Introduction to Financial

Management
Introduction to Financial Management
• Business concern needs finance to meet their requirements in the
economic world
Any kind of business activity depends on the finance. Hence, it is
called as lifeblood of business organization. Whether the business
concerns are big or small, they need finance to fulfill their business
activities

• Meaning of Finance
Finance may be defined as the art and science of managing money. It
includes financial service and financial instruments. Finance also is
referred as the provision of money at the time when it is needed.
Finance function is the procurement of funds and their effective
utilization in business concerns
 Definition of Financial Management
• Financial management is an integral part of overall management. It is
concerned with the duties of the financial managers in the business
firm.
• The term financial management has been defined by Solomon, “It is
concerned with the efficient use of an important economic resource
namely, capital funds”
• The most popular and acceptable definition of financial management
as given by S.C. Kuchal is that “Financial Management deals with
procurement of funds and their effective utilization in the business”
• Thus, Financial Management is mainly concerned with the effective
funds management in the business.
• In simple words, Financial Management as practiced by business
firms can be called as Corporation Finance or Business Finance
 Scope of Financial Management
• Investment Decisions:
Includes investment in fixed assets (called as capital budgeting).
Investment in current assets is also a part of investment decision
called as capital decisions
• Financial Decisions:
They relate to the raising of finance from various resources which
will depend upon the type of sources, the period of financing, the
cost of financing and the return thereby
Dividend Decision:
The finance manager has to take the decision with regard to the net
profit distribution. Net Profit is generally divided into two:
The dividend for Shareholders- Dividend and the rate of it had to be
decided
Retained Profit- Amount of retained profit has to be finalized which
will depend upon expansion and diversification plan of the
enterprise.
 Objectives of Financial Management
• Profit Maximization:
Main aim of any kind of economic activity is earning profit. A
business concern is also functioning mainly for the purpose of
earning profit. Profit is the measuring techniques to understand the
business efficiency of the concern. Profit maximization is also the
traditional and narrow approach, which aims at, maximizes the profit
of the concern
• Wealth Maximization:
Wealth maximization is one of the modern approaches, which
involves latest innovations and improvements in the field of the
business concern. The term wealth means shareholder wealth or the
wealth of the persons those who are involved in the business
concern. Wealth maximization is also known as value maximization
or net present worth maximization. This objective is an universally
accepted concept in the field of business.
Profit Vs Wealth Maximization
 Principal Agent Relationship
• The principal-agent relationship is an arrangement in which one
entity legally appoints another to act on its behalf
• In a principal-agent relationship, the agent acts on behalf of the
principal and should not have a conflict of interest in carrying out the
act
• An agency relationship occurs when a principal hires an agent to
perform some duty. A conflict, known as an agency problem arises
when there is a conflict of interest between the needs of the
principal and the needs of the agent
Separation of Ownership and Management
• Managers and stockholders is an agency relationship, involving,
separation of ownership and management and placing the
management of the firm under the responsibility of professionals
who are not its owners.
• Owners of a company may include shareholders, directors,
government entities, other corporations and the initial founders.
• This separation allows skilled managers to conduct the complicated
business of running a large company
• Creating a management team separate from the ownership enables
the company to be run by professionals with diverse skills such as in
marketing, corporate financing and public relations
• Managers may make decisions that conflict with the best interests
of the shareholders. For example, managers may grow their firms to
escape a takeover attempt to increase their own job security.
However, a takeover may be in the shareholders' best interest
 Types of Financial Markets
• A financial market is a broad term describing any marketplace where
buyers and sellers participate in the trade of assets such as equities,
bonds, currencies and derivatives
• Financial markets are typically defined by having transparent pricing,
basic regulations on trading, costs and fees, and market forces
determining the prices of securities that trade
• Financial markets can be found in nearly every nation in the world.
Some are very small, with only a few participants, while others - like
the New York Stock Exchange (NYSE) trade huge amount of dollars
daily
 Types of Financial Markets
• Capital Markets:
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 Markets:
Stock markets allow investors to buy and sell shares in publicly traded
companies
 Bond Markets:
A bond is a debt investment in which an investor loans money to an
entity (corporate or governmental), which borrows the funds for a
defined period of time at a fixed interest rate
Bonds can be bought and sold by investors on credit markets around
the world. This market is alternatively referred to as the debt, credit
or fixed-income market
• Money Market:
The money market is a segment of the financial market in which financial
instruments with high liquidity and very short maturities are traded. The
money market is used by participants as a means for borrowing and
lending in the short term, from several days to just under a year. Money
market securities consist of U.S. Treasury bills, municipal notes, etc
 Types of Financial Markets
• Cash or Spot Market:
The spot market or cash market is a public financial market in
which financial instruments or commodities are traded
for immediate delivery
• Derivatives Market:
The derivative is named so for a reason: its value is derived from its
underlying asset or assets. A derivative is a contract, but in this case
the contract price is determined by the market price of the core
asset. Examples of common derivatives include forwards, futures,
options
Forex and Interbank Market:
The forex market is where currencies are traded. The interbank
market is the financial system and trading of currencies among banks
and financial institutions, excluding retail investors and smaller
trading parties
 Types of Financial Markets
• Primary Market:
A primary market issues new securities on an exchange. Primary
markets, also known as "new issue markets," are facilitated by
underwriting groups, which consist of investment banks that will set
a beginning price range for a given security and then oversee its sale
directly to investors
• Secondary Market:
The secondary market is where investors purchase securities or
assets from other investors, rather than from issuing companies
themselves. The secondary market is where the bulk of exchange
trading occurs each day
• The OTC Market:
It is a decentralized market where the participants trade with one
another directly, without the oversight of an exchange
A decentralized market where market participants trade with one
another through various communication modes such as the
telephone, email, and proprietary electronic trading systems
 Financial Intermediary
• A financial intermediary is an entity that acts as the middleman
between two parties in a financial transaction, such as a commercial
bank, investment banks, mutual funds and pension funds.
• Financial intermediaries offer a number of benefits to the average
consumer, including safety, liquidity
• Through a financial intermediary, savers can pool their funds,
enabling them to make large investments, which in turn benefits the
entity in which they are investing
• They reduce the costs of the many financial transactions an
individual investor would otherwise have to make if the financial
intermediary did not exist