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INTRODUCTION TO
FINANCE
R ATA N G H O S H
Assistant Professor
Faculty of Business Studies
Bangladesh University of Professionals
WHAT IS FINANCE

• Finance can be defined as the science and art of managing money. Every
enterprise, whether big, medium, small, needs finance to carry on its operations
and to achieve its target. In fact, finance is so indispensable today that it is
rightly said to be the blood of an enterprise. Without adequate finance, no
enterprise can possibly accomplish its objectives.
• Business finance can be broadly defined as the activity
concerned with the planning, raising controlling and administrating the funds
used in the business.
WHAT IS FINANCE……(CON…T)

• Finance is the study of how people and businesses evaluate investments and raise capital to
fund them. (-- How to get and use money)
• Three questions addressed by the study of finance
1. What long-term investments should the firm undertake? (capital budgeting decisions – how to
spend the money?)
2. How should the firm fund these investments? (capital structure decisions -- How to get the
money?)
3. How can the firm best manage its cash flows as they arise in its day-to-day operations? (working
capital management decisions – how to manage cash (liquid) money?)
OBJECTIVES AND FUNCTIONS OF
FINANCE
Objective: 
• Procurement of money needed by business;
• Keeping and increasing the invested money through sound financial policies and program;
and
• Generating income or profit for the business.
Function:
• Financial planning, forecasting of cash receipts and disbursements
• Raising of funds, either equity capital or fixed interest capital which includes both preference
share capital and loan capital (securing of funds);
• Use and allocation of funds and
• Financial controls.
WHY STUDY FINANCE

• Knowledge of financial tools is critical to making good decisions in both professional world
and personal lives.
• Finance is an integral part of corporate world
• Many personal decisions require financial knowledge (for example: buying a house, planning
for retirement, leasing a car)
TRADITIONAL VIEW VS. MODERN VIEW OF FINANCE
…………(CON….T)

Traditional Approach to Finance Function : The traditional approach to the scope of finance
refers to its subject matter in the academic literature in the initial stages of its evolution as a
separate branch of study.
According to this approach, the scope of finance is confined to the raising of funds. Hence, the
scope of finance was treated by the traditional approach in the narrow sense of
procurement of funds by corporate enterprise to meet their financial needs.
Since the main emphasis of finance function at that period was on the procurement of funds, the
subject was called corporation finance till the mid-1950's and covered discussion on the
financial instruments, institutions and practices through which funds are obtained.
These are the broad features of the subject matter of corporation finance, which has no concern
with the decisions of allocating firm's funds.
TRADITIONAL VIEW VS. MODERN VIEW OF FINANCE
…………(CON….T)

The traditional approach to the scope and functions of finance has now been discarded
as it suffers from many serious limitations:
(i) It is outsider-looking in approach that completely ignores internal decision making as to
the proper utilization of funds.
(ii) The focus of traditional approach was on procurement of long-term funds. Thus, it
ignored the important issue of working capital finance and management.
(iii) The issue of allocation of funds, which is so important today, is completely ignored.
(iv) It does not lay focus on day to day financial problems of an organization.
 
TRADITIONAL VIEW VS. MODERN VIEW OF FINANCE
…………(CON….T)

Modern Approach to Finance Function: According to this approach, financial management

considers the broader and analytical viewpoint. According to this approach, financial
management is concerned with both acquisition of funds and their effective and optimum
utilization. This viewpoint not only considers the sporadic events but also the long term
and short-term financial problems. Three decisions are taken under financial
management :-
i. Investment Decision
ii. Financing Decision
iii. Dividend Decision
 TRADITIONAL VIEW VS. MODERN VIEW OF FINANCE
…………(CON….T)
Traditional Approach
Narrowly defined concept of FM
Only concerned with raising long term funds
Era before 1950
Applicable only to large joint stock companies
Only long-term decisions were taken
Outside looking approach
It is a descriptive approach
Modern Approach
Comparatively a wide concept
Concerns both raising as well as use of funds
Era after 1950
Applicable to all the business entities
Long as well as short term decisions are taken
Both, inside as well as outside orientation.
It is an analytical approach
GOAL OF FINANCE

