UNIT -1

Finance Definition:

Finance is a broad term that describes activities associated with

banking, leverage or debt, credit, capital markets, money, and investments.
Basically, finance represents money management and the process of acquiring
needed funds. Finance also encompasses the oversight, creation, and study of
money, banking, credit, investments, assets, and liabilities that make up financial
systems.

Many of the basic concepts in finance originate

from microeconomic and macroeconomic theories. One of the most fundamental
theories is the time value of money, which essentially states that a dollar today is
worth more than a dollar in the future.

Importance Of Finance

 Without financial management business cannot exists

In today’s business economy, Small businesses and Entrepreneurship are more

on rise that means more positions for financial managers will continue to
become much more available. Without aneligible person responsible to manage
the incomingand outgoing of money a good business cannot exist.
As good business generates money, through this generated money paying bills
for materials, payment of salary for the employees in an organization are done.
Good business earnings happen by selling quality services or products.
Managing financial aspects plays a very vital role in progress of any good
business.

 Adequate funds availability

Sufficient funds are necessary to meet daily expenses to purchase long term
assets for the company’s requirement accordingly; also funds should be there to
deal with future unforeseen over costs which may arise. The company should
know from where the funds have to be raised and when it should be needed in
emergency to deal the monetary crisis.

 Cash flow management system

 In an organization, excess cash flow can also become difficult to manage.
Having excess amount of funds and not using it in a genuine much useful way is
a greater waste of resources. When an organization is having adequate funds
they should put it in good
yielding investments by thinking very wisely. And also make sure that they have
expansion future plans and think about new ventures which will gain them huge
profits to earn for the long run.

 Always keeping long term goals

Having long term goals in life or business is a very important aspect to keep,
once it is done the responsibility has to be fulfilled as per the plan made at any
cost to get fulfil the targeted goals to achieve success. In any business entity,
financial planning is a process of engaging a proper financial plan to meet its
financial goals in a specific time period.

To have long term financial goals in a business is a very important part, were by
doing this many upcoming financial crisisin future can be resolved without any
hassle. It is always a good idea to have an early well planning goal, especially in
finance sinceinvesting on any good options may earn high returns over the
period of time to the company to gain financial stability.So investing money
with good thoughtful planning from now will make easier to execute such long
term goals.

 Financial Planning value and importance in a business

Financial planning creates immense value to the company, without this any of
the business entity cannot function properly. It is a major vital venture for all
kinds of businesses worldwide. It is done for an entire year to have control over
financial activities of the company. The bigger the company, the bigger will be
the size of the team working on financial planning and the greater skilled
professionals needed.

Financial planning needs the entire support of accurate financial analysis and
reporting. It has to be done continuously, with this the outcome of the plan also
need to be monitored regularly. In any case the approved plan is not working,
then the plan has to be modified instantly or new plan has to be made and
adopted with immediate effect to run the business successfully without any kind
of hindrance occurring in between.
Scope Of Finance

At the present state, the academic discipline of finance includes the following
specialized areas in its scope.

1. Public Finance

Like business organizations, governments(local, state or federal) raise and spend

large sum of money, but unlike business organizations, they pursue non-profit
goals. To deal with governmental financial matters, a separate and specialized field
of finance has emerged as public finance.

2. Securities And Investment Analysis

This area is of interest to individuals and institutional investors. It covers mainly

measurement of risk and return on investment in securities.

3. Institutional Finance

Institutional finance deals with issues of capital formation and the organizations
that perform the financing function of the economy. Therefore, it mainly studies
saving and capital formation and institutions involved in this process such as
banks, insurance companies, provident and pension funds, etc.

4. International Finance

International finance studies economic transactions among nations, corporations

and individually internationally. It is concerned with flows of money across
international boundaries.

5. Financial Management

Business firms face problems dealing with acquisition of funds and optimum
methods of employing the funds. Thus, financial management studies financial
problems in individual firms, seeks low-cost funds and seeks profitable business
activities.

The popularity of finance is increasing day by day. It is because the study of

finance offers rewarding careers opportunities mainly in above areas.

Financial management: Def:

“Financial management is that area of business management devoted to a judicious

use of capital and a careful selection of the source of capital in order to enable a
spending unit to move in the direction of reaching the goals.” – J.F. Brandley

“Financial management is the operational activity of a business that is responsible for

obtaining and effectively utilizing the funds necessary for efficient operations.”-
Massie

The scope of Financial Management

The introduction to financial management also requires you to understand the scope
of financial management. It is important that financial decisions take care of
the shareholders‘ interests.

Further, they are upheld by the maximization of the wealth of the shareholders,
which depends on the increase in net worth, capital invested in the business, and
plowed-back profits for the growth and prosperity of the organization.

The scope of financial management is explained in the diagram below:

You can understand the nature of financial management by studying the nature of
investment, financing, and dividend decisions.

