Understanding

Financial Management

Financial management is an integrated

decision making process, concerned with
acquiring, managing and financing assets
to accomplish overall goals within a
business entity.
Speaking differently, it is concerned with
making decisions relating to investments in
long term assets, working capital, financing
of assets and so on.

What is Financial Management?

Financial management capacity is a cornerstone of

organizational excellence.
Financial management pervades the whole

organization as management decisions almost

always have financial implications.

Meaning of Financial Management

Financial management entails planning for the

future of a person or a business enterprise to

ensure a positive cash flow, including the
administration and maintenance of financial
assets.
The primary concern of financial management is

the assessment rather than the techniques of

financial quantification.
Some experts refer to financial management as

the science of money management.

Components of Financial
Management
The five basic components of the Financial
Management Framework are:

Planning and Analysis

Asset and Liability Management
Reporting
Transaction Processing
Control

Importance of Financial Management

Financial management is concerned with procurement and
utilization of funds in a proper way. It is important because
of the following advantages:
1. Helps in obtaining sufficient funds at a minimum cost.
2. Ensures effective utilization of funds.
3. Tries to generate sufficient profits to finance expansion
and modernization of the enterprise and secure stable
growth.
4. Ensures safety of funds through creation of reserves,
re-investment of profits, etc.

Finance function
The finance function relates to three major decisions
which the finance manager has to take:
Investment decisions
Finance decisions
Dividend decisions

Investment Decision
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The investment decision relates to the selection of

assets in which funds will be invested by a firm.
The assets which can be acquired fall into two broad
categories
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Long term assets (which yield return over a period over

a time in future.) Capital Budgeting.
Short term or current assets (convertible into cash
usually within one year.) Working Capital Management.

Capital Budgeting
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Capital budgeting refers to selection of an asset or

investment proposal or course of action whose benefits
are likely to be available in future over the lifetime of the
project.
The main elements of capital budgeting are:
Choice of the new assets out of the alternatives
available or relocation of the capital when an existing
asset fails to justify the funds committed.
Capital budgeting decision is the analysis of risk and
uncertainty.
The concept and measurement of cost of capital.
Most important & critical

Working Capital Management

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WCM is concerned with the management of current

assets & current liabilities.
The key strategies and considerations in ensuring a
trade-off between profitability and liquidity is one of the
major dimensions of WCM.
The management of working capital has two basic
ingredients
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An overview of working capital management as a
whole
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Efficient management of the individual current
assets & liabilities such as cash, receivables,
payables and inventory.

The Financing Decision

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The investment decision is broadly concerned

with the assetsmix or the composition of the
assets of the firm.
The two aspects of financing decision are :
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The capital structure theory
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The capital structure decision
A capital structure with a reasonable proportion of
debt and equity capital is called the Optimal
Capital Structure.

The Dividend Decision

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The dividend should be analyzed in relation to the

financing decision of the firm.
Two alternatives are available in dealing with the
profits of a firm:
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They can be distributed to the shareholders in
the form of the dividends
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They can be retained in the business itself.
The decision as to which course should be followed
depends largely on the significant dividend decision,
the dividend pay out ratio, i.e. what proportion of
net profits should be paid out to the shareholders.

OBJECTIVES OF FINANCIAL
MANAGEMENT
The objective provide a framework for
optimum financial decision making. They are
concerned with designing a method of
operating the internal investment and financing
of a firm.
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There are two widely discussed approaches
under this, these are:
Profit Maximisation
Wealth Maximisation
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Profit Maximisation
Profit /EPS maximisation should be undertaken and those
that decrease profits or EPS are to be avoided. Profit is the test of
economic efficiency. It leads to efficient allocation of resources,
as resources tend to be directed to uses which in terms of
profitability are the most desirable. Financial management is
mainly concerned with the efficient economic resources namely
capital. The main technical flaws of this criteria are :
Ambiguity
Timing of benefits
Quality of benefits.

Wealth Maximisation
Wealth maximisation is also known as Value or Net
present worth maximisation. Its operational features satisfy all
the three requirements of the operational of the financial course
of action namely, exactness, quality of benefits, and the time
value of money. Two important issues related to the value/share price
maximisation are:

Focus on stakeholders ,stakeholders include groups such

as employees, customers, suppliers, creditors, owners and
others who have a direct link to the firm.
EVA (Economic Value Added) EVA is equal to the aftertax operating profits of a firm less the cost of the firm to
finance investments.

