DEFINE FINANCE

WHAT IS FINANCE?
According to Lawrence J. Gitman, finance can be defined as the science and art of
managing money.
At the personal level, finance is concerned with individuals’ decisions about how much of
their earnings they spend, how much they save, and how they invest their savings.
In a business context, finance involves the same types of decisions: how firms raise money
from investors, how firms invest money in an attempt to earn a profit, and how they decide whether
to reinvest profits in the business or distribute them back to investors.
TYPES OF FINANCE:
1. Debt Financing- With debt financing, you borrow money from an outside entity to fund
your business.
 SBA loans
 Commercial bank loans
 Working capital loan
 Equipment leasing
2. Equity Financing- Equity financing is money paid to your business by an outside entity.
 Private investors
 Venture capital
 Employee stock ownership plan
 Angel investors
DEBT FINANCING VS. EQUITY FINANCING
DEBT FINANCING
ADVANTAGES DISADVANTAGES
 Keep full ownership
• No obligations after paying debt  Must pay back
• Interest is tax deductible  Could cause cash flow issues
• Short and long-term options  Usually need collateral
• More cash on hand

EQUITY FINANCING
ADVANTAGES DISADVANTAGES

• Less risk than debt • Investors returns could be more than

• No paying back funds debt payments
• Gain credibility through investor networks
• Investors don’t expect immediate ROI • Investors gets some ownership
• Fixed payments for better budgeting • Must consult investor for decisions
 RESPONSIBLE FOR FINANCIAL MANAGEMENT
WITHIN AN ORGANIZATION

FINANCIAL MANAGER
They perform data analysis and advise senior managers on profit-maximizing ideas. They
are responsible for the financial health of an organization. They produce financial reports, direct
investment activities, and develop strategies and plans for the long-term financial goals of their
organization.

FINACIAL MANAGER PRIMARY ACTIVITIES

 Prepare financial statements, business activity reports, and forecasts

 Monitor financial details to ensure that legal requirements are met
 Supervise employees who do financial reporting and budgeting
 Review company financial reports and seek ways to reduce costs
 Analyze market trends to find opportunities for expansion or for acquiring other companies
 Help management make financial decisions

TYPES OF FINANCIAL MANAGERS

1. Controllers- Direct the preparation of financial reports that summarize and forecast the
organization's financial position, such as income statements, balance sheets, and analyses
of future earnings or expenses.
2. Treasurers and finance officers-Direct their organization's budgets to meet its financial
goals. They oversee the investment of funds. They carry out strategies to raise capital (such
as issuing stocks or bonds) to support the firm's expansion.
3. Credit managers-Oversee the firm's credit business. They set credit-rating criteria,
determine credit ceilings, and monitor the collections of past-due accounts.
4. Cash managers-Monitor and control the flow of cash that comes in and goes out of the
company to meet the company's business and investment needs.
5. Risk managers-Control financial risk by using hedging and other strategies to limit or
offset the probability of a financial loss or a company’s exposure to financial uncertainty.
Among the risks they try to limit are those due to currency or commodity price changes.
6. Insurance managers- Decide how best to limit a company’s losses by obtaining insurance
against risks such as the need to make disability payments for an employee who gets hurt
on the job, and any costs imposed by a lawsuit against the company.
IMPORTANT SKILLS FOR FINANCIAL MANAGERS

 Analytical skills. Financial managers increasingly assist executives in making decisions

that affect the organization, a task for which they need analytical ability.
 Communication. Excellent communication skills are essential because financial managers
must explain and justify complex financial transactions.
 Attention to detail. In preparing and analyzing reports such as balance sheets and income
statements, financial managers must pay attention to detail.
 Math skills. Financial managers must be skilled in math, including algebra. An
understanding of international finance and complex financial documents also is important.
 Organizational skills. Financial managers deal with a range of information and
documents. They must stay organized to do their jobs effectively.

