5th MEETING

INTRODUCTION TO FINANCIAL MANAGEMENT

What is Finance?

Word family: (noun) finance, financing; (adjective) financial; (verb) finance; (adverb) financially.
From Longman Dictionary of Contemporary English:
 (Noun) finance
1. [uncountable] the management of money by governments, organizations, and people.
2. [uncountable] money provided by a bank or other institution to help buy or do something
(synonym: funding/funds).
3. [uncountable] the study of the management and use of money
4. [plural] finances: the money that an organization or person has, and the way that they manage it
 (verb) finance (intransitive)
to provide money, especially a lot of money, to pay for something (syn: fund)
 (adjective) financial
refers to matters related to finance e.g. financial management, financial report, financial reasons,
financial issues etc.
Webster’s Ninth New Collegiate Dictionary defines finance as “the Science on study of the management
of funds’ and the management of fund as the system that includes the circulation of money, the granting
of credit, the making of investments, and the provision of banking facilities.
Finance includes activities such as investing, borrowing, lending, budgeting, saving, and forecasting. Below
is a list of the most common examples:
 Investing personal money in stocks, bonds, or guaranteed investment certificates (GICs)
 Borrowing money from institutional investors by issuing bonds on behalf of a public company
 Lending money to people by providing them a mortgage to buy a house with
 Using Excel spreadsheets to build a budget and financial model for a corporation
 Saving personal money in a high-interest savings account
 Developing a forecast for government spending and revenue collection

Finance Topics
There is a wide range of topics that people in the financial industry are concerned with. Below is a list of
some of the most common topics you should expect to encounter in the industry.
 Interest rates and spreads
 Yield (coupon payments, dividends)
 Financial statements (balance sheet, income statement, cash flow statement)
 Cash flow (free cash flow, other types of cash flow)
 Profit (net income)
 Cost of capital (WACC)
 Rates of return (IRR, ROI, ROA)
 Dividends and return of capital
 Shareholders
 Creating value
 Risk and return
 Behavioral finance

What is financial management?

Financial management refers to all of the functions and aspects of the financial components of a company
or for an individual. This includes, but is not limited to, the planning, managing, controlling, and evaluating
of the finances and economic structure for a client (https://corporatefinanceinstitute.com).
According to Paramasivan and Subramanian (2002), financial Management is mainly concerned with the
effective funds management in the business. In simple words, Financial Management as practiced by
business firms can be called as Corporation Finance or Business Finance. Basic objectives of Financial
Management may be broadly divided into two parts such as: maximize profit and wealth.

Functions of Finance Manager

Finance manager is one of the important role players in the field of finance function. He must have entire
knowledge in the area of accounting, finance, economics and management. His position is highly critical
and analytical to solve various problems related to finance. A person who deals finance related activities
may be called finance manager. Finance manager performs the following major functions:
1. Forecasting Financial Requirements
It is the primary function of the Finance Manager. He is responsible to estimate the financial
requirement of the business concern. He should estimate, how much finances required to acquire
fixed assets and forecast the amount needed to meet the working capital requirements in future.
2. Acquiring Necessary Capital
After deciding the financial requirement, the finance manager should concentrate how the finance is
mobilized and where it will be available. It is also highly critical in nature.
3. Investment Decision
The finance manager must carefully select best investment alternatives and consider the reasonable
and stable return from the investment. He must be well versed in the field of capital budgeting
techniques to determine the effective utilization of investment. The finance manager must
concentrate to principles of safety, liquidity and profitability while investing capital
4. Cash Management
Present days cash management plays a major role in the area of finance because proper cash
management is not only essential for effective utilization of cash but it also helps to meet the short-
term liquidity position of the concern.
5. Interrelation with Other Departments
Finance manager deals with various functional departments such as marketing, production, personel,
system, research, development, etc. Finance manager should have sound knowledge not only in
finance related area but also well versed in other areas. He must maintain a good relationship with all
the functional departments of the business organization.
6th MEETING

FINANCE AND MONEY

In the following conversation between two work colleagues (Peter and Juan), Peter explains to Juan how
he uses and manages his money in his private/personal life.

From the context, try to guess what the meaning of the words/phrases in bold are.

Juan:'Peter, do you own your house?'

Peter:'Yes, I do. It's mine. I purchased it 5 years ago. And you? Do you own your house?'

Juan:'No, I don't. I rent mine.'

Peter:'If you don't mind me asking, how much money do you pay in rent each month?'

Juan:'I pay £900 each month to the owner of the property. But I want to buy a property, you know a
house or an apartment.'

Peter:'I understand. But you should be careful. When I bought my house, it cost me £450,000. But
because of the crisis in the economy, its value has decreased a lot. So, if I tried to sell it now, I would get
a lot less. But at the moment, nobody wants to buy property. Plus, when I bought the house I had to pay
for a solicitor (which is a type of lawyer) to organise the legal documents. And solicitors charge a lot of
money for doing this service. My solicitor charged me £4,300.'

Juan:'So, what is your house worth now? How much money could you sell it for?'

Peter:'A similar house in my street was sold for £360,000 last month. So I suppose it's now worth
between £360,000 to £370,000. So, if I could sell it I would make a loss of about £80,000. But to be
honest, I think when I bought the house, I overpaid. 5 years ago, my house wasn't worth £450,000. I
should have paid £420,000 for it at most.'

Juan:'My god! You have lost a lot of money.'

Peter:'Yes, I have. But the property I had before my current house, I made a profit when I sold it, a very
big profit. When I bought it, I paid £92,000. When I sold it 8 years later, it was worth £230,000. So I
made a profit of £138,000.'

MORE FINANCE AND MONEY

In the following conversation between two work colleagues (Peter and Juan), Peter continues to explain
to Juan how he uses and manages his money in his private/personal life.

From the context, try to guess what the meaning of the words/phrases in bold are.

Juan:'Could I ask you how much money you earn from working here? How much money you are paid in
your salary?'
Peter:'Each year I earn about £70,000. But that is my gross salary. That is before the government
removes taxes, the money the government takes from people to pay for its services. So after taxes have
been removed, my net salary (the money that I obtain at the end) is about £54,000.'

Juan:'It's not a lot of money to live on in London!'

Peter:'Yes, I know. But I invested some money in the past. I bought some stocks and shares in
companies. So, every year I earn another £6,000 from them. So my total income, the money I receive
each year, is £60,000.'

Juan:'So, what do you do with your income? What do you spend it on?'

Peter:'I spend my money like most people, on food, bills, clothes, holidays etc... I also have some debts.
I have credit cards, loans and a mortgage from the bank. I owe the bank a lot of money, money which
I borrowed from them in the past to buy things. So, I repay £6,000 to the bank each year.'

Juan:'Do you save a lot of money? Put money into a bank account for the future?'

Peter:'Yes. I try to save £2,000 each month in the bank.'

Juan:'Do you have a car?'

Peter:'I can drive a car, but I don't own a car. With my income, it's too expensive to have a car in
London. You have to buy the car and then you have to pay for petrol, parking, insurance etc... I can't
afford to have a car in London.'