstly, the wealth maximization is based on cash flows and not profits. Unlike the profits, cash flows are exact and definite and therefore avoid any ambiguity associated with accounting profits. Secondly, profit maximization presents a shorter term view as compared to wealth maximization. Short term profit maximization can be achieved by the managers at the cost of long term sustainability of the business. Thirdly, wealth maximization considers the time value of money. It is important as we all know that a dollar today and a dollar one year latter do not have the same value. In wealth maximization, the future cash flows are discounted at an appropriate discounted rate to represent their present value. Fourthly, the wealth maximization criterion considers the risk and uncertainty factor while considering the discounting rate. The discounting rate reflects both time and risk. Higher the uncertainty, the discounting rate is higher and vice-versa. In the light of modern and improved approach of wealth maximization, a new initiative called Economic Value Added (EVA) is implemented and presented in the annual reports of the companies. Positive and higher EVA would increase the wealth of the shareholders and thereby create value. Economic Value Added = Net Profits after tax Cost of Capital. In summary, the wealth maximization as an objective to financial management and other business decisions enables the shareholders achieve their objectives and therefore is superior to profit maximization. For financial managers, it is a decision criterion being used for all the decisions. Profit maximization ruled the traditional business mindset which has gone through drastic changes. In the modern approach of business and financial management, much higher importance is assigned to wealth maximization in comparison of Profit Maximization vs. Wealth Maximization. The loosing importance of profit maximization is not baseless and it is not only because it ignores certain important areas such as risk, quality, and time value of money but also because of the superiority of wealth maximization as an objective of business or financial management.

Finance Organisation
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Changing role of finance managers Financial activities of a firm is one of the most important and complex activities of a firm. Therefore in order to take care of these activities a financial manager performs all the requisite financial activities. A financial manger is a person who takes care of all the important financial functions of an organization. The person in charge should maintain a far sightedness in order to ensure that the funds are utilized in the most efficient manner. His actions directly affect the Profitability, growth and goodwill of the firm. Following are the main functions of a Financial Manager: Raising of Funds In order to meet the obligation of the business it is important to have enough cash and liquidity. A firm can raise funds by the way of equity and debt. It is the responsibility of a financial manager to decide the ratio between debt and equity. It is important to maintain a good balance between equity and debt. Allocation of Funds Once the funds are raised through different channels the next important function is to allocate the funds. The funds should be allocated in such a manner that they are optimally used. In order to allocate funds in the best possible manner the following point must be considered The size of the firm and its growth capability Status of assets whether they are long term or short tem Mode by which the funds are raised.

These financial decisions directly and indirectly influence other managerial activities. Hence formation of a good asset mix and proper allocation of funds is one of the most important activities. Profit Planning
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Profit earning is one of the prime functions of any business organization. Profit earning is important for survival and sustenance of any organization. Profit planning refers to proper usage of the profit generated by the firm. Profit arises due to many factors such as pricing, industry competition, state of the economy, mechanism of demand and supply, cost and output. A healthy mix of variable and fixed factors of production can lead to an increase in the profitability of the firm. Fixed costs are incurred by the use of fixed factors of production such as land and machinery. In order to maintain a tandem it is important to continuously value the depreciation cost of fixed cost of production. An opportunity cost must be calculated in order to replace those factors of production which has gone thrown wear and tear. If this is not noted then these fixed cost can cause huge fluctuations in profit. Understanding Capital Markets Shares of a company are traded on stock exchange and there is a continuous sale and purchase of securities. Hence a clear understanding of capital market is an important function of a financial manager. When securities are traded on stock market there involves a huge amount of risk involved. Therefore a financial manger understands and calculates the risk involved in this trading of shares and debentures. Its on the discretion of a financial manager as to how distribute the profits. Many investors do not like the firm to distribute the profits amongst share holders as dividend instead invest in the business itself to enhance growth. The practices of a financial manager directly impact the operation in capital market. Financial Management Relationship with Other Functional Areas 1. Financial Management and Production Department: The financial management and the production department are interrelated. The production department of any firm is concerned with the production cycle, skilled and unskilled labour, storage of finished goods, capacity utilisation, etc. and the cost of production assumes a substantial portion of the total cost. The production department has to take various decisions like replacing machinery, installation of safety devices, etc. and all the decisions have financial implications. 2. Financial Management and Material Department: The financial management and the material department are also interrelated. Material department covers the areas such as storage, maintenance and supply of materials and stores, procurement etc. The finance manager and material manager in a firm may come together while determining Economic Order Quantity, safety level, storing place requirement, stores personnel requirement, etc. The costs of all these aspects are to be evaluated so the finance manager may come forward to help the material manager. 3. Financial Management and Personnel Department: The personnel department is entrusted with the responsibility of recruitment, training and placement of the staff. This department is also concerned with
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the welfare of the employees and their families. This department works with finance manager to evaluate employees welfare, revision of their pay scale, incentive schemes, etc. 4. Financial Management and Marketing Department: The marketing department is concerned with the selling of goods and services to the customers. It is entrusted with framing marketing, selling, advertising and other related policies to achieve the sales target. It is also required to frame policies to maintain and increase the market share, to create a brand name etc. For all this finance is required, so the finance manager has to play an active role for interacting with the marketing department.

