Unit-I

Introduction to
FM
 WHAT IS FINANCE
● Finance is defined as the provision of money at the
time when it is required. Every enterprises either
big, medium, small needs finance to carry on its
operations & to achieve its targets.
● Finance is also said to be the backbone of an
enterprise.
● Without adequate finance no enterprise can
possibly accomplish its objectives.
 Financial Management

Financial Management means planning, organizing,

directing and controlling the financial activities such as
procurement and utilization of funds of the enterprise.
It means applying general management principles to
financial resources of the enterprise.
 Scope and
Objectives of
FM
 Scope
• Investment decisions includes investment in fixed
assets (called as capital budgeting). Investment in
current assets are also a part of investment decisions
called as working capital decisions.
• Financial decisions - They relate to the raising of
finance from various resources which will depend
upon decision on type of source, period of financing,
cost of financing and the returns thereby.
• Dividend decision - The finance manager has to
take decision with regards to the net profit
distribution. Net profits are generally divided into
two:
 Dividend for shareholders- Dividend and the rate of
it has to be decided.
 Retained profits- Amount of retained profits has to
be finalized which will depend upon expansion and
diversification plans of the enterprise.
Objectives
• To ensure regular and adequate supply of funds to
the concern
• To ensure adequate returns to the shareholders
which will depend upon the earning capacity,
market price of the share, expectations of the
shareholders.
• To ensure optimum funds utilization. Once the
funds are procured, they should be utilized in
maximum possible way at least cost.
• To ensure safety on investment, i.e. funds should be
invested in safe ventures so that adequate rate of
return can be achieved.
• To plan a sound capital structure-There should be
sound and fair composition of capital so that a
balance is maintained between debt and equity
capital.
Functions of
Finance
Manager
 Functions of Finance Manager
● Estimation of capital requirements

● Determination of capital composition

● Choice of sources of funds

● Investment of funds

● Disposal of surplus

● Management of cash

● Financial controls
 Profit Maximization
● Profit earning is the main aim of every economic activity. A business being
an economic institution must earn profit to cover its costs & provide funds
for growth. Thus, profit maximization is considered as the main objective of
business.
ADVANTAGES:
● Profits are the main source of finance for the growth of a business.
● Profitability is essential for fulfilling the goals of an organization.
● Through profitability a business will be able to survive under unfavorable
situation.
● Profitability is a barometer for measuring efficiency & economic prosperity
of a business enterprise.
DISADVANTAGES OF PROFIT MAXIMISATION
● A firm pursuing the objective of profit maximization starts exploiting
workers & the consumers.
● It is immoral & leads to a number of corrupt practices.
 Wealth Maximization
● Financial theory asserts that wealth maximization is the
single substitute for a stockholder’s utility.
● When the firm maximizes the stockholders wealth, the
individual stockholder can use this wealth to maximize his
individual utility.
● Every financial decision should be based on “COST
BENEFIT ANALYSIS”, i.e. if the benefit is more than the
cost ,the decision will help in maximizing the wealth & vice-
versa.
 Profit
Maximization
Vs Wealth
Maximization
 Return Risk
• Systematic risk implies
Risk is the the overall market risk
variability
Return is actual retu of
the actual rn from th
e that affects all securities
income re expected
ceived plu return and cannot be diversified
any chang s associated
e in mark with a give away.
price et asset.. n
of an
asset/invest • Non systematic risk is
ment.
firm specific and can be
avoided by diversification.
Sources of Fund ki n
● wor ments
g capital

require ing
tain
● main ty
liquidi for 0-
1
u i r ed or a
● R eq r a ised f
Short year ● mon
e y
r 1 t
o 5
o d fo
Term peri
years. and
i r of
● repa nizing
mode ry r
e
machin
Mid
Term

of
e m e n ts a
requir i c h a re fo r
w h
funds n g 5-
i o d e x c eed i
Long pe r
r s.
Term 10 yea
 Working
Capital
finance

Sources of short Commercial

Trade Credit
Paper
term finance Short
Term
Finance

Inter-
Factoring Corporate
Deposits
 Mid Term Source of Long Term Sources of
finance finance
Share

Venture
Debentures

Long
Capital

term
Financial
Institutions
Commercial
Banks
Lease & Hire
Purchase Depository
Schemes
finance New Debt
Instruments

Public Currency Retained

Deposits Bonds Earnings