Introduction

INTRODUCTION
Introduction:
The field of finance is broad and dynamic. It directly affects the lives of every person and
every organization. There are many areas and career opportunities in the field of finance. The
financial manager plays a dynamic role in a modern business organization. Financial
managers raise funds manage cash positions, help increase acceptance of present value and
select capital investment project. The financial manager has emerged as the key player in the
overall effort of a company to create value. Basic principles of finance, such as those we will
learn in the textbook, can be universally applied in business organization of different types.
Definition of Finance:
Finance is the process of raising funds or capital for any kind of expenditure. Finance can be
defined as the art and science of managing money.
Scholars’ View:
1. Finance is the art and science of managing money affects the lives of every person
and every organization. –L.J. Gitman
2. Finance includes the subareas of financial management, investments, and money and
capital markets. – C.P. Jones
3. Finance is the study of markets and instruments that deal with cash flows over time. –
Ross, Westerfield & Jaffe
4. Finance is a body of fact, principles and theories dealing with raising and using of
money by individuals, business and government. –Schall & Hally
Definition of Business Finance:
Finance is related with the process, institutions, market, and instruments involved in the
transfer of money among individuals, business, and government. Business finance is
concerned to meet all the finance need of business firm is called business finance.
Scholars’ View:
1. The capital involved in a project especially the capital that has to be raised to start a
new business. – Oxford Dictionary of Finance
2. Activities of a business concern relevant to financial planning, coordinating,
controlling and their application is called business finance. – E.W. Walker
3. Business finance can be defined as the activity concerned with the planning,
organizing, controlling and administering of funds used in the business. – P. L. Mehta
Definition of Financial Management:
Finance is the word used to describe both the money resources available to individuals,
business firms, governments and the management of these money resources.
Scholars’ View:
1. Financial management is concerned with the acquisition, financing and management
of assets with some overall goal in mind. – Van Horne & Wachowicz
2. Financial management is the acquisition, management and financing of resources for
firms by means of money. – George E. Princes
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Md. Sajadul Islam Sarker Mobile: 01725-356173
Lecturer(Finance) Email: sajadul.comilla@gmail.com
Dept. of Business Administration Surma Tower, 8 th Floor
Leading University, Sylhet. Room no: 801
INTRODUCTION
3. Financial management consists of all those activities that are concerned with
obtaining money and using it effectively & efficiently. – Hughes & Kapoor
Who is the Financial Manager:

Financial activity is usually associated with a top officer of the firm, such as the vice
president and chief financial officer and treasurer.
Scholars’ View:
1. Financial manager actively managers the financial affairs of any types of business,
whether financial or nonfinancial, private or public, large or small, profit-seeking or
non-profit. – L. J. Gitman
2. Financial manager refers to anyone who is responsible for a significant investment or
financial decision. – Brealy & Myers
3. Financial managers actively manage the financial affairs of any types of business. –
Khan & Jain
Functions of Business Finance/ Financial Manager:
The term financial manager is often used to refer to anyone directly engaged in making
financial decisions. Financial managers are all those individuals whose decision-making
responsibility affects the financial health of the firm. The principles functions of finance and
the ones will study are listed below:
Financial management
Decision
making Executive
Functions Functions
1. Investment Decisions 1. Planning

2. Financing Decisions 2. Financing
3. Dividend Decisions 3. Investing
4. Liquidity Decisions 4. Others are Required
5.
A. Decision- Making Functions:(Major Functions)
The functions of raising funds, investing them in assets to spare holders are respectively
discussed as below:
1. Investment Decision: Investment decision involves the decision of allocation of
capital to long-term assets that would provide benefits in the future. Two important
aspects of the decision are (a) the evaluation of the prospective profitability of new
investment and (b) the measurement of an expected return against that the prospective
return of new Investments could be compared.
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2. Financing Decision: Financing decides when, where and how to acquire funds to meet
the firm's investment needs. The central issue to determine is the proportion of equity
and debt.
3. Dividend Decision: Financial manager must decide whether the firm should distribute
all profits or retain them. Like the debt policy.
4. Liquidity Decision: Current assets management that affects a firm's liquidity is yet
another important finance function, in addition of long-term assets.
B. Executive Functions (Routine Works):

