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Chapter 1

INTRODUCTION TO FINANCIAL
MANAGEMENT

SESSION-1 1
Content
 Meaning and objective of financial
management
 Functions of a finance manager
 Correlation with other functional areas
 Important forms of business organization
 Regulatory framework affecting financial
decisions

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FINANCIAL MANAGEMENT

Financial Management means efficient use of economic


resources namely capital funds.
Financial Management is concerned with the managerial
decisions that result in the acquisition and financing
of short term and long term credits for the firm.
In short, Financial Management deals with Procurement
of funds and their effective utilization in the business
to achieve business objectives.
Financial Management is that managerial activity which
is concerned with the planning and controlling of the
firm’s financial resources.
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OBJECTIVE OF FINANCIAL MANAGEMENT

Objective :
 To ensure that the various financial decisions are
taken in such a way that they result in the
maximization of shareholders’ wealth.
 The three major financing decisions are:

(a) Investment Decision


(b) Financing Decision
(c) Dividend Decision

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FUNCTIONS OF A FINANCE MANAGER

 * To explore profitable avenues for investment.


 * Mobilization of funds
 * To ensure proper deployment of funds and control
over the use of funds
 * To achieve the right balance between risk and return.
 * To decide the optimal dividend payout ratio
 * To ensure that the liquidity of assets is maintained.

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CORRELATION OF FINANCE FUNCTION WITH
OTHER FUNCTIONAL AREAS

 * Marketing-Finance Interface
 * Production-Finance Interface
 * HR-Finance Interface
 * Linkage With The Functions Of The Top Management

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FORMS OF BUSINESS ORGANIZATIONS

Sole Partnerships Companies


Proprietorship

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Sole Proprietorship

* A business owned by a single person.


- * The owner realizes all profits and bears all the losses.
- * No distinction between business and personal income and all
business is taxed as personal income.
- * Simplest form of business, subject to minimal regulation.

Disadvantages:
 * The owner has unlimited personal liabilities.
 * These firms cannot raise external capital which results in
lack of growth.
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Partnerships

* A business owned by two or more persons.


* The partners bear the risks and reap the rewards of the
business.
*A partnership comes into existence with the execution of
a partnership deed
* They are governed by the Indian Partnership Act, 1932.

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Partnerships

Disadvantages:

Personal liabilities of the partners are unlimited.

Ability to raise external funds is limited

The life of the firm depends on the agreement


between the partners.

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Companies

* A group of persons working together towards a common objective


is a company. It represents different kinds of associations, be it
business or non-business.
*A company is collectively owned by the shareholders, who assign
the task of management to their elected representatives called the
directors.
* It is a distinct legal “person” separate from its owners
(i.e shareholders).
* It can own assets, incur liabilities, enter into contracts, sue and can
be sued in its name.
* The liability of a company is limited to the share capital subscribed
to by them.
*A company can be either a private company or a public limited
company. SESSION-1 11
Chemical Allied Products Export Promotion
DISTINCTION BETWEEN A PRIVATE
COMPANY AND A PUBLIC COMPANY

Feature Private Company Public Company


Minimum number of members2 7
Maximum number of
members 50 No restriction
Minimum number of
Directors 2 3
Subscription of shares
A Private limited company A Public limited company
cannot invite members of can invite members of the
the public to subscribe to its public to subscribe to its
shares. shares.
Transfer of shares
A Private limited company A Public limited company
usually imposes restrictions permits free transfer of its
on transfers of shares. shares.

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Feature Private Company Public Company
Appointment of Not Applicable Applicable if the Co.’s paid
Small Shareholder up capital is Rs. 5 crore or
Director more and having atleast
one thousand small
shareholder
Quorum for GM 2 personally 5 members personally
present present
Passing of Not applicable Applicable to only listed
resolutions by postal public company
ballot
Statutory Meeting Not Applicable Shall hold within a period of
one month nor more then 6
months from the date at
which the company is
entitled to commence
business
Audit Committee Not Applicable Applicable to every public
company whose paid up
capital is not less than five
REGULATORY FRAMEWORK

 Industrial Policy Resolution, 1956


 Industrial Licensing Provisions and Procedures
 Regulation of Foreign Collaborations and Investments
 Foreign Exchange Management Act
 Monopolies and Restrictive Trade Practices Act
 Companies Act, 1956

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Industrial Policy
 Industrial Policy of a nation is the true determinant of foreign
investment as well as domestic investment.
 Objectives of the Industrial Policy:
 Maintaining a sustained growth in productivity;
 Enhancing gainful employment;
 Achieving optimal utilization of human resources;
 Attaining international competitiveness and
 Transforming the country into a major partner and player in
the global arena.
 Policy Focus:
 Deregulating Indian industry;
 Allowing the industry freedom and flexibility in responding
to market forces and
 Providing a policy regime that facilitates and fosters growth
of Indian industry.
Important Policy Measures announced by the Ministry
of Finance, Department of Industrial Policy to pursue
the objectives

 Liberalisation of Industrial Licensing Policy


 Introduction of Industrial Entrepreneurs'
Memorandum(IEM)
 Liberalisation of the Location Policy
 Policy for Small Scale
 Non-Resident Indians Scheme
 Electronic Hardware Technology Park
(EHTP)/Software Technology Park (STP) scheme
Summary

 Meaning and objective of financial management


 Functions of a finance manager
 Areas of Decision Making
 Correlation with other functional areas
 Important forms of business organization
 Difference between Private and Public Companies
 Regulatory framework affecting financial
decisions

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