Financial Management levels

Broadly speaking, the process of financial
management takes place at two levels:
At the individual level, financial management involves
tailoring expenses according to the financial resources of
an individual. From an organizational point of view, the
process of financial management is associated with
financial planning and financial control.
At the corporate level, the main aim of the process of

managing finances is to achieve the various goals a

company sets at a given point of time.

Changing Role of Finance Manager

Role of finance managers has increased tremendously
and their tasks have become complicated following
globalisation of business & increased competition
Critical responsibilities
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Designing and fine-tuning a more responsive "Rolling
Forecast" budgeting process.
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Breeding new economy businesses from within and
releasing value through M&As, planning, negotiating and
overseeing strategic alliances.
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Focus of finance shifts increasingly to create intangible
assets rather than achieving accounting goals.
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Dramatic changes in resource allocation.
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Dynamically balancing investments between old and new
economy ventures essential to fuelling growth and
shareholder value.
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Changing Role of Finance Manager

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Finance manager is actively involved in anticipating

industry trends, launching new ventures, valuing intangible
assets, and managing business options far more dynamic.
The fortification of finance is the driver of change. From
safeguarding the assets of the company to being
answerable to investors, finance is the voice of
organisation.

Functions of financial manager are:

Financial Forecasting
Investment decisions
Managing corporate asset structure
The management of income
Management of cash
Deciding about new sources of finance
To contact and carry negotiations for new financing
Analysis and appraisal of financial performance
Advising the top management

Incidental functions:
They are performed by low level assistants like
accountants, account assistants etc. They include:
Record keeping and reporting
Preparation of various financial statements
Cash planning and its supervision
Credit management
Custody and safeguarding different financial

securities etc.
Providing top management with information on
current and prospective financial conditions of
the business.

Interface of Financial Management with

other functional areas

Financial management is an integral part of overall management

and not merely a staff function.
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Finance influence the operations of other crucial functional areas
of the firm such as production, marketing and human resources.
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Marketing-Finance Interface
There are many decisions, which the Marketing Manager takes
which have a significant financial implications.
For example:
1)He should have a clear understanding of the impact the
credit on the profits of the company.
2)Weigh the benefits of keeping a large inventory of finished
goods in anticipation of sales against the costs of maintaining that
inventory.
3) Other key decisions of the Marketing Manager, which have
financial implications, are: Pricing, Product promotion and
advertisement, Choice of product mix, Distribution policy & so on.
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Interface of Financial Management with

other functional areas

Production-Finance Interface
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In any manufacturing firm, the Production Manager
controls a major part of the investment in the form of
equipment, materials and men.
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He should so organize that the equipments are used
most productively, the inventory of work-in-process or
unfinished goods and stores and spares is optimized
and the idle time and work stoppages are minimized.
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Production manager can hold the cost of the output
under control and thereby help in maximizing profits.
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Similarly, he would have to make decisions regarding
make or buy, buy or lease etc. for which he has to
evaluate the financial implications before arriving at a
decision.

Interface of Financial Management with

other functional areas
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Top Management-Finance Interface

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Strategic planning and management control are two
important functions of the top management.
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Finance function provides the basic inputs needed for
undertaking these activities.
Human resource Finance interface
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Human resource planning
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Cost to company calculation

INDIAN FINANCIAL SYSTEM

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Economic growth and development of any country

depends upon a well-knit financial system.
Financial system comprises a set of sub-systems of
financial institutions, financial markets, financial
instruments and services which help in the formation of
capital.
Economic growth of the country happens by mobilizing
surplus funds and utilizing them effectively for productive
purpose.
It provides a mechanism by which savings are transformed
into investments

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Financial institutions

Financial institutions are the intermediaries who facilitates

smooth functioning of the financial system by making investors
and borrowers meet. They act as middlemen between savers
and borrowers.
They mobilize savings of the surplus units and allocate them in
productive activities promising a better rate of return.
Financial institutions also provide services to entities seeking
advises on various issues ranging from restructuring to
diversification plans.
They provide whole range of services to the entities who want to
raise funds from the markets elsewhere.
Financial institutions may be of Banking or Non-Banking
institutions.

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Financial Markets

Finance is a prerequisite for modern business and financial

institutions play a vital role in economic system. It's through
financial markets the financial system of an economy
works.
It a market where financial products, financial services and
financial securities are traded.

