Introduction to Financial Management
Corporate finance is the area of finance dealing with monetary
The Importance of Finance
Finance involves the evaluation, disclosure, and management of
economic activity and is crucial to the successful operation of firms and
markets.
LEARNING OBJECTIVES
Differentiate between managerial finance and corporate finance
KEY TAKEAWAYS
Key Points
 The primary goal of corporate finance is to maximize
shareholder value and it deals with the monetary decisions
that business enterprises make.
 Managerial finance is interested in the internal and external
significance of a firm’s financial figures.
 The terms corporate finance and corporate financier are also
associated with investment banking. The typical role of an
investment bank is to evaluate a company’s financial needs
and raise the appropriate type of capital that best fits those
needs.
 Sound financial management creates value and
organizational ability through the allocation of scarce
resources.
Key Terms
 dividends: Dividends are payments made by a corporation
to its shareholder members. It is the portion of corporate
profits paid out to stockholders.
The Importance of Finance
Finance involves the evaluation, disclosure, and management of
economic activity and is crucial to the successful and efficient
operation of firms and markets.
Managerial Finance
Managerial finance concerns itself with the managerial significance of
finance. It is focused on assessment rather than technique. For
instance, in reviewing an annual report, one concerned with technique
would be primarily interested in measurement. They would ask: is
money being assigned to the right categories? Were generally
accepted accounting principles (GAAP) followed?
A person working in managerial finance would be interested in the
significance of a firm’s financial figures measured against multiple
targets such as internal goals and competitor figures.They may look at
changes in asset balances and probe for red flags that indicate
problems with bill collection or bad debt as well as analyze working
capital to anticipate future cash flow problems.
Sound financial management creates value and organizational ability
through the allocation of scarce resources amongst competing
business opportunities. It is an aid to the implementation and
monitoring of business strategies and helps achieve business
objectives.
Corporate Finance
decisions that business enterprises make and the tools and analysis
used to make those decisions. The primary goal of corporate finance is
to maximize shareholder value. Although it is in principle different from
managerial finance, which studies the financial decisions of all firms,
rather than corporations alone, the main concepts in the study of
corporate finance are applicable to financial problems of all kinds of
firms.
The discipline can be divided into long-term and short-term decisions
and techniques. Capital investment decisions are long-term choices
about which projects receive investment, whether to finance that
investment with equity or debt, and when or whether to pay dividends
to shareholders. On the other hand, short-term decisions deal with the
short-term balance of current assets and current liabilities; the focus
here is on managing cash, inventories, short-term borrowing, and
lending (such as the terms on credit extended to customers).
The terms corporate finance and corporate financier are also
associated with investment banking. The typical role of an investment
bank is to evaluate the company’s financial needs and raise the
appropriate type of capital that best fits those needs. Thus, the terms
“corporate finance” and “corporate financier” may be associated with
transactions in which capital is raised in order to create, develop, grow,
or acquire businesses.
Wall St.: Wall Street is the symbol of American and global finance.
The Role of Financial Managers
Financial managers ensure the financial health of an organization
through investment activities and long-term financing strategies.
LEARNING OBJECTIVES
Outline the various roles played by financial managers
KEY TAKEAWAYS
Key Points
 Financial managers perform data analysis and advise senior
managers on profit -maximizing ideas.
 The role of the financial manager, particularly in business, is
changing in response to technological advances that have
significantly reduced the amount of time it takes to produce
financial reports.
 Types of financial managers include controllers, treasurers,
credit managers, cash managers, risk managers and
insurance managers.
Key Terms
 net present value: The present value of a project or an
investment decision determined by summing the discounted
incoming and outgoing future cash flows resulting from the
decision.
The Role of Financial Managers

