FINANCE
Finance is the study of how investors allocate their assets over time under
conditions of certainty and uncertainty. Finance measures the risks vs. profits
and gives an sign of whether the investment is good or not.
TYPES OF FINANCE
Public Finance.
 Corporate Finance.
 Personal Finance.

PUBLIC FINANCE
 Collection
of taxes from those who
benefit from the provision of public
goods by the government, and the use
of those tax funds toward production
and distribution of the public goods.
CORPORATE FINANCE

Any financial or monetary activity that deals
with a company and its money.
PERSONAL FINANCE
 Personal
finance refers to the financial
decisions which an individual or a family unit
is required to make to obtain, budget, save,
and spend monetary resources over time,
taking into account various financial risks and
future life events. When planning personal
finances the individual would consider the
suitability to their needs of a range.
FINANCIAL NEEDS OF BUSINESS
1-Purchases of Fixed Assets
Finance is required for meeting the cost of fixed assets such as land
, Building , Machinery and other necessaries for establishing a new
business.
2-Purchases of Current Assets
A firm needs capital to meet its running or
operating expenses such as Cash , Stock of goods.
3-Preliminary Expenses
Every business needs capital for meeting the preliminary expenses
and assembly of business concern such as legal fees, filing fees,
registration and publication of documents etc.
4- Financing Cost
The Financing Cost (FC), also known as the Cost of Finances
(COF), is the cost and interest and other charges involved in the
borrowing of money to build or purchase assets.
FINANCIAL NEEDS OF BUSINESS
5- Cost of Establishing the business
A firm also needs capital to meet the losses which
are incurred in developing the business to self
sustained stage.
6- Cost of Intangible Assets
Capital is required for spending on purchasing
patent rights and goodwill etc.
7- Selling on Credit
Goods are mostly sold on credit in the market.
Since the expenditure in producing the goods is
usually on cash basis ; whereas the sale is mostly
credit, therefore, the funds are required to cover
the time period.
WORKING CAPITAL
Working capital is the amount of funds
invested in the current assets of a business.
(Short Term Capital) It is required to purchase
raw material, payment of wages, electricity
and gas bills, stocks of goods, paying short
term loans, taxes, advertising bills etc.
TYPES OF WORKING CAPITAL
1- Revolving Capital :
Business needs cash to pay
for wages, raw material , rents etc. When the
goods produced by a concern are sold in the
market for cash, the cash received is then
again used to meet the current expenses of
the business.
In this manner the circle is formed . The capital
revolves constantly from cash to current assets
and then to cash and so on. As the capital is
repeatedly invested, recovered and reinvested
in a going business .
TYPES OF WORKING CAPITAL
2- Permanent working Capital:
There is constant
need of minimum amount of cash for a running
business. This minimum amount which is
permanently required to be kept at hand to
manage the business in normal times is called
permanent Working Capital .
FACTORS AFFECTING WORKING CAPITAL
1- Nature of the Business :
A Trading Concern business require large amount
of working capital for investment in stocks,
receivables and cash etc. It require less investment
in fixed assets.
A Business where the proportion of cost of raw
material to be consumed to total cost of
production is high, the amount of working capital
required is large. (Ship Building)
2- Size of the Business :
The Amount of working capital needed depends
upon the scale of operation of the business. The
larger the size of the business unit, generally the
larger is the requirement of working capital and
vice verse.
FACTORS AFFECTING WORKING CAPITAL
3- Length of Period of Manufacture:
If the Goods are fixed up for a long period of time
in the production process such as ship building ,
Heavy weapons, aeroplanes etc., It requires a large
amount of working capital to meet the
manufacturing expenses until the payment is
received for the finished products.
4- Methods of Purchase and sales of Commodities:
If a business is able to purchase the raw material
and other related products on credit and is able to
sell the manufactured goods on cash, it will need
less amount of working capital . In case, the raw
material is purchased on cash and goods are sold
on credit, the amount of required working capital
would be large.
FACTORS AFFECTING WORKING CAPITAL
5- Converting Working assets into cash:
If the assets of a business have liquidity i.e. they are
readily saleable for cash, then less amount will be
set aside for working capital. In case the assets are
not quickly saleable for cash, then a greater
amount of working capital will be required by it.
6- Seasonal Variation in Business :
There are certain industries which purchase raw
material in the production season such as cotton ,
Sugar cane and consume the material in the off
session for the manufacturing of products . These
Industries require large amount of working capital
to purchase the raw material in the production
season and pay the wage costs in the off season.
FACTORS AFFECTING WORKING CAPITAL
7- Price Level Changes:
If the prices are rising very rapidly in the country the
business will require greater amount of working capital to
maintain the same current assets and vise versa.
8- State of Business Activity:
When the business is wealthy, it needs more working
capital for increasing the volume of business.
9- Business Policy:
If a business sets aside funds at the end of each year for
the capital expenditure, payment of loans it requires less
amount of working capital . On the other hand a
business which does not build its own internal resources,
need large amount of working capital to meet the day
to day expenses of the business and other unexpected
expenses.
SOURCES OF COMPANY FINANCING
There are two main sources of company
financing :
1- Owner Capital
2- Borrowed Capital is Interest Based
SOURCES OF COMPANY FINANCING
1- Owner Capital :
Owner Capital consists of the amount
contributed by owners as well as the profits
invested In the business. Owner take their right
of control over management . A company can
raise owned capital in the following ways.
(i) Issue of Equity Shares:
A company can raise owned capital by
issue of Equity Shares. It is a good source of
long term finance for a company . They are
only paid back when the company is winded
up. The Equity Shares do not create any
charge on the assets of a company.
SOURCES OF COMPANY FINANCING
(ii) Retain Earning :
A good running company retains some of the
profits in the business at the end of the year.
These are not distributed to the shareholders.
The portion of the profits retained every year
accumulates in the form of reserve. These
receipts are utilized for meeting working capital
requirement and for expansion of business.
SOURCES OF COMPANY FINANCING
2- Borrowed Capital is Interest Based:
Borrowed fund consists of the amount raise by
way of loan or credit . The borrowed fund is
taking from the following sources.
(i) Debentures :
It is an instrument of credit . It is issued by
the company under its common seal.
Debentures carries a contract for payment of
fixed rate of interest and repayment of the
principal after a certain number of years. Its
Use for financing fixed investment specially for
modernization and expansion of the industrial
units.
SOURCES OF COMPANY FINANCING
(ii) Bank Loans :
The banks used to give short term loans .
Banks have extended their loan operations into
medium and long term finance. There are
generally Five types of credit available to
business from banks .
a- OVER DRAFT
b- CASH CREDIT
c- ADVANCE AGAINST BILLS
d- SHORT TERM LOAN AGAINST SECURITY
e- LONG PERIOD MORTAGAGE LOANS
SOURCES OF COMPANY FINANCING
(iii) Loan from Specialized Financial Institutions:
Financial Institute provide medium and long
term finance to business. The Loans are
provided both in the local and foreign
currency for setting up new industries,
modernization and replacement of existing
units etc.
DIFFERENCE BETWEEN ECONOMICS AND FINANCE
Though, economics and finance are closely interrelated, they have
some unique features that differentiate one from the other.
1- Finance is fund management, whereas economics is a
social science.
2- Economic deals with optimization (To Increase) of the limited
resources, while finance focuses more on wealth maximization for
the stake holders.
3- Finance can be seen as a sub set of economics.
4- Mastering the principles of economics will create economist
whereas mastering the principal of finance will create finance
analyst.
6- Economic is more theoretical subject whereas finance
management is more on numbers.
FINANCIAL MANAGEMENT
Financial Management means planning,
organizing and controlling the financial
activities such as procurement and utilization of
funds of the enterprise (business).
SCOPE/ELEMENTS OF THE FINANCIAL MGT
Investment decisions includes investment in
fixed assets (called as capital budgeting).
Investment in current assets are also a part of
investment decisions called as working capital
decisions.
 Financial decisions - They relate to the raising
of finance from various resources which will
depend upon decision on type of source,
period of financing, cost of financing and the
returns thereby.