• Goal of finance or a finance manager is to optimize the corporate objectives, vision and
mission of a business organization. Way of doing the above said things are two :

1. Profit Maximization
2. Wealth Maximization
GOAL OF FINANCE………(CON….T)

Profit Maximization: According to this approach, a firm should undertake all those activities
which add to its profits and eliminates all others which reduce its profits.
Criticism:
(i) Ambiguity
(ii) Time Value of Money
(iii) Risk Factor
GOAL OF FINANCE………(CON….T)

• Wealth Maximization: Financial theory asserts that the wealth maximization is the single
substitute for a stake holder’s utility. When the firm maximizes the shareholder’s wealth, the
individual stakeholders can use this wealth to maximize his individual utility. It means that by
maximizing stakeholder’s wealth the firm is operating consistently toward maximizing
stakeholder’s utility.

Maximum Maximum
Maximum Utility stockholder’s current stock
wealth price per share
AGENCY PROBLEM & FINANCE

• Agency problem is the likelihood that managers may place personal goals ahead of corporate
goals.
• Reason of agency problem:

1. Agent is risk-averter & principal is risk-seeker.

2. Agent has shorter duration than the principal in the
organization
3. Earnings of agent are fixed
4. Principals are not directly take part in management decision
5. Information asymmetry
AGENCY PROBLEM & FINANCE……
(CON….T)
• Resolving agency problem:

Agency Cost
Market Forces 1. Monitoring Expenditures
1. Behavior of security market 2. Bonding Expenditures
participants 3. Structuring
2. Hostile Takeover Expenditures( incentive and
performance plan)
FINANCE & RELATED DISCIPLINES

• Finance and Economics

• Finance and Accounting
MAJOR AREAS & OPPORTUNITIES IN FINANCE:
MANAGERIAL FINANCE

• Managerial finance is concerned with the duties of the financial

manager in the business firm.
• The financial manager actively manages the financial affairs of
any type of business, whether private or public, large or small,
profit-seeking or not-for-profit.
• They are also more involved in developing corporate strategy and
improving the firm’s competitive position.
 MAJOR AREAS & OPPORTUNITIES IN
FINANCE: MANAGERIAL FINANCE (CONT.)

• Increasing globalization has complicated the financial management function by requiring them
to be proficient in managing cash flows in different currencies and protecting against the risks
inherent in international transactions.
• Changing economic and regulatory conditions also complicate the financial management
function.
TABLE 1.1 STRENGTHS AND WEAKNESSES OF THE
COMMON LEGAL FORMS OF BUSINESS
ORGANIZATION
FIGURE 1.1 CORPORATE
ORGANIZATION
THE MANAGERIAL FINANCE FUNCTION

• The size and importance of the managerial finance function depends on

the size of the firm.
• In small companies, the finance function may be performed by the
company president or accounting department.
• As the business expands, finance typically evolves into a separate
department linked to the president as was previously described in
Figure 1.1.
THE MANAGERIAL FINANCE FUNCTION: RELATIONSHIP TO
ACCOUNTING

• The firm’s finance (treasurer) and accounting (controller) functions are closely-related and
overlapping.
• In smaller firms, the financial manager generally performs both functions.
FIGURE 1.2 FINANCIAL ACTIVITIES
GOAL OF THE FIRM:
WHAT ABOUT OTHER STAKEHOLDERS?

• Stakeholders include all groups of individuals who have a direct

economic link to the firm including employees, customers,
suppliers, creditors, owners, and others who have a direct economic
link to the firm.
• The "Stakeholder View" prescribes that the firm make a conscious
effort to avoid actions that could be detrimental to the wealth
position of its stakeholders.
• Such a view is considered to be "socially responsible."