HOW THE FINANCIAL MANAGER HELPS IN ACHIEVING

THE GOALS OF THE ORGANIZATION

Proper use and allocation of funds leads to improve the operational efficiency of the
business concern. When the finance manager uses the funds properly, they can reduce the cost of
capital and increase the value of the firm. Financial manager helps to take sound financial decision
in the business concern.

ROLE OF FINANCIAL INSTITUTION AND MARKET

FINANCIAL INSTITUTION

A company engaged in the business of dealing with financial and monetary transactions
such as deposits, loans, investments, and currency exchange. Financial institutions encompass a
broad range of business operations within the financial services sector including banks, trust
companies, insurance companies, brokerage firms, and investment dealers. Virtually everyone
living in a developed economy has an ongoing or at least periodic need for the services of financial
institutions.
ROLE OF FINANCIAL INSTITUTIONS:

The primary functions of financial institutions of this nature are as follows:

1. Accepting Deposits
2. Providing Commercial Loans
3. Providing Real Estate Loans
4. Providing Mortgage Loans
5. Issuing Share Certificate

VARIED FINANCIAL INSTITUTION AND

THEIR CORRESPONDING SERVICES

 Central Banks- Central banks are the financial institutions responsible for the oversight
and management of all other banks.
 Retail and Commercial Banks- Traditionally, retail banks offered products to individual
consumers while commercial banks worked directly with businesses. Currently, the
majority of large banks offer deposit accounts, lending and limited financial advice to both
demographics.
 Internet Banks- A newer entrant to the financial institution market are internet banks,
which work similarly to retail banks. Internet banks offer the same products and services
as conventional banks, but they do so through online platforms instead of brick and mortar
locations.
 Credit Unions- serve a specific demographic per their field of membership, such as
teachers or members of the military. While products offered resemble retail bank offerings,
credit unions are owned by their members and operate for their benefit.
 Savings and Loan Associations- Financial institutions that are mutually held and provide
no more than 20% of total lending to businesses fall under the category of savings and loan
associations. Individual consumers use savings and loan associations for deposit accounts,
personal loans, and mortgage lending.
 Investment Banks and Companies- Investment banks do not take deposits; instead, they
help individuals, businesses and governments raise capital through the issuance
of securities. Investment companies, more commonly known as mutual fund companies,
pool funds from individual and institutional investors to provide them access to the broader
securities market.
 Brokerage Firms- Brokerage firms assist individuals and institutions in buying and selling
securities among available investors. Customers of brokerage firms can place trades of
stocks, bonds, mutual funds, exchange-traded funds (ETFs), and some alternative
investments.
  Insurance Companies- Financial institutions that help individuals transfer risk of loss are
known as insurance companies. Individuals and businesses use insurance companies to
protect against financial loss due to death, disability, accidents, property damage, and other
misfortunes.
 Mortgage Companies- Financial institutions that originate or fund mortgage loans
are mortgage companies. While most mortgage companies serve the individual consumer
market, some specialize in lending options for commercial real estate only.

FINANCIAL MARKETS

Refer broadly to any marketplace where the trading of securities occurs. Financial markets
are vital to the smooth operation of capitalist economies.

 Over-the-Counter Markets
 Bond Markets
 Money Markets
 Derivatives Market
 Forex Market
FINANCIAL INSTRUMENTS

Assets that can be traded, or they can also be seen as packages of capital that may be traded.
Most types of financial instruments provide efficient flow and transfer of capital all throughout the
world's investors. These assets can be cash, a contractual right to deliver or receive cash or another
type of financial instrument, or evidence of one's ownership of an entity.

Financial instruments may be divided into two types:

 Cash Instruments- The values of cash instruments are directly influenced and determined
by the markets. These can be securities that are easily transferable. Cash instruments may
also be deposits and loans agreed upon by borrowers and lenders.
 Derivative Instruments- The value and characteristics of derivative instruments are based
on the vehicle’s underlying components, such as assets, interest rates, or indices.