SCOPE/ELEMENTS OF THE FINANCIAL MGT
Dividend decision - The finance manager has
to take decision with regards to the net profit
distribution. Net profits are generally divided
into two:


Dividend for shareholders- Dividend and the
rate of it has to be decided.
Retained profits- Amount of retained profits
has to be finalized which will depend upon
expansion and diversification plans of the
enterprise.
OBJECTIVES OF FINANCIAL MANAGEMENT
The financial management is generally
concerned with procurement, allocation and
control of financial resources .
The objectives can be:
 To ensure regular and adequate supply of
funds to the concern.
 To ensure adequate returns to the shareholders
which will depend upon the earning capacity,
market price of the share, expectations of the
shareholders.
 To ensure optimum funds utilization. Once the
funds are procured, they should be utilized in
maximum possible way at least cost.

OBJECTIVES OF FINANCIAL MANAGEMENT
To ensure safety on investment, i.e, funds
should be invested in safe ventures so that
adequate rate of return can be achieved.
 To plan a sound capital structure-There should
be sound and fair composition of capital so
that a balance is maintained between debt
and equity capital.

FUNCTIONS OF FINANCIAL MANAGEMENT


Estimation of capital requirements: A finance
manager has to make estimation with regards to
capital requirements of the company. This will
depend upon expected costs and profits and
future programmes and policies of a concern.
Estimations have to be made in an adequate
manner which increases earning capacity of
enterprise.
Determination of capital composition: Once the
estimation have been made, the capital structure
have to be decided. This involves short- term and
long- term debt equity analysis. This will depend
upon the proportion of equity capital a company is
possessing and additional funds which have to be
raised from outside parties.
FUNCTIONS OF FINANCIAL MANAGEMENT

Choice of sources of funds: For additional funds
to be procured, a company has many choices
like Issue of shares and debentures
 Loans to be taken from banks and financial
institutions
Choice of factor will depend on relative merits
and demerits of each source and period of
financing.
FUNCTIONS OF FINANCIAL MANAGEMENT


Investment of funds: The finance manager has to
decide to allocate funds into profitable ventures so
that there is safety on investment and regular
returns is possible.
Disposal of surplus: The net profits decision have to
be made by the finance manager. This can be
done in two ways:
 Dividend declaration - It includes identifying the
rate of dividends and other benefits like bonus.
 Retained profits - The volume has to be decided
which will depend upon expansion, innovational,
diversification plans of the company.
FUNCTIONS OF FINANCIAL MANAGEMENT
Management of cash: Finance manager has
to make decisions with regards to cash
management. Cash is required for many
purposes like payment of wages and salaries,
payment of electricity and water bills, payment
to creditors, meeting current liabilities,
maintainance of enough stock, purchase of
raw materials, etc.