The main functions of financial markets are:

1. To facilitate creation and allocation of credit and liquidity;
2. To serve as intermediaries for mobilization of savings;
3. To assist process of balanced economic growth;
4. To provide financial convenience

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Financial Markets

Classified into Money Market & Capital

Market
Money Market:
l Money Market basically deals with short term financial
assets, which are close substitute to money.
l Functions of Money Market:
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Money Market ensures the development of trade and
industry.
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It helps the development of capital market.
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It helps in smooth functioning of commercial banks.

Capital Market:
Capital market is the market for long term debt
instruments and equity instruments.
Capital market consists of Primary market and

Financial Instruments
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Another important constituent of financial system is
financial instruments.
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They represent a claim against the future income and
wealth of others. It will be a claim against a person or
institutions, for the payment of the some of the money
at a specified future date.
Financial Services:
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Efficiency of emerging financial system largely depends
upon the quality and variety of financial services
provided by financial intermediaries.
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The term financial services can be defined as "activites,
benefits and satisfaction connected with sale of money
that offers to users and customers, financial related
value".

Primary Market
It is a Market where securities offered to the public for the first
time so also called as new issue market.
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In other words Market which deals with rising of fresh capital by
companies through issue of securities like shares and
debentures.
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In this market, the flow of funds is from savers(households) to
borrowers (industries), hence, it helps directly in the capital
formation of the country.
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Features of primary market are:
l It Is Related With New Issues
l It Has No Particular Place
l Primary markets are used by companies for the purpose of
setting up new ventures/ business or for expanding or
modernizing the existing business
l Basis for secondary market
l Various Methods Of Floating Capital are:
i) Public issue, ii) Private Placement, iv) Right Issue v)
offer for sale.
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Public issue
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When a company raises funds by selling (issuing) its

shares (or debenture / bonds) to the public through issue of
offer document (prospectus), it is called a public issue.
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1)Initial Public Offer: : When a (unlisted) company

makes a public issue for the first time and gets its
shares listed on stock exchange, the public issue is
called as initial public offer (IPO).
2)Further public offer: When a listed company makes
another public issue to raise capital, it is called further
public / follow-on offer (FPO).

Offer for sale

Institutional investors like venture funds, private equity
funds etc., invest in unlisted company when it is very
small or at an early stage. Subsequently,when the
company becomes large, these investors sell their
shares to the public, through issue of offer document
and the companys shares are listed in stock
exchange. This is called as offer for sale.
The proceeds of this issue go the existing investors and
not to the company.

Issue of Indian Depository

Receipts (IDR):
A foreign company which is listed in stock exchange abroad
can raise money from Indian investors by selling (issuing)
shares. These shares are held in trust by a foreign custodian
bank against which a domestic custodian bank issues an
instrument called Indian depository receipts (IDR).
IDR can be traded in stock exchange like any other shares
and the holder is entitled to rights of ownership including
receiving dividend.

Rights issue (RI):

When a company raises funds from its existing shareholders by
selling (issuing) them new shares / debentures, it is called as
rights issue.
The offer document for a rights issue is called as the Letter of
Offer and the issue is kept open for 30-60 days.
Existing shareholders are entitled to apply for new shares in
proportion to the number of shares already held.
For e..g. in a rights issue of 1:5 ratio, the investors have the right
to subscribe to one (new) share of the company for every 5 shares
held by the investor.

Bonus Issue:
The company issues new shares to its existing shareholders.
As the new shares are issued out of the companys reserves
(accumulated profits), shareholders need not pay any money to
the company for receiving the new shares.
For e..g. In a bonus issue of 5:1 ratio, the investor will receive five
new shares of the company for each share the investor held

Private Placement
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The private placement involves issue of securities, debt or

equity, to selected subscribers, such as banks, FIs, MFs
and high net worth individuals.
It is arranged through a merchant/investment banker, who
acts as an agent of the issuer and brings together the
issuer and the investor(s).
Since these securities are allotted to a few sophisticated
and experienced investors the stringent public disclosure
regulations and registration requirements are relaxed.
Private placement has following advantage
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Time effective
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Cost effective
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Structure effective
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Access effective

Pricing of public issue

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public issues on the basis of pricing,can be classified into Book

Built issues and Fixed Price issues.
Book Building issue
The issuer company mentions the minimum and maximum price
(price band) at which it will sell (issue) its shares.Thus the offer
document (in this case, called theRed Herring Prospectus)
contains only the price band instead of the price at which its
shares are offered to the public.
Within this price band the investor can choose the price at which
the investor are willing to buy the shares and also the quantity.
As this process is similar to bidding in an auction, the application
form for book built issue is also known as the bid form.