For the effective execution of the finance certain other functions have to be routinely
performed:
1. Planning: Planning for the ongoing if the firm and ensuring that the firm responds to
the changing financial and economic environment.
2. Financing: Evaluating, securing and serving long-term financing from within the firm.
3. Investing: Investment and management of long-term assets through the capital
budgeting process.
4. Dividend: Distribution of profits to the firm's stockholders via a cash dividend policy.
5. Short-term Financing: Obtaining Short-term financing from creditors.
6. Assessing Growth: Assessing the viability of growth via merging and ensuring the
economic vitality of the firm.
7. Cash Management: Supervision of cash receipts and payments and safeguarding of
cash papers.
8. Caretaking: Taking care of the mechanical details of new outside financing.
A firms performs finances functions simultaneously and continuously in the normal course of
the business.
Importance of Finance:
Finance is the planning for fund resources and raising, controlling and disposing of the same
of a business organization with a view to attaining the ultimate goal and maintaining a goal
between its resources and the claim against these resources. The important functions that the
business finance is to perform are following:
1. Financial Planning: The financial management is to plan how much fund is needed
for currying out the operations of the firm.
2. Raising of Fund: The financial management to raise the requisite funds to meet the
requirements of the business operations. If the firm is short of fund, the financial
manager is to make arrangements for obtaining funds according to operating
requirement.
3. Investment of Fund: Collection of funds is useless if they can’t be invested
properly. Financial management responsible is to ensure maximum utilization of fund
for earning maximum return.
4. Allocation of Fund: In a business, the basic finance for capital function is to decide
about the investment decisions and to determine the demand for capital for these
expenditures.
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5. Financial Control: The financial management is to control the use of funds

committed to the operation of the concern.
6. Protection of Fund: The financial management is also supervised for taking care to
protect the capital supplied by the owners and creditors.
7. Profit planning: The firm’s fixed cost remain constant while profits fluctuate at a
higher degree than fluctuations in sales. Profit planning helps to anticipate the
relationships between volume, costs and profits and development action plans to face
unexpected surprise.
8. Retained Earnings: If a firm needs funds, it may either borrow it from outside or it
may, if there are adequate profits, retain a part or whole of the profits to finance the
requirement.
9. Distributions of Profit: Financial management is to determine the disposition of the
funds represented by the net income.
10. Understanding Capital Market: The financial management has to deal with capital
market, where the firm’s securities are traded.
Objectives of Business Finance:
The principal objectives of finance are to raise capital to earn adequate profit thought the
investment; conservation and efficient utilization of invest able capital. Let us discuss the
objectives:
1. Rising of Capital: The first and foremost objective of finance is to raise capital
needed for the organization concerned. The financial manager attempts to raise the
capital economically, so that excess fund doesn’t remain idle of fund doesn’t create
bottleneck in the way of running the business.
2. Investment of Capital: The second objective is to invest the capital raised in
appropriate time and in proper sequence. By investment of funds, we mean that
financial managers should decide where cooperate money may be invested.
Generally money should be invested where it will do the most good.
3. Protection of Capital: It’s also the objective of finance to protect the capital, which
is invested in the business.
4. Minimization of Cost: One objective of finance is to minimize the cost of funds in
order to maximize shareholder wealth. That involves examine all alternative source
of financing. A firm may decide to issue bonds instead of stock.
5. Maximization of Profit: One of the important objectives of finance is to maximize
the profit of the firm. The financial manager would take those actions that were
expected to make a major contribution to the firm’s overall profits.
6. Maximization of wealth: The other most important objective of the firm is to
maximize the profit wealth of the owners for whom it’s being operated.
7. Maintain Firm Value: One of the important objectives of finance is to maintain the
value of the firm. It’s generally believed that the value of the firm is maximized
when the cost of capital is minimized. The optimum capital structure exists the value
of the firm’s maintained with constantly.
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Principles of Business Finance:
Business finance involves the application of the principles of general management to the
particular financial operation. Let us discuss the principles in details:
1) Investment Principle: Investment involves the allocation of resources among various

types of assets. The assets mix affects the amount of income the firm can earn. Besides
determining the asset mix, financial managers must also decide what types of financial
and real assets to acquire.
2) Financing Principle: Financing involves raising funds for the firm. Thus, while
Investment decisions are related to the asset side of the balance sheet, financing
decisions are related to the liabilities and equity side.
3) Profit Maximization: At the first, principle of the firm is to maximize profits. Many
firms believe that as long as they are earning as much as possible while holding-down
costs.
4) Wealth Maximization: The second frequently encountered principle of a firm is to

