FINANCIAL MANAGEMENT

We all have heard about the term finance, let us discuss on what does it mean and why do you as a student of MBA want to study it?

Finance can be defined as the art and science of managing money. Virtually all individuals and organizations earn or raise money and spend or invest money. Finance is concerned with the process, institutions, markets, and instruments involved in the transfer of money among and between individuals, businesses, and governments.

Why study finance? An understanding of the concepts, techniques, and practices presented in this course will fully acquaint you with the financial manager's activities Most business decisions are measured in financial terms, the financial manager plays a key role in the operation of the firm
People in all areas of responsibility accounting, information systems, management, marketing, and operations- need a basic understanding of the managerial finance function. All managers in the firm, regardless of their job descriptions, work with financial personnel to justify personnel requirements, negotiate operating budgets, deal with financial performance appraisals, and sell proposals based at least in part on their financial' merits.

 Clearly, those managers who understand the financial decision- making process will be better able to address financial concerns, and will therefore more often get the resources they need to accomplish their own goals To make informed decisions about where to get and put money in order to maximize value in both personal and business decisions.

If I have no intention of becoming a financial manger, why do I need to understand financial management?

One good reason is to prepare yourself for the workplace of the future. More and more businesses are reducing management jobs and squeezing together the various layers of the corporate pyramid. This is being done to reduce costs and boost productivity. As a result, the responsibilities of the remaining management positions are being broadened. The successful manager will need to be much more of a team player that has the knowledge and ability to move not just vertically within an organization but horizontally as well. Developing cross-functional capabilities will be the rule, not the exception. Thus, a mastery of basic financial management skills is key ingredient that will be required in the work place of your not too distant future.

Finance Finance is the study of money management, the acquiring of funds (cash) and the directing of these funds to meet particular objectives. Good financial management helps businesses to maximize returns while simultaneously minimizing risks. Hardly anybody wants to work in a field where there is no room for experience, creativity, judgment and a pinch of luck but study of finance is not so. There are many reasons that the financial managers job is challenging and interesting. Here are four important ones. - Securities Markets -Understanding Values -Time and uncertainty -Understanding People.

Securities Markets :
Securities Markets include Money Markets and Capital Markets. Money Markets includes : Markets for short-term claims with original maturity of one year or less , High-grade securities with little or no risk of default , Examples Treasury Bills, Commercial Paper , Certificates of Deposit Capital markets include : Market for long-term securities with original maturity of more than one year , Securities may be of considerable risk , Examples - Stocks ,Corporate bonds & Government bond Primary Markets : A primary market is a market for newly created securities. The proceeds from the sale of securities in primary markets go to the issuing entity. A security can trade only once in the primary market.

 Secondary Markets : A secondary market is a market for previously issued securities. The issuing firm is not directly affected by transactions in the secondary markets. A security can trade an unlimited number of times in secondary markets. The volume of trade in secondary markets is such higher than in primary markets. Investment Bankers : An investment banker specializes in marketing new securities in the primary market. Examples of Investment bankers are: Merrill Lynch, Sigma Manufactures Merchant Bank, etc..

 Financial Intermediaries : These are institutions that assist in the financing of firms. Example include; commercial banks and pension funds. These institutions invest in securities of other firms, but they are themselves financed by other financial claims. On the other hand, it is a sort of indirect financing in which savers deposit funds with the banks and financial institutions rather than directly buying bonds or shares and the financial institutions, in turn lend the money to ultimate borrowers. The Commercial Banks, Financial Institutions, Finance and Investment Companies, Insurance Companies, Unit Trust, Pension Funds etc., are examples of financial intermediaries

Understanding Value

Understanding how capital markets work amounts to understanding how financial assets are valued. This is a subject on which there has been remarkable progress over the past 10 to 20 years. New theories have been developed to explain the prices of bonds and stocks. And, when put to the test, these theories have worked well. I, therefore, would like to give more stress in this area because the implication of this is applying in almost all parts of the corporate finance.

Time and Uncertainty

The financial manager cannot avoid coping with time and uncertainty. Firms often have the opportunity to invest in assets which cannot pay their way in the short run and which expose the firm and its stockholders to considerable risk. The investment, if undertaken, may have to be financed by debt, which cannot be fully repaid for many years. The firm cannot walk away from such choices- someone has to decide whether the opportunity is worth more than it costs and whether the additional debt burden can be safely borne.

Understanding People

The financial manager needs the opinions and cooperation of many people. For instance, many new investment ideas come from plant managers. The financial manager wants these ideas to be presented fairly; therefore, the proposers should have no personal incentives to be either overconfident or overcautious. Take another example. In some firms the plant manager needs permissions from the head office to buy a company car but not to lease it, and the line of least resistance may be to lease the car. In other firms the plant manager needs permission from the head office to buy or lease, and the line of least resistance may be to travel everywhere by cab. The financial manager has to be aware of these effects and has to devise procedures that will avoid as far as possible any conflicts of interest.

Finance managers are presently facing some new challenges as indicated below:

TREASURY OPERATIONS: Short-term fund management must be more sophisticated. Finance managers could make speculative gains by anticipating interest rate movements. FOREIGN EXCHANGE: Finance Managers will have to weigh the costs and benefits of playing with foreign exchange particularly now that the Indian economy is going global and the future value of the rupee visa a vis foreign currency has become difficult to predict FINANCIAL STRUCTURING: An optimum mix between debt and equity will be essential. Firms will have to tailor financial instruments to suit their and investors' needs. Pricing of new issues is an important task in the Finance Managers portfolio now.

 MAINTAINING SHARE PRICES: In the premium equity era, firms must ensure that share prices stay healthy. Finance managers will have to devise appropriate dividend and bonus policies ENSURING MANAGEMENT CONTROL: Equity issues at premium means managements may lose control if they are unable to take up their share entitlements. Strategies to prevent this are vital.