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Introduction to Financial Management

Learn about the concept of business finance and its importance in enterprises. Explore various sources of finance and objectives of financial management.

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Introduction to Financial Management

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  1. Financial management UNIT I INTRODUCTION By: Prof. Bhavini Patel

  2. Concept of business finance • finance is defined as the provision of money at the time when it is required. Every enterprise, whether big, medium of small, needs finance to carry on its operations and to achieve its targets. In fact, finance is so indispensable today that it is rightly said to be the lifeblood of an enterprise. Without adequate finance, no enterprise can possibly accomplish its objectives. • The subject of finance has been traditionally classified into two classes: (i) Public Finance; and (ii) Private Finance. Public finance deals with the requirements, receipts and disbursements of funds in the government institutions like states, local self-governments and central government. Private finance is concerned with requirements, receipts and disbursements of funds in case of an individual, a profit seeking business organisation and a non-profit organisation. Thus, private finance can be classified into: (i) Personal finance; (ii) Business finance; and (iii) Finance of non-profit organisations

  3. CONCEPT OF BUSINESS FINANCE The term 'business finance' connotes finance of business activities It is composed of two words (i) business, and (ii) finance Thus, it is essential to understand the meaning of the two words, business and finance, which is the starting point to develop the whole concept and meaning of the term business finance! " • The word 'business' literally means a 'state of being busy'. All creative human activities relating to the production and distribution of goods and services for satisfying human wants are known as business. It also includes all those activities which indirectly help in production and exchange of goods, such as transport, insurance, banking and warehousing, etc. Broadly speaking, the term 'business' includes industry, trade and commerce. • Finance may be defined as the provision of money at the time when it is required. Finance refers to the management of flows of money through an organisation. It concerns with .the application of skills in the manipulation, use and control of money.

  4. SCOPE • 1. Estimating Financial Requirements • 2. Deciding Capital Structure • 3. Selecting a Source of Finance. • 4. Selecting a Pattern of Investment • 5. Proper Cash Management • 6. Implementing Financial Controls • . Proper Use of Surpluses.

  5. OBJECTIVES OF FINANCIAL MANAGEMENT • Financial management is concerned with procurement and use of funds. Its main is to use business funds in such a way that the firm's value / earnings are maximised. There are various alternatives available for using business funds. Each alternative course has to be evaluated in detail. The pros and cons various decisions have to look into before making a final selection. The decisions will have to take into consideration the commercial strategy of the business. Financial management provides a framework tor selecting a proper course of action and deciding a viable commercial strategy. The main objective of a business is to maximse the owner s economic welfare. This objective can be achieved by: • 1. Profit Maximization, and • 2. Wealth Maximization

  6. Sources of finance LONG TERM: SHORT TERM: shares bank finance debentures Commercial paper term loans trade credit lease & hire purchasebill discounting retained earnings public deposits bonds

  7. Bank finance • Sources of bank finance: • Secured term loan • Bank loans • Cash credit • Bank overdraft

  8. Utility of bank finance: • charge of interest • Amount of borrowing • Renewal option • Economical • Repayment • Flexible

  9. Commercial paper Features: • Negotiable instrument • Unsecured nature • Fluctuating rates • For business purposes Utility: • For short term • Large amount of funds • Merchant bank/dealers/banks • Fixed maturity

  10. Trade credit Features: • Extension by the supplier • Informal source • Easy availability • Flexibility Utility: • Satisfies short term needs • High rate of interest • Credit worthiness

  11. Bills discounting Features: • Negotiable instrument • Quick money • Maturity period • Source for short term needs Utility: • Depends on the credit worthiness • No extra security • Discounts by bank

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