maximize the value of the firm over the long run. This principle may also be stated as the
wealth maximization, with wealth defined as the net present worth of the firm.
5) Risk-Return Trade-off: When a firm borrows funds, the lender expects to the repaid
according to the terms of the loan agreement. If the firm is unable to raise, sufficient
revenue over time to repay the borrowed funds.
6) Time Value of Money: The people prefer to receive a given amount of money now
rather than at some time in the future.
7) Cost Principle: Cost principle is to minimize the cost of funds in order to maximize
wealth.
8) Capital Structure: The capital structure of a firm is its mix of debt and equity.
Several factors affect a firm’s capital structure; one of them involves the firm's expected
return.
9) Liquidity and Profitability: The liquidity means that the firm has adequate cash in
hand to meet its obligations at all times. The profitability requires the firm's operations to
yield a long-term profit.
10) Flexibility Principle: Flexibility attempts to be as flexibility as possible in providing

the funds needed to support the development of the firm
11) Portfolio Principle: The principle of asset selection that considers the combined risk
of all assets held by the firm became an increasingly important tool as the relationship
between risk and return became better appreciated and understood.
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12) Dividend Principle: Shareholders may expect to receive some part of the firm's
earnings as cash dividends.
Another principle of finance is that it lets the firm know when financial decisions will have to
be made. To make effective decisions, these principles must analyze and plan.
Financial Goals/ Goals of Business Finance:

Efficient business finance requires the existence of some objectives or goal because judgment
as to whether or not a financial decision is efficient must be in light of some standard.
A. Profit Maximization: Profit maximization means maximizing the profit of the firm's.
While maximizing profits, a firm either produces maximum output for a given amount
of input uses minimum input for producing a given output.
Scholars’ View:
1. Profit maximization is maximization of a firm's net income. - C. P.Jones
2. Profit maximization means maximizing the rupee (currency) income of firms. – I. M.

Pandey
A.1. Rationale and Objection to Profit Maximization: The profit maximization has
some rationale and objection, which are given below:
1. It is argued that profit maximization assumes perfect competition.
2. It is also argued that profit maximization is a business objective.
3. Profit maximization behavior in a market economy may tend to produce goods and
services.
4. Profit is the only indicator of the growth of a firm.
5. Main objective to earn profit.
In view of such conditions, it is difficult to have a truly competitive price system.It is

doubtful if the profit maximizing behavior will lend to the optimum social welfare.
A.2 Argument against Profit Maximization:
Profit maximization fails to serve as an operational criterion for maximizing the economic
welfare. It suffers from the following limitations:
2)Time Value of Money: The profit maximization objective does not make a distinction
between returns received in different time.
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3) Cash Flows: Profit do not necessarily resulting cash flows available to the stockholders.
4) Risk and Return: The streams of benefits may possess different degree of risk. Because
profit maximization does not achieve the objectives of the firm's owners, it should not be the
goal if the finance.
B. Wealth Maximization:
Wealth maximization is an appropriate and operationally feasible criterion to choose among
the alternative financial action.
Scholars’ view:
1. The goal of the firm should be to maximize stockholder wealth, which is
accomplished by maximizing the current stock price. – C. P. Jones.
2. Wealth maximization means maximizing the net present value of a course of

action to shareholders. - I. M Pandey.
3. Wealth maximization implies the maximization of the market of share. – Khan &
Jain.
B.1.Important Issue of Wealth Maximization:
Two important issues related to maximizing share price are economic value added and the
focus on stakeholders.
1. Economic Value Added: EVA is a popular measure used by many firms to determine
whether an investment proposed contributes positively to the owner’ wealth. EVA is
calculated by subtracting the cost of funds used to finance an investment from its
after-tax operation profits.
2. Focus on stakeholders: Although maximization of shareholder wealth is the primary
goal, many firms broaden their focus include the interests of stakeholders as well as
shareholders. Stakeholders are groups such as employees, customers, suppliers,
credits, owners and other who have a direct economic link to the firm.
Clearly, the firm can better achieve its goal of shareholder wealth maximization by
fostering cooperation with its other stakeholders, rather than conflict with them.
B.2. Rationale to Wealth Maximization:
The wealth will be maximized if this criterion is fallowed in making financial decisions.
1. Time Value of Money: The wealth maximization objective makes a distinction
between returns received in different times. It considers time value of money.
2. Risk and Return: The objective of shareholders wealth maximization takes care of the
questions of the risk of the expected returns.
3. Select Discount Rate: By selecting an appropriate rate for discounting the expected
cash flows of future returns.
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4. Cash Flows: It is important to emphasize that benefits are measured in terms of cash
flows, which is important for investment and financing decisions.
5. Economic Welfare: Maximizing the shareholders economic welfare is equivalent to