Overview
Financial managers perform data analysis and advise senior managers
on profit-maximizing ideas. Financial managers 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. Financial managers
typically:
 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.
The role of the financial manager, particularly in business, is changing
in response to technological advances that have significantly reduced
the amount of time it takes to produce financial reports. Financial
managers’ main responsibility used to be monitoring a company’s
finances, but they now do more data analysis and advise senior
managers on ideas to maximize profits. They often work on teams,
acting as business advisors to top executives.
Financial Statements: This is an example of a financial statement that
financial managers are responsible for preparing and interpreting.
Financial managers also do tasks that are specific to their organization
or industry. For example, government financial managers must be
experts on government appropriations and budgeting processes, and
healthcare financial managers must know about issues in healthcare
finance. Moreover, financial managers must be aware of special tax
laws and regulations that affect their industry.
Capital Investment Decisions
Capital investment decisions are long-term corporate finance decisions
relating to fixed assets and capital structure. Decisions are based on
several inter-related criteria. Corporate management seeks to
maximize the value of the firm by investing in projects which yield a
positive net present value when valued using an appropriate discount
rate in consideration of risk. These projects must also be financed
appropriately. If no such opportunities exist, maximizing shareholder
value dictates that management must return excess cash to
shareholders (i.e., distribution via dividends ). Capital investment
decisions thus comprise an investment decision, a financing decision,
and a dividend decision.
Management must allocate limited resources between competing
opportunities (projects) in a process known as capital budgeting.
Making this investment decision requires estimating the value of each
opportunity or project, which is a function of the size, timing and
predictability of future cash flows.
Achieving the goals of corporate finance requires that any corporate
investment be financed appropriately. The sources of financing are,
generically, capital self-generated by the firm and capital from external
funders, obtained by issuing new debt or equity.
Types of Financial Managers
There are distinct types of financial managers, each focusing on a
particular area of management.
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. Controllers also are in charge of preparing special reports
required by governmental agencies that regulate businesses. Often,
controllers oversee the accounting, audit, and budget departments.
Treasurers and finance officers direct their organization’s budgets to
meet its financial goals and oversee the investment of funds. They
carry out strategies to raise capital and also develop financial plans for
mergers and acquisitions.
Credit managers oversee the firm’s credit business. They set credit-
rating criteria, determine credit ceilings, and monitor the collections of
past-due accounts. 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. 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. 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 or 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.
What does a Financial Manager do?
The role of the financial manager, particularly in business, is changing
in response to technological advances that have significantly reduced
the amount of time it takes to produce financial reports. Financial
managers’ main responsibility used to be monitoring a company’s
finances, but they now do more data analysis and advise senior
managers on ideas to maximize profits. They often work on teams,
acting as business advisors to top executives.
Financial managers typically do the following:
 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
Financial managers also do tasks that are specific to their organization
or industry. For example, government financial managers must be
experts on government appropriations and budgeting processes, and
healthcare financial managers must know about issues in
healthcare finance. Moreover, financial managers must be aware of
special tax laws and regulations that affect their industry.
The following are examples of types of financial managers:
 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. Controllers also are in charge
of preparing special reports required by governmental
agencies that regulate businesses. Often, controllers
oversee the accounting, audit, and budget departments.
 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. They also develop financial plans for mergers
(two companies joining together) and acquisitions (one
company buying another).
 Credit managers oversee the firm's credit business. They
set credit-rating criteria, determine credit ceilings, and
monitor the collections of past-due accounts.
 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. For example,
they must project cash flow (amounts coming in and going
out) to determine whether the company will not have enough
cash (and will need a loan), or will have more cash than
needed (and can invest some of its money).
 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.
 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.
ROLE of FINANCIAL INSTITUTIONS
First off, we need to understand what a financial institution is. A
financial institution is basically an establishment that conducts financial
transactions such as investments, loans and deposits.
There are five main types of financial institutions.
1.Commercial banks
2. Investment Banks
3. Insurance Company
4. Brokerage
5. Investment Company
You can see the definitions for all of them here.
The primary role of financial institutions is to provide liquidity to the
economy and permit a higher level of economic activity than would
otherwise be possible.
According to the Brookings Institute, banks accomplish this in three
main ways: offering credit, managing markets and pooling risk among
consumers.
If you are familiar with GDP, the investment portion is heavily
influenced by financial institutions, as they facilitate how much people
save and invest in an economy, which is an ingredient for economic
growth.
Without financial institutions, people wouldn’t be able to take
advantage of rising and falling interest rates and there would be no
saving of money, other than the stacks you stuff under your mattress.
the roles very depending on the type of institution.
Banks in general- provide liquidity via loans against illiquid assets,
cash storage depots to facilitate transactions, capital for business
investment.
Savings banks - there is a discussion that they are risk intermediators,
i.e. customers put low risk (should be) sometimes insured to be so,
and banks lend the cash out to risky customers, paying the depositor a
return to reflect their low risk.
Insurance pool risks and manage them for a fee and earn an income
from the premiums and assets.
Asset and wealth management provide expert services to clients to
manage their savings and investments.
Brokers - act as intermediaries, often providing expert advice as to the
right product to suit the client , so a professional agent of the end use.
Financial Statement
What is a Financial Statement?
A financial statement is the combination of the three major reports on a
business. It will contain the cash flow statement, the income statement
and the balance sheet of the business. All three together produce an
overall picture of the health of the business.
