V.GopalaKrishnan.,M.Com.,M.B.A.,M.Phil.

,PGD
MM.,
Assistant professor,
Dept of Commerce,
Kamaraj College, Tuticorin

FINANCE

Finance is the life-blood of business.

Without finance neither any business can
be started nor successfully run .
Finance is needed to promote or
establish business, acquire fixed assets,
make necessary investigations, develop
product keep man and machines at work
,encourage management to make
progress and create values.

FINANCE
Finance is defined as the provision of
money at the time when it is
required. It is the life-blood of the an
enterprise. Without adequate
finance, no enterprise can possibly
accomplish its objectives

FINANCE
FINANCE

PUBLIC FINANCE
Central Government
State Governments
Local Self Governments
Government Institutions

PRIVATE FINANCE
Personal Finance
Business Finance
Finance of nonprofit organisations

BUSINESS
FINANCE
Sole-Proprietory
Finance

Partnership
Firms
Finance

Company or
Corporate Finance

FINANCIAL MANAGEMENT

Traditionally known as Business

Finance and Corporation Finance
According to Guthmann & Dougall
Business finance can be broadly
defined as the activity concerned with
planning, raising, controlling and
administering the funds used in the
business.

FINANCIAL
MANAGEMENT
Financial management is one the
functional area of management. It
refer to that part of the management
activity which is concerned with the
planning and controlling of firms
financial resources.

DEFINITION
Financial management is the
application of planning and control
function of the finance function

Howard and Upton

Importance of FM

No business, whether big, medium, or

small can be started without an adequate
amount of finance. Right from the very
beginning, i.e., conceiving an idea to
business, finance is needed to promote or
establish the business, acquire fixed
assets, make investigation such as market
survey etc, develop product, keep men &
machine at work, encourage management
to make progress and create values

Importance of FM
The importance of corporation finance
has arisen because of the fact that
present day business activities are
predominantly carried on company or
corporate from of the organisation.
Following factors further increased the
importance of FM
1. The increase in size and influence of the
business enterprise
2. Wide distribution of corporate ownership
3. Separation of ownership & management

Importance of FM

1.

2.

3.
4.
5.
6.
7.

FM is indispensible to any orgn as it helps

Financial planning & successful promotion of an
enterprise
Acquisition of funds as & when required at minimum
possible cost
Proper use & allocation of funds
Taking sound financial decision
Improving the profitability through financial controls
Increasing the wealth of investors and nations, &
Promoting & mobilising individual & corporate
savings

Finance function

Finance function is the most important

of all functions. It remains a focus of all
activities. It is not possible to
substitute or eliminate this function
bcoz the business will close down in the
absence of finance. The need for
money is continuous. It start with
setting up of an enterprise & remains at
all times. The development &
expansion of business rather needs
more commitment of funds.

Finance function

The fund will have to be raised from

various sources. The receiving money is
not enough, its utilisation is more
important. The money once received will
have be returned also. If its use is proper
then its return will be easy otherwise it will
create difficulties for repayment. The
management should have an idea of using
the money profitably. It may be easy to
raise funds but it may be difficult to repay
them.

Approaches to finance
function
The Traditional approach
It relates to the initial stage of its evolution
during 1920s & 1930s when the term
corporate finance was used to describe what
is known as financial management today.
According to this approach, the scope of finance
function was confined to only procurement of
funds needed by a firm on most suitable terms.
The utilisation of funds was considered beyond
the purview of finance function. It was felt that
decisions regarding the application of funds are
taken somewhere else in the organisation

The Modern approach

It includes both raising of funds as well as

their effective utilisation.
The cost of raising funds and the returns
from their use should be compared.
The funds raised should be able to give
more returns than the cost involved in
procuring them.
This approach considers the three decisions
Investment decision, Financing decisions &
Dividend decision

Aims of Finance function

Acquiring Sufficient Funds

Proper Utilisation Funds
Increasing profitability
Maximising firms Value

Scope / Content of FM

Estimating Financial Requirement

Deciding Capital Structure
Selecting a Source of Finance
Selecting a Patten of Investment
Proper Cash Management
Implementing Financial Control
Proper use of surplus

Objective of FM

FM is concerned with procurement &use

of funds. Its main aim is to use business
fund in such a way that the firms value
or earnings are maximised. This objective
can be achieved by
Profit maximisation
Wealth maximisation

PROFIT MAXIMISATION

1.

2.
3.

4.

5.

Arguments are in favour of profit maximisation:

When profit earning is the aim of business then profit
maximisation should be the obvious objective.
Profitability is the barometer for measuring efficiency.
A business will be able to survive under unfavourable
situation, only if it has some past earnings
Profit are the main sources of finance for growth of a
business.
Profitability is essential for fulfilling social goals also

PROFIT MAXIMISATION
Arguments against profit
maximisation
1. Ambiguity
2. Ignores Time Value of Money
3. Ignores Risk Factor
4. Dividend Policy

WEALTH MAXIMISATION

1.

2.
3.
4.

5.

6.

Arguments in favour of wealth maximisation

It serves the interest of owners & other stake
holders
It is consistent with the objective of owners welfare
It implies long-run survival & growth of the firm
It takes into consideration the risk factor & time
value of money
The effect of dividend policy on market price of
shares also considered
This leads towards maximising shareholders utility
or value maxmisation of equity share holders

WEALTH MAXIMISATION

Arguments against wealth maximisation

1. It is a prescriptive idea
2. This objective not necessarily socially
desirable.
3. There is some controversy as to whether
objective is to maximise the
shareholders wealth or wealth of the firm
4. This objective may also face difficulties
when ownership & management are
separated

FINANCIAL DECISION

Investment Decision

Long-term investment decision

Short-term investment decision

Financing Decision
Dividend Decision

Functional areas of FM

Determining Financial Needs

Selecting the Source of Funds
Financial Analysis & interpretation
Cost-Volume Profit Analysis
Capital Budgeting
Working capital Management
Profit planning & control
Dividend policy

Functions of Financial
Manager

Financial Forecasting & Planning

Acquisition of Funds
Investment of Funds
Helping in valuation decision
Maintain proper liquidity

The financial decision involves

Investment, Financial & Dividend

decision
Investment, Capital budgeting&
Dividend decision
Investment, financing &Dividend
decision

Value or wealth maximisation

objectives stands for

Maximisation of earnings per

share
Maximisation of value of debt
instument
Maximising the value of equity
None of these

F M is concerned with
the

Raising of fund from the market

Investing the funds in most
appropriate assts
Procurement of funds & their
effective utlisation
Management of working fund only

Objective of the firm in FM

is

Profit Maximisation
Profitability maximisation
Wealth maximisation
Cash maximisation

Profit maximisation lacks

Time value of money

Risk & uncertainty
Vague & ambiguous
All of the above

Intrinsic value of a share is equal

to its

Book value
Market value
True value justified by earning
capacity
Par value

Decision regarding long-term

investment is called

Solvency decision
Capital budgeting
Capital structuring
Long-term investment decision