Finance

1. 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.

2. Types of Finance • Public Finance. • Corporate Finance. • Personal Finance.

3. Public finance • Collection of taxes from those who benefit from the provision of public goods by the government, and the use of those taxfunds toward production and distribution of the public goods.

4. Corporate Finance • Any financial or monetary activity that deals with a company and its money.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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 .

10. 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 .

11. 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.

12. 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.

13. 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.

14. 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.

15. Sources of company financing There are two main sources of company financing : 1- Owner Capital 2- Borrowed Capital is Interest Based

16. 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.

17. 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.

18. 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.

19. 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

20. 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.

21. 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.

22. Financial Management Financial Management means planning, organizing and controlling the financial activities such as procurement and utilization of funds of the enterprise (business).

23. 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.

24. 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.

25. 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.

26. 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.

27. 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.

28. 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.

29. 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.

30. 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.