Why is a Financial Statement Important?
The answer to this question is in the definition; it is the complete report
on the health of the business taking in cash flow, income and the
balance sheet. The financial statement determines if a business has to
ability to repay loans, if it has the cash flow to meet bills and purchase
stock. It will also tell from where the business is generating cash and
where the cash goes.
The financial statement tells if the business is profitable, if it will stay
profitable and if there are any large problems looming, such as a
continuous drop in sales over time. Reading the financial statement will
give an overall view of the condition of the business and if there are
any warnings signs of possible future problems. A bank or other such
institution will look to the financial statement as the first indicator of
how the business is performing and if there is a need for further
investigation.
When Will a Company Prepare a Financial Statement?
Every business will ready a financial statement to go with their end of
year results, to give interested parties the overview of how the
business is functioning. If a business is looking to increase credit
facilities with a bank or trying to raise capital for an expansion, it will
produce a financial statement for the end of a fiscal quarter or the most
recent month.  When preparing a financial statement for such purposes
the best practice is to use general accountancy language, understood
by all parties. A financial statement that may accompany an end of
year report and read just by employees, is often in terms familiar to just
those involved.
Often a government body may request a financial statement for tax
purposes and the company will need to produce one of high quality
using generally accepted guidelines. A bank or investors may also
request a financial statement without warning, if they are concerned
about the profitability or otherwise of the company. For these reason
alone it is vital for any business to keep good and current records so
that a financial statement is easy and quick to produce.
Analysis and Interpretation of Financial Statements
In this article we will discuss about:- 1. Introduction to Analysis
and Interpretation of Financial Statements 2. Types of Financial
Analysis 3. Preliminaries Required 4. Objectives 5. Importance 6.
Techniques.
Introduction to Analysis and Interpretation of Financial
Statements:
Analysis and interpretation of financial statements are an attempt to
determine the significance and meaning of the financial statement data
so that a forecast may be made of the prospects for future earnings,
ability to pay interest, debt maturities, both current as well as long
term, and profitability of sound dividend policy.
The main function of financial analysis is the pinpointing of the strength
and weaknesses of a business undertaking by regrouping and analysis
of figures contained in financial statements, by making comparisons of
various components and by examining their content. The analysis and
interpretation of financial statements represent the last of the four
major steps of accounting.
ADVERTISEMENTS:
The first three steps involving the work of the accountant in the
accumulation and summarisation of financial and operating data
as well as in the construction of financial statements are:
(i) Analysis of each transaction to determine the accounts to be debited
and credited and the measurement and variation of each transaction to
determine the amounts involved.
(ii) Recording of the information in the journals, summarisation in
ledgers and preparation of a worksheet.
(iii) Preparation of financial statements.
ADVERTISEMENTS:
The fourth step of accounting, the analysis and interpretation of
financial statements, results in the presentation of information that aids
the business managers, investors and creditors.
Interpretation of financial statements involves many processes like
arrangement, analysis, establishing relationship between available
facts and drawing conclusions on that basis.
Types of Financial Analysis:
The process of analysis may partake the varying types. Normally, it is
classified into different categories on the basis of information used and
on the basis of modus operandi.
(a) On the basis of Information Used:
(i) External analysis.
(ii) Internal analysis.
External analysis is an analysis based on information easily available
to outsiders (externals) for the business. Outsiders include creditors,
suppliers, investors, and government agencies regulating the business
in a normal way.
These parties do not have access to the internal records (information)
of the concern and generally obtain data for analysis from the
published financial statements. Thus an analysis done by outsiders is
known as external analysis.
Internal analysis is an analysis done on the basis of information
obtained from the internal and unpublished records and books. While
conducting this analysis, the analyst is a part of the enterprise he is
analysing. Analysis for managerial purposes is the internal type of
analysis and is conducted by executives and employees of the
enterprise as well as governmental and court agencies which may
have major regulatory and other jurisdiction over the business.
ADVERTISEMENTS:
(b) On the basis of Modus Operandi:
(i) Horizontal analysis.
(ii) Vertical analysis.
Horizontal analysis is also known as ‘dynamic analysis’ or ‘trend
analysis’. This analysis is done by analysing the statements over a
period of time. Under this analysis, we try to examine as to what has
been the periodical trend of various items shown in the statement. The
horizontal analysis consists of a study of the behaviour of each of the
entities in the statement.
Vertical analysis is also known as ‘static analysis’ or ‘structural
analysis’. It is made by analysing a single set of financial statement
prepared at a particular date. Under such a type of analysis,
quantitative relationship is established between the different items
shown in a particular statement. Common size statements are the form
of vertical analysis. Thus vertical analysis is the study of quantitative
relationship existing among the items of a particular data.
Preliminaries Required for Analysis and Interpretation of
Financial Statements:
The following procedures are required to be completed for
making an analysis and interpretation of financial statements:
(i) Data should be presented in some logical way.
(ii) Data should be analysed for preparing comparative statements.
(iii) All data shown in financial statements should be studied just to
understand their significance.
(iv) The objective and extent of analysis and interpretation should be
determined.
(v) Facts disclosed by the analysis should be interpreted taking into
account economic facts.
(vi) Interpreted data and information should be in a report form.
Objectives of Analysis and Interpretation of Financial Statements:
The following are the some of the common objects of
interpretation:
(i) To investigate the future potential of the concern.
(ii) To determine the profitability and future prospects of the concern.
(iii) To make comparative study of operational efficiency of similar
concerns.
in a limited manner. The income statement deals solely with operations
and the balance sheet shows the changes in the assets and liabilities.
In fact, these statements are substantially an analysis of static aspects
of financial statements. Under this context, it is imperative to study and
to analyse the fund movements in the business concern. Such a study
or analysis may be undertaken by using another tool of financial
analysis, which is called ‘Statement of Sources, and Uses of Funds’ or
simply ‘Fund Statement’ or Fund Flow Analysis.

