Financial Management
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Transcript of Financial Management
FINANCIAL MANAGEMENT
AN OVERVIEW
GOALS OF THE FIRM
• Maximizing the owners’ wealth
• Maximizing shareholders’ wealth
• Maximizing the price per share
• Market price of a share serves as a barometer for business performance
• It indicates how well management is doing on behalf of its’ shareholders
DEFINITION
• Financial Management is broadly concerned with the acquisition(investment), financing and management of assets by a business firm
OBJECTIVES OF FINANCIAL MANAGEMENT
Maximize owners' wealth
Market value of equity
SCOPE
• How large should the firm be?• How fast should the firm grow?• What should be the composition of the
firms’ assets?• What should be the mix of the firms’
financing?• How should the firm analyse, plan and
control its financial affairs?
Financial Analysis, Planning and Control
Balance Sheet
Long Term Financing
Short Term Financing
Fixed Assets
CurrentAssets
Managementof the Firm’s Asset Structure
Managementof the Firm’sFinancial Structure
KEY ACTIVITIES OF FINANCIAL MANAGEMENT
Capital Budgeting Decisions
Capital Structure Decisions
Dividend Decisions
Working Capital Decisions
Return
Risk
Market Value ofthe Firm
RISK RETURN TRADE OFF
FINANCE AND ECONOMICS• Macro Economics
– Necessary for understanding the environment in which the firm operates
• Micro Economics– Helpful in sharpening the tools of decision
making
•Growth rate of economy, tax environment, availability of funds, rate of inflation, terms on which the firm can raise finances
•Principle of marginal analysis is applicable to decision making
FINANCE AND ACCOUNTING
• Score Keeping vs. Value Maximising
• Accrual Method vs. Cash Flow Method
• Certainty vs. Uncertainty
BUSINESS
Sole proprietorship
Decision-making is simple
Can be set up easily & inexpensively
The owner receives all income from business.
Income is taxed at only one level (that of the owner).
Subject to few regulations
Unlimited liability.
Limited life of the proprietorship
The business has limited access to additional funds.
The general partners are decision-makers.
The owners (the partners) divide income according to partnership agreement.
Income is taxed once.
Set up with ease
Few government regulations
Unlimited liability for each partner.
A limited life of partnership.
Limited access to additional funds.
Distinct legal entity
Limited liability
The business enterprise has a life in perpetuity
Access to additional funds through the sale of new share of stock.
Income is distributed according to proportionate ownership.
The separation of ownership and decision-making.
Double taxation on income
Partnership Corporation
Corporation
Private Company Public Company
Minimum 2 personsMaximum Shareholders 50Public subscription not allowedRestricted rights to transfer shares
Promoters enjoy unchallengedcontrol over the firm
Firms ability to raise capital is limited
Minimum 7 personsMaximum Shareholders –unlimitedPublic subscription allowedFree transfer of shares
Firm can raise substantial funds
Cumbersome procedure forFormation
• Public Company is the most appropriate form of organisation as– Limited liability– Enormous growth potential– Free and easy transferability of shares
REGULATORY FRAMEWORK
• Industrial Policy of 1991
• Companies Act 1956
• Securities and Exchange Board of India Guidelines 1992
TAXES
Direct Taxes
Impact and incidence of the tax is on the
same person
Income Tax Wealth Tax
Gift Tax
Indirect Taxes
Impact and incidence of the tax is on
different persons
Excise DutySales Tax
Customs duty
Financial Institutions
Commercial BanksInsurance Companies
Mutual FundsProvident Funds
Non Banking FinancialInstitutions
Suppliers of Funds
IndividualsBusinesses
Governments
Financial Markets
Money MarketCapital Market
Demanders of Funds
IndividualsBusinesses
Governments
THE FINANCIAL SYSTEM
Transferring CapitalTransferring Capital
• Direct Transfer of Funds
saver
Transferring CapitalTransferring Capital
• Direct Transfer of Funds
saverfirm
CashCash
Transferring CapitalTransferring Capital
• Direct Transfer of Funds
saverfirm
CashCash
SecuritiesSecurities
Transferring CapitalTransferring Capital
• Direct Transfer of Funds
saverfirm
Financial Institutions
Commercial BanksInsurance Companies
Mutual FundsProvident Funds
Non Banking FinancialInstitutions
Suppliers of Funds
IndividualsBusinesses
Governments
Financial Markets
Money MarketCapital Market
Demanders of Funds
IndividualsBusinesses
Governments
THE FINANCIAL SYSTEM
Private Placement
Funds
Securities
Transferring CapitalTransferring Capital• Indirect Transfer using a Financial Intermediary
saver
Rs.
