INTRODUCTION TO

THE WORLD OF
FINANCE

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MEANING
Men, Money, Machines, Materials, Methods, Minutes
and Management, are the 7 Ms of management,

Moneyis one of the important vitamins required for

running any organization, it is just like blood, without
which there is no human being, similarly without
finance there is no organization.

Put it simply, a currency as long as you have it with

you is money only and when you lend it to others to
buy or invest in investment avenues it becomes
finance.
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DEFINITION
Financial management mainly involves raising funds
and their effective utilization with the objective of
maximizing shareholders wealth.

Financial management concerned with maximizing

shareholders value primarily through sound
investment and financing decisions, efficient working
capital management, judicious risk management and
well designed performance management system.

Financial management concerned with the

acquisition, financing and management of assets with
some overall goal in mind. 3
EVOLUTION OF FINANCIAL
MANAGEMENT

The Traditional Phase

The Transitional Phase

The Modern Phase

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 Financial Management is concerned with three activities:
(i) Anticipating financial needs, which means estimation of
funds required for investment in fixed and current assets
or long-term and short-term assets.

(ii) Acquiring financial resourcesonce the required

amount of capital is anticipated the next task is acquiring
financial resources i.e., where and how to obtain the funds
to finance the anticipated financial needs and

(iii) Allocating funds in business means allocation of

available funds among the best plans of assets, which are
able to maximize shareholders wealth.

Thus, the decisions of financial management can be divided

into three viz., investment, financing and dividend
decisions. 5
FINANCIAL DECISIONS
As mentioned in the contents of modern approach the
discussions of financial management can be broken
down into three major decisions

(1) Investment decision

(2) Financing decision
(3) Dividend decision

A firm takes these decisions simultaneously and

continuously in the normal course of business.

Firm may not take these decisions in a sequence, but

decisions have to be taken with the objective of
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maximizing shareholders wealth.
FUNCTIONS OF FINANCE MANAGER
Finance manager performs the following major
functions:

1. Anticipation of Funds Needed

2. Acquire the Anticipated Funds

3. Allocation or Utilization of Funds

4. Increase Profitability

5. Maximizing Firms Value

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FORMS OF BUSINESS OWNERSHIP
1. Sole Proprietorship
2. Partnership
Limited Liability Partnership
3. Co-operative Society
4. The Company Form of Business Ownership

5. Government Company

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GOALS OF FINANCIAL MANAGEMENT
Profit maximization
Shareholders Wealth Maximization

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AGENCY PROBLEM
In company (public ltd) form of business organization,
shareholders (equity) are the owners of the company. They
may be in crores and they spread out through the country,
(or some cases through the world). Due to this they cannot
control or manage the company. They elect board of
directors (BoDs) as their representative or agent and
assign the responsibility to the management.
Once BoDs are elected the actual power of shareholders is
restricted, except in certain companies where the
shareholders are also the directors. If they want to know
the future prospects of their company they can collect from
the annual report, accounts, stock brokers, journals, and
daily newspapers. In this circumstances will the (BoDs)
management act in the interest of the shareholders or they
may try to achieve their personal goals at the cost of the
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shareholders.
HOW TO OVERCOME AGENCY
PROBLEM
Connecting pay to the profit earned
Rewarding managers with shares

Direct intervention by owners

Threat of firing

Threat of takeover

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INTRODUCTION TO FINANCIAL
SYSTEM

The term financial system is a set of inter-related

activities/services working together to achieve some
predetermined purpose or goal.

Financial System is a complex and well integrated

set of sub-systems of financial institution, financial
markets, financial instrument, & financial services
which facilitates the transfer and allocation of funds
effectively and efficiently.

The financial system is the process by which money

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flows from savers to users.
FUNCTION OF FINANCIAL
SYSTEM
Mobilizing & allocating saving
Monitor corporate performance

It provides payment & settlement system

It provide investor education.

It provide low cost of transactions.

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STRUCTURE OF FINANCIAL SYSTEM

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FINANCIAL INSTITUTIONS
Financial institutions are the business
organization that mobilize saving & depositories
of savings.

Banking Institutions which include central bank,

commercial banks & co-operative banks.

Non-Banking Institution which include

development financial institution such as
development banks, investment institution like
LIC,GIC,UTI & NBFIs .etc.
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FINANCIAL MARKETS
Financial Markets are mechanism enabling
participants to deal in financial claims.

This market also provides a facility in which their

demands and requirements interact to set a price for
such claims.

In other words it is a place that allow people to easily

buy & sell financial securities.

Financial markets is a two types:

Money Market
Capital Market 16