MODULE – 01 FINANCIAL MANAGEMENT - Inchara Murthy Assignment ■ Prepare a report on different Financial Services offered by a bank. ■ Elucidate the different sources of financing. ■ Depict the Emerging Issues in financial management. ■ Solve case study on loan amortization. ■ Picturize the entire financial system. Topics covered ■ Introduction to financial management ■ Objectives of FM ■ Changing roles of finance managers ■ Interface of FM with other functional areas ■ Emerging issues in FM : Risk management, Behavioral finance, Financial engineering ■ Introduction to financial system : ■ Financial markets, Financial instruments ■ Financial institutions, Financial services ■ Introduction to derivatives. Introduction to Financial Management ■ Finance is concerned with the sources, allocation, application and usage of money by business entity for maximizing its returns and to meet the financial needs. ■ Finance aids in procurement of raw materials, machinery, equipment, human resources etc., ■ Finance managers are required to look at each functional area of a business activities like purchasing, production, marketing, administration, etc., also wise application of funds. Introduction to Financial Management ■ Financial Management is not just concerned about fund raising, also extends to cover utilization of funds and monitoring its uses. It also concerns on following issues: How large should be the firm and how fast should it grow? How should the firm analyze, plan and control its financial affairs? ■ FM of a firm affects its very survival as Survival of the firm depends on strategic decisions made. Scope of Financial Management FM involves: Investment decisions Decisions as to which assets the firm should acquire. Financing decisions Decisions as to how to raise the funds to pay for investment in assets Dividend decisions Decision as to take decisions regarding the net profit distribution, and how much and how frequently in what form to return cash to the owners Objectives of Financial Management ■ Financial decisions of a firm must be made with some single objective in mind. Return on investment Size of firm *Profit maximization *Wealth maximization Profit Market value Cost Risk Objectives of Financial Management Profit maximization : ■ To achieve this financial managers takes only those actions that are expected to contribute to the firm’s overall profits. ■ It makes allocation of resources to profitable and desirable areas ■ This also judges economic performance of the enterprise and insists on optimal utilization of society’s economic resources. Objectives of Financial Management Profit maximization : ■ By increasing the sales and there by increasing the revenues. ■ By reducing the cost of production through efficient use of the resources. ■ By making judicious choice of funds. ■ By minimizing risk Objectives of Financial Management Wealth maximization : ■ It’s a widely recognized criterion with which the performance of a business enterprise is evaluated. ■ Maximization of wealth of a company, over the long run. ■ Wealth refers to the net present worth of the firm. ■ It helps in taking investment decisions. Objectives of Financial Management Wealth maximization : ■ Helps in future cash flow ■ Maximize the market value of the firm’s shares. De-Merits : ■ It is subjected to the social responsibilities of the firm. ■ It is also subjected to the government restrictions. Objectives of Financial Management Other Objectives: ■ Ensuring maximum operational efficiency through planning, directing and controlling of the utilization of the funds. ■ Enforcing financial discipline in the organization in the use of financial resources. ■ Ensuring a fair return to the shareholders on their investments. Role of Financial Managers ■ Raising funds in order to meet the short and long term requirements of the business. ■ Allocation of funds wisely ■ Profit planning for profit earning ■ International financial decisions ■ Investment decisions ■ Risk management ■ Understanding capital markets. Changing role of Financial Managers ■ No longer an accountant ■ Part of the top management ■ Policy formulation and implementation ■ Should foresee the changes and is required to face it head-on proactively for the issues like policy related, technological, political, economic. ■ Upgrade accounting practices ■ Utilization of international markets in sourcing finance. ■ Updated to the contemporary issues and technologies. Interface of Financial Management with other functional areas ■ Financial management - Marketing : Pricing, product promotion, advertisement, choice of product mix, distribution policy etc. ■ Financial management – Human resource : Fixing wages, salaries, remunerations, commission, bonus, pensions, incentives, insurances etc. Interface of Financial Management with other functional areas ■ Financial management – Top management : Firm’s long-term goals, strategic planning and management control decisions. ■ Financial management – Production : Purchase of machineries, tools, raw materials, payment