maximizing the utility of their consumption over time.
6. Increase Market Value: The wealth maximization principle implies that the
fundamental objective of a firm is to maximize the market value of its share.
Profit Maximization Vs Wealth Maximization:
Difference between profit maximization and wealth maximization are given below:
Topic Profit Maximization Wealth Maximization
1.Definition Profit maximization means Wealth maximization means
maximizing the profit of the firm. maximizing the net present value or
The maximization of the firm’s wealth of a course of action to
net income is called profit shareholders.
maximization.
2.Subject To increase profit volume. To increase wealth not profit.
Mater
3.Risk Risk would not be considered. Risk would be considered.
4.Inflation Inflation would not be evaluated. Inflation would be evaluated.
5.Welfare Social welfare is not considered. Social welfare in considered.
6.Indicator It indicates increasing EPS. It indicate increasing share price.
7.Time Value Time value is not considered. Time value is considered
8.Concept Its ambiguous concept. Its unambiguous concept.
Agency Theory/ Agency Problem: Financial managers can be viewed as agents of the
owners who have hired them and given them decision making authority to manage the firm.
Most financial managers would agree with the goal of owner wealth maximization.
Scholars’ View:
1. Agency problem is potential conflict between principles and agents. – C.P Jones.
2. An agency problem is the potential conflict of interest that can arise between a
principles and an agent. – Brigham.
3. Agency problem is the likelihood that managers may place personal goals ahead of
corporate goals. – L. J. Gitman.
Resolving the Agency Problem:
From the conflict of management objective of personal goals and maximizing owner’s value
arises the agency problem. The agency problem can be maximized by act of (A) market
forces, and (B) agency costs.
A. Market Forces: Market forces act to minimize agency problem in two ways:
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1. Major Shareholders: To exercise the major shareholders legal voting rights, the large
institutional shareholders communicate with and exert pressure on, corporate
management perform or face replacement.
2. Threat of Takeover: The constant threat of takeover would motivate management to
act in the best interests of the owners despite the fact that techniques are available to
define against a threat takeover.
B. Agency Costs:
The cost born by stockholders to minimize agency problems is called agency cost. To
minimize agency problem, the owners have to incur four types of cost, which are:
1. Monitoring Expenditures: The monitoring outlays relate to payment for audit and
control procedures to ensure that managerial behavior is turned to actions that tend to
be in the best interest of the shareholders.
2. Bonding Expenditures: The firm pays to obtain a fidelity bond from a third-party
bonding company to the effect that the latter will compensate the former up to a
specified amount for financial losses caused dishonest acts of managers.
3. Opportunity Costs: Such costs result from the inability of large companies from
responding to new opportunities.
4. Structuring Expenditures: The most popular, powerful and expensive method is to
structure management compensation to correspond with share price maximization.
The objective is to give managers incentives to act in the best interests of the owners.
The two key type’s compensation plans are:
(a) Incentive Plans: The most popular incentive plan is the granting of stock options to
managers. These options allow managers to purchase stock, if the market price rises
managers will be rewarded.
(b) Performance Plans: The forms of performance-based compensation are cash
bonuses, cash payments tied to the achievement of certain performance goals.
Corporate Social Responsibility:
The firms responsible for the welfare of their employees, customers and the communities is
where their operations. Certainly, firms have an ethical responsibility to prove a safe working
environment, to avoid polluting the air or water and to produce safe products.
Scholars’ View:
1. Social responsibility is expected to provide long-run benefit to shareholders by
maintaining positive stakeholder relationship. – L.J. Gitman.
2. Management has ethical responsibility to sell products free of known defects and
potentially harmful substances. – C.P. Jones.
3. Social responsibility is the concept that business should be actively concerned with
me welfare of society at large. – Besley & Brigham.
Areas of Corporate Social Responsibility in Finance:
The firms may exercise social responsibility toward their constituents, environment and
social welfare.
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1. Organizational Constituents: The people who own and invest in a firm are affected
by virtually anything the fir does. Firms also have a responsibility to their creditors. If
poor social performance hurts the firms abilities to repay its debts, those creditors and
their employees will also suffer. To maintain a socially responsible stance toward
financial managers should follow proper accounting procedures, provide appropriate
information to shareholder about the financial performance of the firm and manage
the firm to protect shareholder right and investments.
2. Natural Environment: An area social responsibility relates to the natural

