Financial Financial managementmanagement

Definitions:Definitions: Financing of industry and trade Financing of industry and trade refers to the operations involved in refers to the operations involved in providing capital or funds to these providing capital or funds to these business organizations. The word business organizations. The word “Finance” refers to those activities “Finance” refers to those activities involved in seeing that an involved in seeing that an individual or organization has the individual or organization has the cash with which to pay its bill cash with which to pay its bill promptly.promptly.

Definition:Definition: The “Encyclopedia Britannica” defines it by The “Encyclopedia Britannica” defines it by saying that “Finance is that area or set of saying that “Finance is that area or set of administrative functions in an organization administrative functions in an organization which have to do with the management of which have to do with the management of the flow of cash so that the organization will the flow of cash so that the organization will have the means to carry out its business have the means to carry out its business objectives as satisfactory as possible and at objectives as satisfactory as possible and at the same time meet its obligations as they the same time meet its obligations as they come due”.come due”.

Definition:Definition: Business finance is also defined by Business finance is also defined by Wheeler as “the acquisition and Wheeler as “the acquisition and conservation of the capital funds in conservation of the capital funds in meeting the financial needs and meeting the financial needs and overall objectives of business overall objectives of business enterprise”. In simple words, the enterprise”. In simple words, the refers to the prevision of funds refers to the prevision of funds needed by an enterprise for its needed by an enterprise for its smooth running.smooth running.

Why Business Needs Why Business Needs Finances?Finances?

BusinessBusiness requires capital for two purposes requires capital for two purposes firstly for initial expenditure on buildings, lands, firstly for initial expenditure on buildings, lands, and machinery and other equipments. For and machinery and other equipments. For meeting these initial expenditures “Fixed meeting these initial expenditures “Fixed capital” in required. Secondly “Floating” or capital” in required. Secondly “Floating” or “Circulating” capital is required for carrying on “Circulating” capital is required for carrying on the current transactions use in the process of the current transactions use in the process of production. production.

It is apparent that the finance must be It is apparent that the finance must be provided both for starting the provided both for starting the

business and also for running the business and also for running the same. Without adequate finance no same. Without adequate finance no

trade or industry can successfully and trade or industry can successfully and smoothly run according to the smoothly run according to the

required standard and objectives.required standard and objectives.

Importance of Importance of Finance:Finance:

Finance is the soul of business Finance is the soul of business enterprises because on in depends enterprises because on in depends the success of any business the success of any business organization. organization.

Many firms fail simply because of Many firms fail simply because of inadequacy of finance. The real work inadequacy of finance. The real work

in promoting an organization is in promoting an organization is therefore, the determination and therefore, the determination and

provision of adequate finance. In fact, provision of adequate finance. In fact, finance is very important branch of the finance is very important branch of the

distributive side of economic distributive side of economic activities. The need for finance arises activities. The need for finance arises from the fact that a considerable time from the fact that a considerable time passes before the value of a good is passes before the value of a good is realized by the manufacturer, who realized by the manufacturer, who must carry on production work with must carry on production work with

borrowed money.borrowed money.

The importance of finance is changing with The importance of finance is changing with the change in time and process of the change in time and process of production. When methods of production production. When methods of production were simple and easy in nature, finance was were simple and easy in nature, finance was not so important, because the goods were not so important, because the goods were produced in a simple form with some simple produced in a simple form with some simple tools and machinery. In simple words, the tools and machinery. In simple words, the production was “Labor intensive”production was “Labor intensive”

with the introduction of science and with the introduction of science and technology and invention of new methods of technology and invention of new methods of production and also other related changes in production and also other related changes in the world economy, the importance of finance the world economy, the importance of finance

was very much realized in every field of was very much realized in every field of production. At present, adequate provision of production. At present, adequate provision of

finance is the basic requirement for the finance is the basic requirement for the development of any sector of an economy. development of any sector of an economy. Now the production is generally carried on Now the production is generally carried on large scale basis where bulk of capital or large scale basis where bulk of capital or

finance is required. Moreover, science and finance is required. Moreover, science and technology has their own affects in the technology has their own affects in the

modern production.modern production.