of wages and operating expenses calculation Interface of Financial Management with other functional areas ■ Financial management – Accounting : Record keeping , financial information analysis ■ Financial management – Economics : Varying levels of economic activity and changes in economic policies. Emerging issues in financial management Risk management ■ Identification ■ Assessment ■ Evaluation ■ Risk control ■ Prioritization of risks ■ review ■ Risks can come from uncertainty in financial markets, project failures, legal liabilities, accidents, natural disasters etc Emerging issues in financial management Risk management : 4 methods to handle risk : Avoidance Risk Retention Loss control Non-insurance transfers Behavioral finance ■ It proposes psychology based theories to explain stock market variations. ■ In this it is assumed that characteristics of market participants systematically influence individual’s investment decisions as well as market outcomes. ■ It studies how the emotion and psychology of the investor affects the investment decisions. Behavioral finance Pros : Determines goals of investors Defines investor’s biases Helps financial advisors Manages cognitive and emotional decisions. Financial engineering ■ It is the design , the development and the implementation of innovative financial instruments and processes and the formulation of creative solutions to problems in finance. ■ Primary objective of FE is to meet the needs of risk management. ■ Types : Financial system engineering Financial institution engineering Process engineering Product engineering Introduction to Financial System ■ To enable capital formation, there is a requirement of a system which will create and channelize savings, leading to capital formation. The system which does this function in the economy is called the financial system. ■ Financial system consists of a variety of institutions, markets and instruments related in a systematic manner and provides the means by which savings are transformed into investments. ■ It Is the system that allows the transfer of money between investors and borrowers. Indian Financial System Characteristics of Good financial system : Low risk Efficient Management Fair treatment Convenience Key Components of Financial System: Financial institutions Financial Markets Financial services Financial instruments Functions of Financial system ■ It links the savers and investors. ■ It helps in mobilizing and allocating the savings efficiently and effectively. ■ It plays a crucial role in economic development ■ It helps to monitor corporate performance ■ It provides a mechanism for managing uncertainty and controlling risk. ■ It helps in lowering the transaction costs and increase returns. ■ This will motivate people to save more ■ It promotes the process of capital formation. Weakness of Indian Financial System ■ Lack of Co-ordination between different Financial Institutions ■ Monopolistic Market Structures ■ Dominance of Development Banks in Industrial Financing ■ Unhealthy financial practices Financial Markets ■ It is a place where funds from surplus units are transferred to deficit units. It is a market for creation and exchange of financial assets. Components of financial market : ■ Money market: A market for dealing in monetary assets of short term nature, less than one year. It enables raising up of short term funds for meeting temporary shortage of fund and temporary deployment of excess fund. ■ Capital /securities market : A market for long term funds, focus on financing of fixed investments. Two segments : Primary market and secondary market. Financial Markets Major players in the Financial Markets : ■ Banks ■ Insurance companies ■ Finance companies ■ Merchant banks ■ Mutual funds ■ Stock brokerages ■ Government Financial Instruments ■ The commodities that are traded in financial market. ■ A Financial Instrument is a legal document identified by cheques, bonds, shares, etc., which has a monetary value. ■ The agreement is signed between two parties regarding payment of money with specified conditions. Financial Instruments Categories of Financial Instruments : ■ Equity based: characterized by ownership of assets. ■ Debt based: loans from an investor to the owner of assets. ■ Foreign exchange instruments: unique instrument dealing with international currencies Types of Financial Instruments: ■ Mutual funds ■ Bonds ■ Cash equivalents ■ Deposits Financial institutions ■ Among these organizations are banks, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises. ■ They assist their clients and investors to maximize their profits by rendering appropriate guidance. ■ Financial institutions also impart a wide range of educational programs to educate the investors on the fundamentals of investment and also regarding the valuation of stock, bonds, assets, foreign exchanges, and commodities. Financial services Services provided y the finance market. ■ Banking ■ Advisory ■ Wealth management ■ Mutual funds ■ Insurance ■ Stock market ■ Tax/audit consulting ■ Portfolio management.