environment. Many firms indiscriminately dump sewage, waste products from
production and trash into steams and rivers, into the air and on vacant land. However,
many laws regulate the disposal of waster materials.
3. Social Welfare: Business firms also should promote the welfare of society include
making contributions to charities, philanthropic firms non-profitable organizations
and taking a role in improving education and public health.
Finance in the Organizational Structure of the Firm:
The exact nature of the organization for financial management will differ from firm to firm. It
will depend on factors such as the size of the firm, nature of the business, financing
operations, capabilities of financial managers and most importantly on the financial
philosophy of the firm. In some cases, financial manager may be known as the vice president
of finance or the director of finance or the financial controller. Two officer treasurer and
controller may be appointed under the direct supervision of the chief financial officer to assist
him. The simple organization chart is started here:
Board of Directors
Chairman/Managing Director
Vice-President (Finance)
Treasurer Controller
Functions of Treasurer Functions of Controller

1. Capital Budgeting 1.Cost Accounting
2. Cash Management 2. Cost Management
3. Banking and Investment 3. Data Processing
4. Credit Management 4. Financial Statements
5. Dividend Disbursement 5.Performance Evaluation
6. Financial Analysis and Plan 6. Internal Control
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7. Investor Relations 7. Financial Accounting

8. Pension Fund Management 8. Planning and Budgeting
9. Insurance and Risk Management 9. Forecasting
10. Taxation and Auditing 10. Inventory Management
Figure: Financial Management on the Organization Chart
It may state that the controller’s functions are related with primary and internal works of the
firms and concentrate the asset side of the balance sheet. While the treasurer’s functions are
secondary and external works and relate to the liability side of the balance sheet. The
controller is manager and treasurer is financial manager, their activities are typically within
control of vice-president.
Classification of Finance or Types of Finance:
Finance is the process of making efficient use of financial resources to increase the value of
the firm. As the practice of finance has changed over time, so has the way financial
management is classified. Finance may mainly be classified into following types:
Finance
Basis of Basis of Basis of

Ownership Sources Duration
Short Mid
Public Private Internati Internal External Long
Term Term
Finance Financ onal Finance Finance Term
finance Finance
e Finance Financ
e
Personal Business
Institutional No
Finance Finance Compan
Finance Institutional
y
Finance
Finance
Non-
Sole Propriet State
profit
Propriet orship Business
Finance
orship Finance Finance
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A. Financial on the Basic of Ownership:

1. Public Finance: Financing by federal, state, local governments and municipal
corporations are public finance. It is concerned with the financial requirement,
receipts and disbursements of different government bodies.
2. International Finance: International finance includes foreign direct investment,
investment cash flows and decisions, capital structure, long-term debt and equity
capital. The most distinguishing feature of an international financial transaction is that
it involves more than one currency
3. Private Finance: Private finance is financing by business concerns and individuals. It
is subdivided into three categories, such as:
(a) Personal Finance: Personal finance is that class of private finance, which deals with
the essentials of managing individual’s own money.
(b) Nonprofit Organization Finance: A firm that does not have profit as a goal. Public
nonprofit companies are created by a public authority to perform governmental
functions. Private nonprofit firms are firms are usually established to pursue religions,
charitable, educational or social goals.
(c) Business Finance: Business finance is concerned with the financial management of
profit seeking business firms, which are engaged in the field of trading,
manufacturing, servicing and financing. It is available to enterprise of all size and use
of money obtained from such sources.
(i) Sole Proprietorship: An unincorporated owned by one person. In this type of firm,
the finance consist of the money invested by the proprietor and his/her relatives.
(ii) Partnership Business: An unincorporated business owned by more than one
person. The funds are supplied by partners and their financial position also differs.
(iii) Company Finance: A legal firm chartered by the state to conduct business. It is an
artificial being existed only in the eyes of the law. The company finance
represents common stock, preferred stock, bond and retained earnings.
(iv) State Business Finance: The state business firm is owned and operated by
government. The funds are supplied time to time by government according to
need of the firm.
B. Financing on the Basic of Source:

1. Internal Finance: The internal finance is generated internally. Internal finance
consists of retained earnings plus depreciation and other non-cash charges, bonus
shares, stock dividend.
2. External Finance: The financing is raised though sources outside of the firm. A
bond, debentures, notes and papers fall in this category. They are two types:
(a) Institutional Finance: A financial institution such as a bank, leasing, financing or
insurance company that directs other people’s money into such investment as
securities.
(b) Non-institutional Finance: A firm not in the banking or financial services industry.
The term would primarily apply to manufacturing, wholesaling and retail firms.
C. Financing on the Basic of Duration:

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1. Short-term Finance: Short-term finance is the finance, which is required for one year
or less period for the purpose of current assets of the firms. It is needed for meeting
temporary requirements of the firms. Short-term finance is also known as working
capital finance.
2. Mid-term Finance: Finance with a maturity greater than one year. Typical mid-term
finance by banks range in maturity from one year to five years. It may have up-to ten
years.
3. Long-term Finance: Long-term finance is generally needed for a period to ten years
or more. It is required for financing fixed assets such as land, building, machinery etc.
It is financed from long-term capital fund like common or preferred stock, bond,
debts, and retained earnings.
Difference between Public Finance and Private Finance:
The difference between public finance and private finance are given below:
Topics Public Finance Private Finance
Area Wide area and out of the border of Small area and within the range of
the country. the country.
Bankrupt Government would not be bankrupt. It may be bankrupt due to un payable
liabilities.
Definition Financing by state, local government Private finance is financing by
and municipal corporations are public business concerns and individuals.
finance.
Investmen It operates investment to social It operates investment to earn profit.
t welfare.
Purpose Maximization the social welfare to Maximization the wealth to
the citizens shareholders.
Sources Revenue, tax, foreign loan and aid Owner’s funds, retained earnings,
are the main sources. stock, bonds are the main sources.
Tax Impose tax to others. Pays tax to government.
Factors influencing on financial decision: Financial manager takes financial decision in the
light of investment decision, financing decision, dividend decision and liquidity decision.
Various factors affect the objective of the firm. These factors are divided into two types are
given below:
(A) Internal Factors: Internal factors are those matters of a firm, which influences financial
decisions of that firm. On these factors, the firm has control. Internal factors are discussed
below:
1. Nature of Business: Nature of business effects on financial decisions. The firm can
retain fund or divided to the shareholders depend on the nature of business.
2. Size of Business: Large business firms invest more money to acquire fixed assets due
to its huge capital fund. However, small firms can't do the same.
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3. Condition of Assets: Condition of assets is an important element to receive finance

from lender. Therefore, the form should keep both short and long-term assets for
enjoy financing from suitable sources.
4. Life of Business: Investors keep faith on running firm rather than newly formed firm.
So, possible investor invested fund to the old business firm.
5. Business Cycle: Business Cycle is the life cycle of business. In different stages of
business cycle reflects differently and decision has according to the stage.
6. Legal Entity: Legal entity of the business is other elements to affect financial
decision l. Only public limited company can finance from stock market.
7. Management: The aggressive or conservative management strategy is the another

important factor that effects financial decision.
8. Loan Contract: The loan from the lender or financial market and pay its interest is
another influencing factor to financial decision.
(B) External Factors: External factors are those external matters of a firm that influences
financial decision. On those factors, the firm can't control it. External factors are discussed
below:
1. Tax System: The tax system effects on in investment and financial decision. The tax
incentive, tax exemption, tax holiday and easy tax submission system encourage the
investment.
2. Financial Market: Efficient money market and capital market can influence the
financial decision.
3. Political Condition: Government stability, political situation influence firm's finance

decision.
4. Economic Condition: Economic Stability, inflation, balance of trade, remittance are

significant aspects of external factors that influence financial decision.
Financial institution and Financial Markets:

Most successful firms have ongoing need for funds. They can obtain funds from external
sources in three ways. One is though a financial institution that accepts saving and transfers
them to those that need funds. Another is though financial market that organized forums in
which the supplies and demanders of various types of funds can make transactions. A third is
though private placement. Because of the unstructured nature of private placement, here we
focus primarily on financial institution and financial markets.
Financial Institution: Financial institution serves as intermediaries by channeling the
savings of individuals, business and governments into loans or investments. Many financial
institutions directly or indirectly pay savers interest on deposited funds.
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Scholars’ View:
1. Financial institution is an immediately that channels the saving of individuals,

business and government into loans. – L. J. Gitman
2. Financial intermediates are financial institutions that serve as an intermediary between

savers of funds and users of funds. – Prasanna Chandra
Financial Market: A financial market is a market for creation and exchange of financial
assets. If you buy or sell financial assets, you will participate in financial markets in some
way.
Scholars’ View:
1. Financial markets are the markets where financial assets are traded - C.P.Jones
2. Financial market is the market in which financial assets such as stocks and bonds are
traded. – Jeff Madura
Types of Financial Market:The key financial markets are given below:
A. One the basis of Issuing:
1. Primary Market: All securities are initially issued in the primary market. A primary
market is a "new issues" market and a firm raises new capital from this market.
2. Secondary Market: Once the securities begin to trade between savers and investors,
they become part of the secondary market. This market exists to facilitate investor
trading.
B. On the basis of maturity :
1) Money Market: Money market us the market for securities with maturities of less
than one year. Money market us the short-term market.
2) Capital Market: Capital market is the market for long-term debt, bond and stock.
C. On the basis of Trading:
1. Organized Security Exchange: The organized security exchange is the

formal organization's that has physical location. Many people call security
exchange as stock market.
2. Over the Counter Market: The OTC market is the market for the purchase
and sale of securities not listed by the organized exchange. The bonds and
stock are traded in OTC as opposed to being traded on an organized exchange.
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Relationship of Finance with Economics, Accounting, Management and Marketing:
Finance is an integrate part of overall management, is not a very independent area. Here, we
discuss these relationships:
(A)Finance and Economics:
Definition of Economics- Economics is the study to know how men and society end up
choosing with or without the use of money to employ productive resources that could have
alternative uses to produce various commodities and distribute them for consumption now or
in the future among various people and groups in society.
The relationships of finance with economics are described here:
1. Macroeconomics use concerned with overall financial environment in which the firm
operates.
2. Macroeconomics is also concerned with financial structured, money and banking

system, money and capital market.
3. Financial managers recognize and understand how monetary police affects the cost
and availability of funds.
4. Financial managers beware of the various institutions and be versed in fiscal policy
and its effects on the economy.
5. Financial manager should understand economic activity and the economic policy for
decision making.
6. Supply and demand relationships and profit maximization strategies.
7. Mix of productiv e factor is relayed worth optimum sales level and product pricing.
8. Measurement of utility preference and risk determine the value.
9. The rational depreciation will permit to achieve the assets.
So, the field of finance is closely related to economics. Moreover, finance is the applied
subject of economics.
(B) Finance and Accounting:
Definition of Accounting- Accounting is an information system that identifies records.
The relationships of finance with accounting are discussed here:
1. Accounting us an important input in financial decision.

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INTRODUCTION
2. Accounting function is a necessary input into finance function.
3. Accounting generates information relating to operations of the firm.
4. Financial manager makes fund statement from income and financial statement.
5. In small firms the controller (Accounts Managers) often carries out the finance
function.
6. The firm would be financially profitable in accounting sense.
7. The purpose of accounting is collection and presentation of financial data.
The firm's finance (treasure) and accounting (controller) activities are closely related. So
accounting and finance: One is related to the emphasis on cash flows and the other to
decision making.
(C) Finance and Management:
Definition of Management- Management is a set of activities directed at an organization