Indian Financial System

Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products. This paper discusses the meaning of finance and Indian Financial System and focus on the financial markets, financial intermediaries and financial instruments. The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit.
Constituents of a Financial System

Financial Markets
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A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend. Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid, short-term instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions. Capital Market - The capital market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year. Forex Market - The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market. This is one of the most developed and integrated market across the globe. Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and longterm loans to corporate and individuals.

Was my MBA worth it?

ADAM JANIKOWSKI Special to The Globe and Mail Published Tuesday, Jan. 10 2012, 12:35 PM EST Last updated Thursday, Sep. 06 2012, 12:02 PM EDT

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Adam Janikowski left his job as vice-president of investment banking at BMO Capital Markets in Britain to pursue an MBA at INSEAD in France, and has written for the Globe about his experiences. He graduated with distinction in December. In todays educational landscape, there are a lot of schools that offer MBAs. Each school tries to stand out by building or maintaining its reputation through the offering of options such as joint degrees, multiple campuses and flexible learning. The common factor among each school is the promise of a unique business education that will help take your career to the next level. However, there is a common misperception among many MBA graduates that once you obtain your degree, the path to the corner office magically appears. Unfortunately, while having an MBA degree may help some attain this success; it is not necessarily the case for everyone. According to a 2011 study by U.S. News, of the CEOS that helm the American Fortune 500 companies; 174 (35 per cent) have an MBA (while 59 [12 per cent]have law degrees). Contrast this to nearly 200 (40 per cent) CEOs who have no graduate-level (masters level or above) degree.

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Video: Don't go to b-school in your home town Vote: Is an MBA worth the expense? So the question is, why spend so much time and money pursuing an MBA, especially if it isnt a guaranteed path to success. The answer to this is as individual and personal as each student. For me, the answer is comprised of three major components: rounding out my education; learning soft management skills; and, perhaps most importantly, building my network. As someone with an engineering undergraduate degree who worked in finance prior to doing an MBA, I felt that there were small parts of business theory that, had I known, I could have capitalized on. Thus, doing an MBA complemented my engineering education. Amongst my classmates at INSEAD, the MBA program helped round out the technical individuals who were hoping to move into more financial roles post-graduation. Another great strength of an MBA course is the exposure to management and business psychology courses. Most MBA programs require students to take a minimum of one or two organizational behaviour courses and offer many more as part of their elective curriculum. Courses such as decision making, negotiation tactics, and communication theory offer to teach skills that are vital in todays business environment but not necessarily intuitive and often overlooked by many. Although it is possible to learn these skills on the job, studying them in a classroom environment provides a safe arena with instantaneous and honest feedback, something not often

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available in the workplace. These skills are heavily reinforced through the MBA practice of working in groups, which doesnt happen easily in self-study courses such as the Chartered Financial Analyst program. One of the big differences between European schools like INSEAD and many North American universities is the level of endowment and of government support. According to the OECDs Education at A Glancepublication, the most recent information available from the Organization for Economic Co-operation and Development, European countries tend to spend a smaller percentage of their GDP on higher education than North American ones (U.S.: 2.7 per cent; Canada: 2.5 per cent; Britain: 1.2 per cent). For instance, as INSEAD is a relatively young university, it has not yet had time to build a large endowment, and, similar to other young, private universities, it is therefore reliant largely on executive education. Executive education accounts for 50 per cent of INSEADs revenue, compared with 40 per cent contributed by the fulltime MBA tuition and 10 per cent from grants, giving and endowments. Because of this reliance on executive education, INSEAD caters heavily to executives who want to learn management and business psychology courses. This, in turn, has created a very strong organizational behaviour department within the university and the courses from this department provided some of the more rewarding and applicable learning I will take from my MBA. Finally, and perhaps most importantly, the greatest value to me of my MBA is the network I gained. All MBA schools, from Ivey to Rotman, from Harvard to Oxford, have a strong alumni network. Former students are encouraged to connect to help their Alma Mater and other alumni. This network can be very powerful throughout a career. The network of students that I graduated with has dispersed to the four corners of the world. Some are starting businesses in Africa and the BRIC emerging economies; many have returned to consulting jobs, while others have headed to financial hubs like London and New York. Regardless, the network I created in the short span of 12 months is one that will remain with me throughout the rest of my career. An MBA does not guarantee any individual a straight path to executive success. That typically only comes with hard work and a bit of luck. Earning an MBA can be a great opportunity for someone who wants to round out their education, learn something new in a business-based environment, meet dynamic, interesting friends and even find a new career. And while earning an MBA for the right reasons can be incredibly useful, as it was in my case; like anything else in life, what you get out of the program depends very heavily on what you put into it.

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