What is Finance

Finance is the language of Business & Risk is the grammar of finance

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Finance means what finance does? What finance does means procurement of fund & its proper utilization.

It is a circulatory system of an economic body

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Financial Management
It is a specialized functional field dealing with the management of finance right from estimation & procurement till its effective utilization in the business.

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OBJECTIVE
v

Profit maximization. Wealth maximization

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Profit Maximization
Profit can be used in two ways: As an owners oriented concept: The amount paid to the owners of business.
v

A vibrant of the term is profitability: It is a situation where output exceed input.

v

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Short comings
It ignore the time value of money & does not consider the magnitude & timing of earning.
v

It does not take into consideration the risk of the prospective earning stream.
v

The effect of dividend policy on the market price of shares is also not considered in the objective of profit maximization.
v

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Wealth or Value maximization

It means the maximization of the net present value of a course of action. v The net present value of a course of action is the difference between present value of its benefits(i.e, stream of future expected cash flows) & thus of its cost. v This approach assumes that the objective of financial management is to maximize the value of the firm. And the reasons in favour of wealth maximizations are: Measuring the benefit in terms of cash flows avoids ambiguity associated with accounting profit. It considers both the quality & quantity dimensions of benefit and at the same time it incorporates the concept of time value of money.
v

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Short coming
It is a prescriptive idea. The objective is not descriptive of the firms actually do.
v

The objective of wealth maximization is not necessarily socially desirable.

v

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Finance Function:

Financial planning. Managing assets. Raising Funds.

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ORGANIZATION CHART OF FINANCE FUNCTION

Board of Directors PRESIDENT

VP Manufacturin g Treasurer

VP Finance

VP Marketing

Controller

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TREASURE

Credit management. Cash management. Banking relations. Portfolio management

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CONTROLLER
Corporate, General & Cost accounting.

Taxation. Internal audit. Budgeting

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Financial Market:

To facilitate the transfer of funds from surplus sector (lenders) to deficit sector ( borrowers). Price discovery process which results from the interaction of buyers & sellers in the market when they trade assets. Provision of liquidity by providing a mechanism for an investor to sell financial assets.
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Financial Manager Decision:

Investment. Financing. Dividend. Working capital .

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Investment Decision:

Selection of project. Measurement of Risk. Determination of cost of capital. Measurement of W.C. Decision on lease & hire purchase. Decision on M/A.
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Financing Decision:

Finding of the sources of fund. Optimizing capital structure. Dividend decisions.

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Dividend decision
The activities of financing & investment are to be followed up optimal dividend payments & returns to the investors.

A firm that does not pay optimal dividends will be put to difficulties in raising capital & such firm will also be limiting its investment opportunities if the resources are not for the coming.

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Working capital decision

Are concerned with the management of current assets.

The two key decision points in working capital management are:

Level of investment in current assets Financing of current assets.

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Financial Tools
Type of Decision Financing Decision: To maximize wealth of shareholders Investment Decision: To maximize return on investment made Performance Evaluation Decision: Tool/Method Financial Leverage/Trading on equity, Cost of capital Capital budgeting: pay back, average rate of return, NPV, IRR, profitability index etc. Budgetary control, Ratio analysis, cash flow & funds flow etc.

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Financial System
Seekers of Funds ( Mainly Business firm & Govt.) Flow of Funds Suppliers of Funds ( Mainly Households)

Flow of Financial Services, income & financial claims.

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Function of Financial System:

Saving function. Liquidity function. Payment Function. Risk function. Policy function.

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