resource with the aim of achieving organizational goals in an efficient.
The relationships of finance with management are discussed below:
1. Financial policies will be devised to fit management decisions of a firming practice.
2. It requires payment of salaries and other benefits involve finance.
3. Buying new machine or assets on Investment project affects the flow of funds.
4. It is necessary to identify the constraints of fund to the manager running the business.
5. Finance provides the funds that will be used in business.
6. Management involves in financial planning and analysis.
7. Financial manager is the decision maker of the firm. Finally, the tools and techniques
of management are helpful in analyzing complex financial management problems.
(D) Finance and Marketing:
Definition of Marketing- Marketing is a social and managerial process by which individuals

and groups obtain what they need and want through creating, offering and exchanging
products of values with others.
The relationships of finance with marketing are discuss below:
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INTRODUCTION
1. Finance draws the decisions on supportive marketing method.
2. There exists an inseparable relationship between the functions of finance and

marketing.
3. Marketing activities directly or indirectly involve the use of finance.
4. Marketing, advertising and promotion activities affect financial resources.
5. Marketing and finance functions are making to maximize profit and wealth if the firm.
6. When the marketing functions end the finance functions begin.
In fact, the financial policies will be devised to fit marketing decisions of firm in practice.
Page 18

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INTRODUCTION

Who is the Financial Manager:

1. Investment Decisions 1. Planning

B. Executive Functions (Routine Works):

5. Financial Control: The financial management is to control the use of funds

Principles of Business Finance:

1) Investment Principle: Investment involves the allocation of resources among various

4) Wealth Maximization: The second frequently encountered principle of a firm is to

10) Flexibility Principle: Flexibility attempts to be as flexibility as possible in providing

Financial Goals/ Goals of Business Finance:

1. Profit maximization is maximization of a firm's net income. - C. P.Jones

2. Profit maximization means maximizing the rupee (currency) income of firms. – I. M.

1. It is argued that profit maximization assumes perfect competition.

2. It is also argued that profit maximization is a business objective.

4. Profit is the only indicator of the growth of a firm.

5. Main objective to earn profit.

In view of such conditions, it is difficult to have a truly competitive price system.It is

A.2 Argument against Profit Maximization:

2. Wealth maximization means maximizing the net present value of a course of

5. Economic Welfare: Maximizing the shareholders economic welfare is equivalent to

2. Natural Environment: An area social responsibility relates to the natural

Functions of Treasurer Functions of Controller

7. Investor Relations 7. Financial Accounting

Basis of Basis of Basis of

A. Financial on the Basic of Ownership:

B. Financing on the Basic of Source:

C. Financing on the Basic of Duration:

3. Condition of Assets: Condition of assets is an important element to receive finance

7. Management: The aggressive or conservative management strategy is the another

3. Political Condition: Government stability, political situation influence firm's finance

4. Economic Condition: Economic Stability, inflation, balance of trade, remittance are

Financial institution and Financial Markets:

1. Financial institution is an immediately that channels the saving of individuals,

2. Financial intermediates are financial institutions that serve as an intermediary between

Types of Financial Market:The key financial markets are given below:

A. One the basis of Issuing:

B. On the basis of maturity :

C. On the basis of Trading:

1. Organized Security Exchange: The organized security exchange is the

Relationship of Finance with Economics, Accounting, Management and Marketing:

(A)Finance and Economics:

The relationships of finance with economics are described here:

2. Macroeconomics is also concerned with financial structured, money and banking

6. Supply and demand relationships and profit maximization strategies.

8. Measurement of utility preference and risk determine the value.

9. The rational depreciation will permit to achieve the assets.

(B) Finance and Accounting:

Definition of Accounting- Accounting is an information system that identifies records.

The relationships of finance with accounting are discussed here:

1. Accounting us an important input in financial decision.

2. Accounting function is a necessary input into finance function.

3. Accounting generates information relating to operations of the firm.

6. The firm would be financially profitable in accounting sense.

7. The purpose of accounting is collection and presentation of financial data.

(C) Finance and Management:

Definition of Management- Management is a set of activities directed at an organization

The relationships of finance with management are discussed below:

1. Financial policies will be devised to fit management decisions of a firming practice.

2. It requires payment of salaries and other benefits involve finance.

5. Finance provides the funds that will be used in business.

6. Management involves in financial planning and analysis.

(D) Finance and Marketing:

Definition of Marketing- Marketing is a social and managerial process by which individuals

The relationships of finance with marketing are discuss below: