INTRODUCTION TO FINANCIAL MANAGEMENT

Prof.Pooja Choudhary AMITY PATNA

POOJA CHOUDHARY

Module I: Introduction to Financial Management(subtopics)

A. Financial Environment,

B. Indian Financial System,

C. Evolution of Financial Management , D. Key activities of Finance Manager E. Changing Role of Finance Managers, F. Key Decision Areas in Financial

Management, G. Objectives of the firm, H. Organization of Finance

Financial Environment,
All business activities involve acquisition

and use of funds. Finance function makes money available to meet the costs of production and marketing operations. Financial policies are devised to fit production and marketing decisions of a firm in practice.

Indian Financial System

FUNCTIONS OF Indian Financial System: It provides a payment system for the exchange of

goods and services. It enables the pooling of funds for undertaking large scale enterprises. It provides a mechanism for transfer of resources. It provides a way for management of risk. It generates information that helps in coordination

Indian Financial System

Financial System of any country consists

of financial markets, financial intermediation and financial instruments or financial products

 What are FINANCIAL MARKETS??? Who are FINANCIAL INTERMEDIARIES??? What are FINANCIAL INSTRUMENTS???

Evolution of Financial Management

The transitional phase begins around the early forties and

continues through the early fifties. Though the nature financial management during this phase was similar to that of the traditional phase, greater emphasis was placed on the day to day problem faced by the finance managers in the area of funds analysis, planning, and control. These problems however were discussed within limited analytical framework. The modern phase begin in mid 50s and has witnessed an accelerated pace of development with the infusion of ideas from economic theories and its applications. * The scope of financial management has broadened. The central concern of financial management is considered to be a rational matching of funds to their uses in the light of appropriate decision criteria

Growth and trend IN THE Indian Financial System

Emergence of many financial institutions.

Significant expansion of operations of

commercial banks. Variety of schemes and financial products available today. System is becoming more transparent. Stricter regulations being practiced.

Key activities of Finance Manager

Raising of Funds

Allocation of Funds
Profit Planning Understanding Capital Markets

Key Decision Areas in Financial Management

1. Financial planning and estimation of finance required for

the organisation 2. Mobilization of financial resources required as above 3. Ensuring that the funds are available in adequate quantity at appropriate time and at an affordable cost 4. Management of cash in the organisation through cash flow statement 5. Management of investment outside the business enterprise in other organizations 6. Management of risk in dealing with foreign exchange for imports and exports (All the points are explained in the later slides)

EXPLANATIONS

Financial planning and estimation of finance required for the organisation

Any activity in a business enterprise requires planning for

proper execution in time. Finance is required for any activity at least in the beginning and hence financial planning is the prime function of Finance. This involves detailed study of any activity from understanding the total funds requirement for that activity, when the funds will be required and how much funds will be required at different stages. For a new enterprise the entire resources have to come from outside (externally); for an existing enterprise, a part of the resources at least will be available from the profits made in the past and retained in business after declaring dividend. Example No. 1: We require Rs.10lacs for an activity. Let us see how it affects an existing enterprise. Let us assume the profits available to be Rs.5lacs. Then we require further resources of Rs.5lacs only. This is the difference between an existing enterprise and a new one. Financial planning will take this into account.

Mobilization of financial resources

Having ascertained in the above example that we require

Rs.10lacs for a set activity, for a new enterprise we require the entire amount to be mobilized. For an existing enterprise with available profits of Rs.5lacs, we require only Rs.5lacs. The Financial manager will then assess all the alternative resources available to him keeping in mind the following requisites: Adequacy (availability in adequate quantity) Timeliness (availability in time) and Cost (at an affordable cost)

Adequate supply in time etc.

This has been explained this in the above point.

For reinforcement the students attention is drawn to one of the objectives of financial management at least in the short run, the objective of maximizing profits of the organisation. The profits so maximized in turn enhance the Earning Per Share.

Management of cash in the organisation

This involves the following steps:

Ascertaining the average cash requirement by looking at

the past figures and for a new enterprise, estimating this figure. Preparing the cash flow statement for a given period, taking all the cash inflows and cash outflows during the period to determine whether there is a surplus or deficit at the end of the period . Arranging for funds from outside especially through a bank with whom the enterprise has loan facilities in case of deficit in the cash flow statement; if on the contrary, the cash flow statement reveals a surplus, dealing with this surplus in a suitable manner.

Management of investment outside the organisation

Over a period of time the enterprise reinvests a

part of the profits for future growth of the organisation in business. The Finance manager can invest such funds outside the business in other enterprises also provided the parent enterprise does not require them immediately. Short-term surplus as revealed by the Cash flow statement is also invested for short duration. Thus investment outside ones own business becomes the responsibility of the Finance Manager

Management of risk in foreign exchange etc.

A business enterprise may require imports and do exports also. Whenever

this is done the invoice is in foreign currency. In imports the business enterprise requires foreign exchange while in exports it gets foreign exchange. There is a risk involved while doing imports or exports. The risk is that the exchange rate of the foreign currency in terms of Indian Rupees can keep changing. We will explain this through an example. Example no. 2 We have exported goods worth US Dollars 1000. The money is to be received in a months time. Presently the exchange rate is 1 US Dollar = Rs.44/-. By the time the money is received after a month, in case the rate is less than Rs. 44/-, we will lose money. On the contrary if the exchange rate is more than Rs. 44/-, we will gain. Exactly opposite will be the effect in the case of imports. The importer will pay less if the exchange rate decreases and more if the exchange rate increases. There are ways and means of minimizing the risk of foreign exchange. Finance manager is expected to take care of such risks.

Objectives of the firm

Profit maximization (profit after tax) Maximizing earnings per share Wealth maximization

Task:
What is the difference between profit

maximisation & wealth maximisation?

Organization of Finance
Reason for placing the finance functions in the

hands of top management

Financial decisions are crucial for the

survival of the firm. The financial actions determine solvency of the firm Centralisation of the finance functions can result in a number of economies to the firm.

Organization for finance function

 Two officersthe treasurer and the controllermay be

appointed under the direct supervision of CFO to assist him or her. The treasurers function is to raise and manage company funds while the controller oversees whether funds are correctly applied

Organization for finance function in a multidivisional company