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

lThe investment decision relates to the selection of

assets in which funds will be invested by a firm.
lThe assets which can be acquired fall into two broad

categories
lLong term assets (which yield return over a period
over a time in future.) –Capital Budgeting.
lShort term or current assets (convertible into cash

usually within one year.) –Working Capital

Management.
 •Capital Budgeting

lCapital 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.
lThe 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

lWCM is concerned with the management of current assets

& current liabilities.
l The key strategies and considerations in ensuring a trade-

off between profitability and liquidity is one of the major

dimensions of WCM.
lThe management of working capital has two basic
ingredients
lAn overview of working capital
management as a whole
lEfficient management of the individual
current assets & liabilities such as cash,
receivables, payables and inventory.
 The Financing Decision
While investment decision is largely concerned
with choosing an optimum mix of assets
The second decision, viz., financing decision,
relates to the financing-mix or capital structure or
leverage.
The term ‘capital structure’ is used to refer to the
proportion of debt (fixed-interest securities or
outsiders’ capital) and equity capital (variable-
dividend securities or owners’ capital).
A sound financial structure is said to be one
which aims at maximizing shareholders return with
minimum risk.
 The Dividend Decision

lThe dividend should be analyzed in relation to the

financing decision of the firm.
lTwo alternatives are available in dealing with the
profits of a firm:
lThey can be distributed to the shareholders

in the form of the dividends

lThey can be retained in the business itself.

lThe 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
lThe 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.
lThere are two widely discussed approaches
under this, these are:
Profit Maximisation
Wealth Maximisation
 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
after-tax 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
lRole of finance managers has increased tremendously
and their tasks have become complicated following
globalisation of business & increased competition
Critical responsibilities
lDesigning and fine-tuning a more responsive "Rolling
Forecast" budgeting process.
lBreeding new economy businesses from within and
releasing value through M&As, planning, negotiating and
overseeing strategic alliances.
lFocus of finance shifts increasingly to create intangible

assets rather than achieving accounting goals.

lDramatic changes in resource allocation.

lDynamically balancing investments between old and new

economy ventures essential to fuelling growth and

shareholder value.
 Changing Role of Finance Manager

Finance manager is actively involved in anticipating industry

l

trends, launching new ventures, valuing intangible assets,

and managing business options far more dynamic.

The fortification of finance is the driver of change. From

l

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
lFinancial management is an integral part of overall management
and not merely a staff function.
lFinance influence the operations of other crucial functional areas

of the firm such as production, marketing and human resources.

lMarketing-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.
 Interface of Financial Management with
other functional areas
l Production-Finance Interface
lIn any manufacturing firm, the Production Manager

controls a major part of the investment in the form of

equipment, materials and men.
lHe 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.
lProduction manager can hold the cost of the output

under control and thereby help in maximizing profits.

lSimilarly, 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
l Top Management-Finance Interface
lStrategic planning and management control are two

important functions of the top management.

lFinance function provides the basic inputs needed for

undertaking these activities.

l Human resource – Finance interface

lHuman resource planning

lCost to company calculation

 INDIAN FINANCIAL SYSTEM
lEconomic growth and development of any country depends
upon a well-knit financial system.
lFinancial system comprises a set of sub-systems of financial

institutions, financial markets, financial instruments and

services which help in the formation of capital.
lEconomic growth of the country happens by mobilizing

surplus funds and utilizing them effectively for productive

purpose.
lIt provides a mechanism by which savings are transformed

into investments
 Financial institutions
l

lFinancial 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.
lThey mobilize savings of the surplus units and allocate them in

productive activities promising a better rate of return.

lFinancial institutions also provide services to entities seeking

advises on various issues ranging from restructuring to

diversification plans.
l They provide whole range of services to the entities who want to

raise funds from the markets elsewhere.

lFinancial institutions may be of Banking or Non-Banking

institutions.
 Financial Markets
l

lFinance 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.
lIt 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
 Financial Markets
l

Classified into Money Market & Capital

l

Market
l Money Market:
lMoney Market basically deals with short term financial
assets, which are close substitute to money.
lFunctions of Money Market:
lMoney Market ensures the development of trade and

industry.
lIt helps the development of capital market.

lIt helps in smooth functioning of commercial banks.

lCapital Market:
lCapital market is the market for long term debt

instruments and equity instruments.

l Capital market consists of Primary market and
l Financial Instruments
lAnother important constituent of financial system is

financial instruments.
lThey 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.

l Financial Services:
lEfficiency of emerging financial system largely

depends upon the quality and variety of financial

services provided by financial intermediaries.
lThe 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
lIt is a Market where securities offered to the public for the first
time so also called as new issue market.
lIn other words Market which deals with rising of fresh capital by

companies through issue of securities like shares and debentures.

lIn this market, the flow of funds is from savers(households) to

borrowers (industries), hence, it helps directly in the capital

formation of the country.
lFeatures of primary market are:

lIt Is Related With New Issues

lIt Has No Particular Place
lPrimary markets are used by companies for the purpose of
setting up new ventures/ business or for expanding or
modernizing the existing business
lBasis for secondary market
lVarious Methods Of Floating Capital are:
i) Public issue, ii) Private Placement, iv) Right Issue v)
offer for sale.
 Public issue
When a company raises funds by selling (issuing) its shares
l

(or debenture / bonds) to the public through issue of offer

document (prospectus), it is called a public issue.

1)Initial Public Offer: : When a (unlisted) company

l

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

l

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 company’s 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 company’s 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
lThe private placement involves issue of securities, debt or
equity, to selected subscribers, such as banks, FIs, MFs and
high net worth individuals.
lIt is arranged through a merchant/investment banker, who

acts as an agent of the issuer and brings together the issuer

and the investor(s).
lSince these securities are allotted to a few sophisticated and

experienced investors the stringent public disclosure

regulations and registration requirements are relaxed.
lPrivate placement has following advantage

lTime effective

lCost effective

lStructure effective

lAccess effective
 Pricing of public issue
lpublic issues on the basis of pricing,can be classified into Book
Built issues and Fixed Price issues.
lBook Building issue

lThe 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.
lWithin this price band the investor can choose the price at which

the investor are willing to buy the shares and also the quantity.
lAs 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
lBids by various investors are entered into the stock exchange
system through the broker’s (also called syndicate member )
terminal.
lThe 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.
lBased on the total demand in the ‘book’, the cut off price is then

decided by the issuer and merchant banker.

lThe cut off price is the price at which the cumulative demand for

shares, equals or exceeds the offer size is estimated.

lAll 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

lIn this method the price will be fixed by the company for
its securities before issue is brought to the market.
lThe price at which the securities are offered/allotted is

known in advance to the investor.

lDemand for the securities offered is known only after

the closure of the issue.

lPayment is made at the time of subscription whereas

refund is given after allotment.

 Green Shoe option

lIt denotes ‘an option of allocating shares in excess

of the shares included in the public issue’.
lSEBI guidelines allow the issuing company to
accept over subscriptions, subject to a ceiling, say
15% of the offer made to public.
lIt is extensively used in international IPOs to
stabilized the post-listing price of new issued
shares.
 Secondary Market
lSecondary market is a market where securities which are already
issued in private or public offering are traded.
lAlternatively, secondary market can refer to the market for any

kind of used goods also referred has the aftermarket.

lIn the secondary market, securities are sold by and transferred

from one investor or speculator to another.

lIt is therefore important that the secondary market be highly liquid

and transparent.
lBefore 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

lIt Creates Liquidity

lIt Comes After Primary Market

lIt Has A Particular Place

lIt Encourage New Investments

lAids in financing the industry

lEnsures 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. 43
Different between primary market
and secondary market
primary market
Inprimary 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.
secondary market
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.
44
Types of financial Markets
 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
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 secondary market.
 Commodity market
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
Multi-Commodity Exchange of India Limited (MCX),
National Multi-Commodity & Derivatives Exchange of
India Limited (NCDEX)
 Foreign exchange(FOREX)
Market
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