Core Financial Management Decisions

In organizations, managers in an effort to minimize the costs of procuring finance

and using it in the most profitable manner, take the following decisions:

Investment Decisions: Managers need to decide on the amount of investment

available out of the existing finance, on a long-term and short-term basis. They are of
two types:

 Long-term investment decisions or Capital Budgeting mean committing funds

for a long period of time like fixed assets. These decisions are irreversible and
usually include the ones pertaining to investing in a building and/or land,
acquiring new plants/machinery or replacing the old ones, etc. These decisions
determine the financial pursuits and performance of a business.
 Short-term investment decisions or Working Capital Management means
committing funds for a short period of time like current assets. These involve
decisions pertaining to the investment of funds in the inventory, cash, bank
deposits, and other short-term investments. They directly affect the liquidity and
performance of the business.
Financing Decisions: Managers also make decisions pertaining to raising finance
from long-term sources (called Capital Structure) and short-term sources (called
Working Capital). They are of two types:
 Financial Planning decisions which relate to estimating the sources and
application of funds. It means pre-estimating financial needs of an organization
to ensure the availability of adequate finance. The primary objective of financial
planning is to plan and ensure that the funds are available as and when required.
 Capital Structure decisions which involve identifying sources of funds. They
also involve decisions with respect to choosing external sources like issuing
shares, bonds, borrowing from banks or internal sources like retained earnings
for raising funds.
Dividend Decisions: These involve decisions related to the portion of profits that
will be distributed as dividend. Shareholders always demand a higher dividend, while
the management would want to retain profits for business needs. Hence, this is a
complex managerial decision.

Objectives of Financial Management

Building on those pillars, financial managers help their companies in a variety of

ways, including but not limited to:

Maximizing profits by providing insights on, for example, rising costs of raw
materials that might trigger an increase in the cost of goods sold.

Tracking liquidity and cash flow to ensure the company has enough money on
hand to meet its obligations.

Ensuring compliance with state, federal and industry-specific regulations.

Developing financial scenarios based on the business’ current state and forecasts
that assume a wide range of outcomes based on possible market conditions.

Dealing effectively with investors and the boards of directors.

Ultimately, it’s about applying effective management principles to the company’s

financial structure.
IMPORTANCE OF FINANCIAL MANAGEMENT CYCLE:

Finance is the lifeblood of business organization. It needs to meet the requirement

of the business concern. Each and every business concern must maintain adequate
amount of finance for their smooth running of the business concern and also
maintain the business carefully to achieve the goal of the business concern. The
business goal can be achieved only with the help of effective management of
finance. We can’t neglect the importance of finance at any time at and at any
situation. Some of the importance of the financial management is as follows:

Financial Planning.

Financial management helps to determine the financial requirement of the business

concern and leads to take financial planning of the concern. Financial planning is
an important part of the business concern, which helps to promotion of an
enterprise

Acquisition of Funds.

Financial management involves the acquisition of required finance to the business

concern. Acquiring needed funds play a major part of the financial management,
which involve possible source of finance at minimum cost.

Proper Use of Funds.

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 Decision.

Financial management helps to take sound financial decision in the business

concern. Financial decision will affect the entire business operation of the concern.
Because there is a direct relationship with various department functions such as
marketing, production personnel, etc.

Improve Profitability.

Profitability of the concern purely depends on the effectiveness and proper

utilization of funds by the business concern. Financial management helps to
improve the profitability position of the concern with the help of strong financial
control devices such as budgetary control, ratio analysis and cost volume profit
analysis.

Increase the Value of the Firm.

Financial management is very important in the field of increasing the wealth of the
investors and the business concern. Ultimate aim of any business concern will
achieve the maximum profit and higher profitability leads to maximize the wealth
of the investors as well as the nation.

Promoting Savings.

Savings are possible only when the business concern earns higher profitability and
maximizing wealth. Effective financial management helps to promoting and
mobilizing individual and corporate savings.

Now days financial management is also popularly known as business finance or

corporate finances. The business concern or corporate sectors cannot function
without the importance of the financial management.

Tools Of FM

1. Accounting Software
While certain accounting software platforms have been considered top-of-the-line
for many years, now newer software options are also becoming more popular.
Before choosing accounting software for your company, look for features
important to your business. They might include cloud-based entries, integration
with your POS software or the ability to easily send information to your tax
preparer.

2. Expense Tracking
When my employees are on the go, they often have different expenses that will
need to be reimbursed—meals and mileage, for example. Monitoring such
expenses is part of some accounting software, but not all, so look for a program
that integrates with your accounting software if the feature isn't already present.
Also, be sure you're not paying for more than you need. Some expense
management software is more robust than a typical small-to-mid-size business
requires.
3. Budgeting Tools
One of the crucial ways a business can be successful is to maintain careful
budgeting. Knowing what money is coming in and going out makes it easier to
manage your cash flow and plan for upcoming months. Generally, I use reports
from my company's accounting software to make sure inflows and outflows are on
track.