Pricing of public issue

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Bids by various investors are entered into the stock exchange

system through the brokers (also called syndicate member )
terminal.
The list of the bid received from investors at various price bands
is known as the book and can be seen in the website(s) of the
stock exchange for each investor category.
Based on the total demand in the book, the cut off price is then
decided by the issuer and merchant banker.
The cut off price is the price at which the cumulative demand for
shares, equals or exceeds the offer size is estimated.
All investors who applied (bid) for shares at or above the cut off
price will be allotted shares at the cut off price (issue price),
proportionately.

Fixed price Issue

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In this method the price will be fixed by the company

for its securities before issue is brought to the market.
The price at which the securities are offered/allotted is
known in advance to the investor.
Demand for the securities offered is known only after
the closure of the issue.
Payment is made at the time of subscription whereas
refund is given after allotment.

Green Shoe option

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It denotes an option of allocating shares in excess

of the shares included in the public issue.
SEBI guidelines allow the issuing company to
accept over subscriptions, subject to a ceiling, say
15% of the offer made to public.
It is extensively used in international IPOs to
stabilized the post-listing price of new issued
shares.

Secondary Market
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Secondary market is a market where securities which are

already issued in private or public offering are traded.
Alternatively, secondary market can refer to the market for any
kind of used goods also referred has the aftermarket.
In the secondary market, securities are sold by and transferred
from one investor or speculator to another.
It is therefore important that the secondary market be highly
liquid and transparent.
Before electronic means of communications, the only way to
create this liquidity was for investors and speculators to meet at
a fixed place regularly. This is how stock exchanges originated.

Features of Secondary Market

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It Creates Liquidity
It Comes After Primary Market
It Has A Particular Place
It Encourage New Investments
Aids in financing the industry
Ensures safe & fair Dealing

Advantages and Disadvantages

of secondary market
Advantages

Secondary markets offer advantages to both sellers and

buyers. Sellers gain the advantage of effectively reducing
the purchase price of products and investments by
recouping a portion of what they originally paid.
Disadvantages
If secondary markets grow too large, they can eat into
original sellers' sales and profit margins. Especially in the
case of long-lasting goods such as automobiles and musical
instruments, secondary markets can encourage a large
percentage of shoppers to purchase used items rather than
purchasing new.

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Different between primary

market and secondary market

primary market

secondary market

In primary markets,
securities are bought by
way of public issue
directly from the company.
New issue are available in
primary market.
The primary is a
middlemen.
New issue of common
stock;bonds and preferred
stock are sold by
companies.

In Secondary market share

are traded between two
investors.
Securities usually bought
and sold through the
secondary market.
The secondary market are
broker and dealer.
The secondary market
stock and bonds issues
are sold to the public.

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Types of financial Markets

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Capital market

Capital market is a market where buyers and sellers

engage in trade of financial securities like bonds,
stocks, etc.
The buying/selling is undertaken by participants such
as individuals and institutions.
Stock market: The market in which shares of publicly
held companies are issued and traded either through
exchanges or over-the-counter markets.
Also known as the equity market.
The stock market makes it possible to grow small
initial sums of money into large ones without doing
business.

Capital Market
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Dedt Market : It is market where the

issuance and trading of debt securities
occurs.
The bond market primarily includes
government-issued securities and corporate
debt securities.
Most trading in the bond market occurs
over-the-counter, through organized
electronic trading networks, and is
composed of the primary market and the

Commodity market
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Commodity market is a place where trading in commodities

takes place. These are the markets where raw and primary
products are exchanged.
Commodities are split into two types: hard and soft
commodities. Hard commodities are typically natural
resources that must be mined or extracted (gold, rubber,
oil, etc.), whereas soft commodities are agricultural
products or livestock (corn, wheat, coffee, sugar, soybeans,
pork, etc.)
The two most important commodity exchanges in India are
l Multi-Commodity Exchange of India Limited (MCX),
l National Multi-Commodity & Derivatives Exchange of
India Limited (NCDEX)

Foreign exchange(FOREX)
Market
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The market in which participants are able to buy, sell,

exchange and speculate on currencies.
Foreign exchange is the mechanism by which the currency
of one country gets converted into the currency of another
country.
The forex markets is made up of banks, commercial
companies, central banks, investment management firms,
hedge funds, and retail forex brokers and investors.
The currency market is considered to be the largest
financial market in the world, processing trillions of dollars
worth of transactions each day.

Thank you

Presented by:
Prof lokesh K N