These days finance has become one of These days finance has become one of the most important administrative the most important administrative functions in the business. It has been functions in the business. It has been given the same importance as given to given the same importance as given to production and market or any other production and market or any other function. It has been fully observed that function. It has been fully observed that beginning of every undertaking is beginning of every undertaking is finance. The problems of finance have finance. The problems of finance have become important with its important become important with its important administrative aspects.administrative aspects.

Money Market and Capital Money Market and Capital Market:Market:

It is already given that a business It is already given that a business enterprise needs “fixed Capital” for enterprise needs “fixed Capital” for meeting its initial expenditures or for meeting its initial expenditures or for the establishment of industry or the establishment of industry or financing its fixed assets like land, financing its fixed assets like land, buildings, machinery and acquirements. buildings, machinery and acquirements. Whereas “circulating or floating Whereas “circulating or floating capital” is required for running the capital” is required for running the business or carrying production or for business or carrying production or for meeting the contingent expenses.meeting the contingent expenses.

There are different agencies which There are different agencies which supply different kinds of capital to any supply different kinds of capital to any business organization. These agencies business organization. These agencies are known as “Money market” and are known as “Money market” and “Capital Market”, whether, it is the “Capital Market”, whether, it is the money market or capital market, money market or capital market, money is being bought and sold for money is being bought and sold for varying periods of time. Money is here varying periods of time. Money is here for hire.for hire.

In money market, the period of hire is In money market, the period of hire is one year or less. On the other hand, in one year or less. On the other hand, in capital market the period is more than capital market the period is more than one year. Money market provides one year. Money market provides capital to any business organization for capital to any business organization for the period of one or less than one year the period of one or less than one year for the requirements of running the for the requirements of running the business. Capital market, supplies business. Capital market, supplies funds for financing fixed assets like funds for financing fixed assets like land, building etc. for a longer period land, building etc. for a longer period of time. Both the money market and of time. Both the money market and the capital market may be jointly the capital market may be jointly referred to as “financial market”.referred to as “financial market”.

Since present time production is a Since present time production is a capital intensive, all the financial capital intensive, all the financial market of a country influence the market of a country influence the nature scope and rate of industrial and nature scope and rate of industrial and economic development of the country. economic development of the country. A full range of borrowing and lending A full range of borrowing and lending markets is needed for the most markets is needed for the most complete economic potential of a complete economic potential of a country to be realized a well organized country to be realized a well organized financial market plays an important financial market plays an important role in overall economic development role in overall economic development of a country.of a country.

CATEGORIES OF FINANCECATEGORIES OF FINANCE The general subject of finance is The general subject of finance is

usually divided into categories usually divided into categories according to the type of according to the type of organization it serves. In its organization it serves. In its major classification, it can be major classification, it can be divided into the following divided into the following categories.categories.

Public FinancePublic Finance Private FinancePrivate Finance

Public finance is concerned with the income Public finance is concerned with the income and expenditure of public authorities such as and expenditure of public authorities such as state, nation and municipal committee etc. It state, nation and municipal committee etc. It is that branch of economic which deals with is that branch of economic which deals with the financial problems of state. the financial problems of state.

Private finance is generally further divided Private finance is generally further divided into the following kinds.into the following kinds.

1.1. Personal Finance Personal Finance 2.2. Business Finance Business Finance 3.3. Finance of Non-Profit OrganizationFinance of Non-Profit Organization

Personal Finance is concerned with Personal Finance is concerned with the principles of managing one’s the principles of managing one’s own day to day financial activities. own day to day financial activities. For example, the money which is For example, the money which is lying in the pocket of a person or lying in the pocket of a person or which has been deposited into his which has been deposited into his personal account of bank, is his personal account of bank, is his personal finance.personal finance.

Business finance is mainly Business finance is mainly concerned with the financial concerned with the financial

management of private profit management of private profit seeking organization in the fields seeking organization in the fields of services, trade, commerce and of services, trade, commerce and other manufacturing concerns.other manufacturing concerns.

The finance of non-profit The finance of non-profit organization covers the financial organization covers the financial

management of private management of private organization the like education, organization the like education,

charity and religion.charity and religion.

finance can also be finance can also be classified according to the classified according to the period of time as under.period of time as under.

Short term finance usually supplied for Short term finance usually supplied for one year or less than one year.one year or less than one year.Medium term finance, which is issued Medium term finance, which is issued generally for five to seven years.generally for five to seven years.Long term finance, normally it is issued Long term finance, normally it is issued for a period of more than ten years.for a period of more than ten years.