Transferring CapitalTransferring Capital• Indirect Transfer using a Financial Intermediary
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saver
FundsFunds
Transferring CapitalTransferring Capital• Indirect Transfer using a Financial Intermediary
financialintermediary
saver
FundsFunds
Transferring CapitalTransferring Capital• Indirect Transfer using a Financial Intermediary
financialintermediary firm
saver
FundsFunds
Transferring CapitalTransferring Capital• Indirect Transfer using a Financial Intermediary
FundsFunds
financialintermediary firm
saver
FundsFunds
Transferring CapitalTransferring Capital• Indirect Transfer using a Financial Intermediary
FundsFunds
financialintermediary firm
saver
FirmFirmSecuritiesSecurities
FundsFunds
Transferring CapitalTransferring Capital• Indirect Transfer using a Financial Intermediary
IntermediaryIntermediarySecuritiesSecurities
FundsFunds
FirmFirmSecuritiesSecurities
financialintermediary firm
saver
Financial Institutions
Commercial BanksInsurance Companies
Mutual FundsProvident Funds
Non Banking FinancialInstitutions
Suppliers of Funds
IndividualsBusinesses
Governments
Financial Markets
Money MarketCapital Market
Demanders of Funds
IndividualsBusinesses
Governments
Funds
Deposits/shares
Funds
Loans
THE FINANCIAL SYSTEM
Private Placement
Funds
Securities
Transferring CapitalTransferring Capital
• Indirect Transfer using Investment Banker
saver
Transferring CapitalTransferring Capital
• Indirect Transfer using Investment Banker
saver
investmentbanker
FundsFunds
Transferring CapitalTransferring Capital
• Indirect Transfer using Investment Banker
saver
investmentbanker
FundsFunds
Transferring CapitalTransferring Capital
• Indirect Transfer using Investment Banker
saver
investmentbanker firm
FundsFunds
Transferring CapitalTransferring Capital
• Indirect Transfer using Investment Banker
FundsFunds
saver
investmentbanker firm
FundsFunds
Transferring CapitalTransferring Capital
• Indirect Transfer using Investment Banker
FundsFunds
SecuritiesSecurities
saver
investmentbanker firm
FundsFunds
Transferring CapitalTransferring Capital
• Indirect Transfer using Investment Banker
SecuritiesSecurities
FundsFunds
SecuritiesSecurities
saver
investmentbanker firm
Financial Institutions
Commercial BanksInsurance Companies
Mutual FundsProvident Funds
Non Banking FinancialInstitutions
Suppliers of Funds
IndividualsBusinesses
Governments
Financial Markets
Money MarketCapital Market
Demanders of Funds
IndividualsBusinesses
Governments
Private Placement
Funds
Deposits/shares
Funds
Securities
Funds
Loans
Securities
Funds
Securities
THE FINANCIAL SYSTEM
Funds
Financial Institutions
Commercial BanksInsurance Companies
Mutual FundsProvident Funds
Non Banking FinancialInstitutions
Suppliers of Funds
IndividualsBusinesses
Governments
Financial Markets
Money MarketCapital Market
Demanders of Funds
IndividualsBusinesses
Governments
Private Placement
Funds
Deposits/shares
Funds
Securities
Funds
Loans
Funds
Securities
Funds Securities
Funds
Securities
THE FINANCIAL SYSTEM
INTEREST RATES
• Regulated
• Rates on deposits with commercial banks are subject to ceiling
• Rates chargeable by commercial banks and financial institutions are subject to floors
• Rates payable on small savings are fixed by the government
Growth Trends in the Indian Financial System
• Impressive growth post 1950 era• Emergence of wide array of Financial
Institutions• Introduction of a variety of financial
schemes and instruments to mobilise savings
• Remarkable growth in money markets• Deregulation in recent years