4. Payroll Management
A lot goes into managing a company's payroll, and making errors in this area is
expensive. Once my company started to grow, I knew I couldn't handle my own
payroll anymore. In my experience, the best payroll solutions for small-to-mid-size
businesses are those that scale as your business grows and that integrate with your
accounting software. If you work with both freelancers and W2 employees, you'll
also want to ensure that the solution makes working with both easy.

5. Easy Billing
Waiting for your vendors to pay their bills can make your business struggle. For
some big suppliers, paying late is standard business practice and you may not be
able to do anything about it other than to work with another company. But for
other businesses, having quick and easy billing and payment options may be
simpler.

6. Inventory Tracking
POS software tracks sales, and accounting software tracks profits and losses, but
what do you use to track your inventory? When you have just one location,
monitoring inventory may be easier. On the other hand, when you're looking at
products over multiple locations, you need more powerful tools to keep everything
on track. Software solutions that automate inventory monitoring and tracking can
save you time and money and provide a competitive edge. Benefits to consider are
features tailored to your business, real-time inventory visibility and the ability to
track inventory from purchase order to sale. It's also crucial that your inventory
software integrates with your POS software.

7. Tax Preparation
With so many tax preparation software programs available, it can be hard to find
just the right one. For me, it was crucial for my company's tax prep software to
work well with all of our other systems. It needed to be able to import from our
POS system, download data from our inventory management software and be
compatible with our employee reimbursement systems and our payroll data. While
software helps us partially complete our taxes, our company is large enough to also
need our accountant to be able to access our collected information.
The most important factor in choosing high-quality financial tools for your
company is to make sure they all work together. Without integration, the financial
side of your business can quickly turn into a big mess.
Valuation:
What Is Valuation?
Valuation is the analytical process of determining the current (or projected) worth
of an asset or a company. There are many techniques used for doing a valuation.
An analyst placing a value on a company looks at the business's management, the
composition of its capital structure, the prospect of future earnings, and the market
value of its assets, among other metrics.

What Is the Time Value of Money (TVM)?

The time value of money (TVM) is the concept that a sum of money is worth more
now than the same sum will be at a future date due to its earnings potential in the
interim.

This is a core principle of finance. A sum of money in the hand has greater value
than the same sum to be paid in the future.

The time value of money is also referred to as present discounted value.

Principles of TVM:

1.Compounding :

It is process of calculating the present value of cash flow.

(1+i)n – Compound Value Factor(CVF)

2.Discounting:

It is process of calculating the present value of cash flow.

1/(1+i)n – Discount Value Factor(DVF)

PROBLEM:

Present Value = FV X [1/(1+i)n]

Future Value = PV X (1+i)n ---- [ Questions : Compounding value or maturity

value ]

Multi Period Compounding (Halfyearly – 2, Quarterly – 4 , Weeks – 52, Months –

12)

FV = P(1+i/m)mn

Where,

PV - Current Worth of some amount of income

FV – Value of asset at some point in future

i – Interest

n – Time Period

m – No. of compounding per year

PROBLEM

EIR = Effective Interest Rate

EIR = {1 + i/m}m - 1 [Questions: Effective Interest rate ]

PROBLEM

Annuity :

FV = A[(1+i)n-1/i] – CVFA [End of the year ]

PV = A[(1+i)n-1/i(1+i)n] --- DVFA

Sinking fund ( If : FV given, A=?)

A = FV (i/(1+i)n-1) ---- [Questions: How much]

Capital Recovery ( If : PV given , A=?)

A = PV [i(1+i)n/i(1+i)n – 1] ---- [Questions: Present value of Annuity , will be]

Cash Inflow [find table value then PRESENT VALUE=CASHFLOW X

TABLE VALUE]

To Find Table Value :Use:

[1/(1+i)n ]

Valuation of Bonds :[PVIF – PRESENT VALUE INTEREST FACTOR =>

1/(1+k)n]

Without Table Value:

V = A1/(1+k)1 + A2/(1+k)2 +A3/(1+k)3……….

With Table Value

V = A1(PVIFk1)+ A2(PVIFk12)+….. An(PVIFkn)

V= A X PVIF(kn)

Where,

A = Cashflow stream at the end of t

K = Appropriate discount rate

Another form of Value of Bonds:

V = [ I1/(1+kd)1 + I2/(1+kd)2+………. M/(1+kd)n] ----- [Questions: Coupon Rate]

Where,

I – Interest

Kd – Cost of Capital

M – Maturity or Par Value or Face Value

V – Value of bond

Yield To Maturity(ydm):

Ydm = Ai + (F-P)/N X (F+P/2)

Where,

Ai – Annual Interest Payment

F – FaceValue of debentures

P – Present Value of debentures

N – Period of debentures to maturity