FUNCTIONS OF FUNCTIONS OF FINANCEFINANCE

Importance of finance is already Importance of finance is already given in the previous part of this given in the previous part of this topic. It is due to its functions which topic. It is due to its functions which it performs in the promotion of it performs in the promotion of trade, commerce and industries. The trade, commerce and industries. The following are the chief functions and following are the chief functions and activities which may be taken into activities which may be taken into consideration for the successful consideration for the successful administration of the finance of any administration of the finance of any organization.organization.

Financial PlanningFinancial PlanningFinancing Financing Financial ControlFinancial Control

Financial Planning: Financial Planning:

Financial planning is the act of Financial planning is the act of deciding in advance the financial deciding in advance the financial activities which are the necessary activities which are the necessary if the business is to achieve its if the business is to achieve its primary goal. It is commonly said primary goal. It is commonly said as Budgeting which refers to the as Budgeting which refers to the estimate of future possible estimate of future possible income.income.

Financing: Financing: Financing means raising the funds in Financing means raising the funds in according with the financial plans. It according with the financial plans. It includes the raising of funds, which includes the raising of funds, which cannot be obtained by the daily cannot be obtained by the daily receipts of the business and for this receipts of the business and for this purpose, some other channels must be purpose, some other channels must be searched out to meet these searched out to meet these requirements, Financial management requirements, Financial management deals with those channels and deals with those channels and instruments by which a needy business instruments by which a needy business may obtain the capital. For the success may obtain the capital. For the success of any business and completion of of any business and completion of production process, adequate supply of production process, adequate supply of capital is very much essential; capital is very much essential; otherwise it will not be easy to have the otherwise it will not be easy to have the desired objectives.desired objectives.

Financial Control:Financial Control: This term refers to the checking of the financial This term refers to the checking of the financial activities of the business. Financial control activities of the business. Financial control enables the management to see that the enables the management to see that the disbursement is within the income and capacity disbursement is within the income and capacity and not beyond the financial plan. Financial and not beyond the financial plan. Financial control is of great importance because human control is of great importance because human nature is such which always drive away from the nature is such which always drive away from the original plan. But such small changes can surely original plan. But such small changes can surely cause a great defect on overall purpose of the cause a great defect on overall purpose of the plan. Moreover, business conditions are not plan. Moreover, business conditions are not static, they change off and on, therefore, a static, they change off and on, therefore, a vigilant control must be exercised on the vigilant control must be exercised on the financial activities of a business organization so financial activities of a business organization so that the financial plan can easily be adjusted to that the financial plan can easily be adjusted to prevailing conditions of the business community.prevailing conditions of the business community.

Review of statementsReview of statementsCash flowCash flow Income statementIncome statementFinancial statementFinancial statement

Who will be the finance Who will be the finance controllercontroller

Finance controllerFinance controllerBoard of directorsBoard of directorsChief executive officerChief executive officerChief finance officerChief finance officerTreasurer Treasurer controllercontrollerCash and investmentCash and investment AccountsAccountsCapital budgeting Capital budgeting AuditAuditCapital structure Capital structure inventoryinventory

Business legal entitiesBusiness legal entitiesProprietorship (80% worldwide)Proprietorship (80% worldwide)PartnershipPartnershipCorporationCorporationHybrids (mixed)Hybrids (mixed)

ProprietorshipProprietorshipOne person is the ownerOne person is the ownerEasy to set upEasy to set upProfit goes to one personProfit goes to one personMaximum profitMaximum profitDisadvantagesDisadvantagesLiability is unlimitedLiability is unlimitedLimited lifeLimited lifeLimited capitalLimited capitalSingle taxSingle tax

PartnershipPartnership

Multiple partnersMultiple partnersSet upSet upCapitalCapitalProfitProfitLimited lifeLimited lifeDouble taxDouble taxDesolation Desolation

CorporationCorporationLimited companyLimited companyUnlimited companyUnlimited company

Internal business Internal business environmentenvironment

marketingmarketingH.RH.R I.TI.TFinanceFinanceLogisticLogisticOperationOperation

External business External business environmentenvironment

CompetitorsCompetitorsMarketMarketCustomerCustomerSuppliersSuppliersGovernmentGovernmentTechnologyTechnology