Ch 1 - Introduction to Financial Management

8/14/2019 Ch 1 - Introduction to Financial Management

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SESSION-1SESSION-1 11

Chapter 1

INTRODUCTION TO FINANCIALMANAGEMENT


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Meaning and objective of financialmanagement

Functions of a finance manager

Correlation with other functional areas

Important forms of business organization

Regulatory framework affecting financial

decisions

Content


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FINANCIAL MANAGEMENT

Financial Management means efficient use of economicresources namely capital funds.

Financial Management is concerned with the managerialdecisions that result in the acquisition and financingof short term and long term credits for the firm.

In short, Financial Management deals with Procurement

of funds and their effective utilization in the businessto achieve business objectives.

Financial Management is that managerial activity whichis concerned with the planning and controlling of the

firms financial resources.


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OBJECTIVEOF FINANCIAL MANAGEMENT

Objective :

To ensure that the various financial decisions are

taken in such a way that they result in themaximization of shareholders wealth.

The three major financing decisions are:

(a) Investment Decision(b) Financing Decision

(c) Dividend Decision


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FUNCTIONS OF A FINANCE MANAGER

* To explore profitable avenues for investment.

* Mobilization of funds

* To ensure proper deployment of funds and control

over the use of funds

* To achieve the right balance between risk and return.

* To decide the optimal dividend payout ratio * To ensure that the liquidity of assets is maintained.


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CORRELATION OF FINANCE FUNCTION WITH

OTHER FUNCTIONAL AREAS

* Marketing-Finance Interface

* Production-Finance Interface * HR-Finance Interface

* Linkage With The Functions Of The Top Management


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FORMS OF BUSINESS ORGANIZATIONS

SoleProprietorship

Partnerships Companies


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Sole Proprietorship

* A business owned by a single person.

- * The owner realizes all profits and bears all the losses.

- * No distinction between business and personal income and allbusiness is taxed as personal income.

- * Simplest form of business, subject to minimal regulation.

Disadvantages: * The owner has unlimited personal liabilities.

* These firms cannot raise external capital which results inlack of growth.


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Partnerships

*A business owned by two or more persons.

* The partners bear the risks and reap the rewards of the

business.*A partnership comes into existence with the execution of

a partnership deed

* They are governed by the Indian Partnership Act, 1932.


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Disadvantages:

Personal liabilities of the partners are unlimited.

Ability to raise external funds is limited

The life of the firm depends on the agreement

between the partners.

Partnerships


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Companies

* A group of persons working together towards a common objectiveis a company. It represents different kinds of associations, be it

business or non-business.

*A company is collectively owned by the shareholders, who assignthe task of management to their elected representatives called thedirectors.

* It is a distinct legal person separate from its owners

(i.e shareholders).

* It can own assets, incur liabilities, enter into contracts, sue and canbe sued in its name.

* The liability of a company is limited to the share capital subscribedto by them.

*A company can be either a private company or a public limited

company.


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DISTINCTION BETWEEN A PRIVATE

COMPANY AND A PUBLIC COMPANY

Feature Private Company Public Company

Minimum number of membersMaximum number ofmembers

Minimum number ofDirectorsSubscription of shares

Transfer of shares

2

50

2

A Private limited companycannot invite members ofthe public to subscribe to its

shares.

A Private limited companyusually imposes restrictionson transfers of shares.

7

No restriction

3

A Public limited companycan invite members of thepublic to subscribe to its

shares.

A Public limited companypermits free transfer of itsshares.


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Feature Private Company Public Company

Appointment ofSmall ShareholderDirector

Not Applicable Applicable if the Co.s paidup capital is Rs. 5 crore ormore and having atleast

one thousand smallshareholder

Quorum for GM 2 personallypresent

5 members personallypresent

Passing ofresolutions by postalballot

Not applicable Applicable to only listedpublic company

Statutory Meeting Not Applicable Shall hold within a period ofone month nor more then 6months from the date at

which the company isentitled to commencebusiness

Audit Committee Not Applicable Applicable to every publiccompany whose paid upcapital is not less than five


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REGULATORY FRAMEWORK

Industrial Policy Resolution, 1956

Industrial Licensing Provisions and Procedures

Regulation of Foreign Collaborations and Investments

Foreign Exchange Management Act

Monopolies and Restrictive Trade Practices Act

Companies Act, 1956


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Industrial Policy

Industrial Policy of a nation is the true determinant of foreigninvestment as well as domestic investment.

Objectives of the Industrial Policy:

Maintaining a sustained growth in productivity;

Enhancing gainful employment;

Achieving optimal utilization of human resources; Attaining international competitiveness and

Transforming the country into a major partner and player inthe global arena.

Policy Focus:

Deregulating Indian industry;

Allowing the industry freedom and flexibility in respondingto market forces and

Providing a policy regime that facilitates and fosters growth

of Indian industry.


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Important Policy Measures announced by the Ministry

of Finance, Department of Industrial Policy to pursue

the objectives

Liberalisation of Industrial Licensing Policy

Introduction of Industrial Entrepreneurs'

Memorandum(IEM)

Liberalisation of the Location Policy

Policy for Small Scale

Non-Resident Indians Scheme Electronic Hardware Technology Park

(EHTP)/Software Technology Park (STP) scheme


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Summary

Meaning and objective of financial management

Functions of a finance manager

Areas of Decision Making Correlation with other functional areas

Important forms of business organization

Difference between Private and Public Companies

Regulatory framework affecting financial

decisions

Ch 1 - Introduction to Financial Management

Documents

Transcript of Ch 1 - Introduction to Financial Management