This statement is also called by other several names and they are:
(iv) To examine the earning capacity and efficiency of various business (a) Application of Funds Statement.
activities with the help of income statements.

(b) Statement of Sources and Applications of Funds.

(v) To estimate about the performance efficiency and managerial
ability.
(c) Statement of Funds Supplied and Applied.
(vi) To determine short term and long term solvency of the business
concerns. (d) Where Got and Where Gone Statement.

(vii) To enquire about the financial position and ability to pay of the
concerns.
Importance of Analysis and Interpretation of Financial
Statements:
The following factors have increased the importance of the
analysis and interpretation of financial statements:
(i) Decision taken on the basis of intuition may be wrong and defective
on the other hand. Analysis and interpretation are based on some
logical and scientific methods and hence decisions taken on that basis
seldom prove to be misleading and wrong.
(ii) The user as individual has a very limited personal experience. He
can only understand the complexities of business and mutual
relationship by observation and external experience. Thus it becomes
necessary that financial statements in an implicit form should be
analysed in an intelligible way.
(e) Statement of Resources Provided and Applied.
(f) Fund Movement Statement.
(g) Inflow-Outflow of Fund Statement.
Fund statement is a new contribution of science of accounting but has
become the doyen of tools of Financial Analysis.
3. Cash Flow Analysis:
Fund Flow Statement fails to convey the quantum of inflow of cash and
outflow of cash. When we say cash, we refer to the cash as well as the
bank balances of the company at the end of the accounting period as
reflected in the Balance Sheet of the company. Cash is a current asset
like inventory and Accounts Receivables. Cash reflects its liquidity
position.

(iii) Decision or conclusions based on scientific analysis and
interpretation are relative and easily to be read and understood by
other people.
(iv) Even to verify and examine the correctness and accuracy of the
decisions already taken on the basis of intuition, analysis and
interpretation are essential.
Techniques of Analysis and Interpretation:
The most important techniques of analysis and interpretation are:
1. Ratio Analysis
The term cash can be viewed in two senses. In a narrow sense, it
includes actual cash in the form of notes and coins and bank drafts
held by a firm and the deposits withdrawable on demand the company
has held in commercial banks. But in a broader sense, it also includes
what are called ‘marketable securities’ which are those securities
which can be immediately sold or converted into cash if required.
Cash flow statement is a statement of cash flow and cash flow signifies
the movements of cash in and out of a business concern. Inflow of
cash is known as sources of cash and outflow of cash is called uses of
cash. This statement also depicts factors for such inflow and outflow of
cash.

2. Fund Flow Analysis

3. Cash Flow Analysis.
1. Ratio Analysis:
Two individual items on the statements can be compared with one
another and the relationship is expressed as a ratio. Ratios are
computed for items on the same financial statement or on different
statements. These ratios are compared with those of prior years and
with those of other companies to make them more meaningful.
Thus cash flow statement is a statement designed to highlight upon the
causes which bring changes in cash position between two Balance
Sheets dates. It virtually takes the nature and character of cash
receipts and cash payments though the basic information used in the
preparation of this statement differs from that which is used in
recording cash receipts and cash payments.
This is particularly useful to the management, credit grantors, investors
and others. As regards the management, it is helpful in budgeting cash
requirements.

A ratio is a simple mathematical expression. Ratio may be expressed

by a number of ways. It is a number expressed in terms of another
number. It i s a statistical yard stick that provides a measure of
relationship between two figures.

2. Fund Flow Analysis:

Funds Flow Analysis has been the salient feature of the evolution of
accounting theory and practice. The financial statement of a business
provides only some information about financial activities of a business