Finance is management of money including activates such as
investing, borrowing, lending, saving, budgeting and forecasting.
The finance field includes three main subcategories: personal
finance, corporate finance, and public (government) finance.
Finance versus Economics and Accounting Finance as we
know it today grew out of economics and accounting.
Economists developed the notion that an asset’s value is based
on the future cash flows the asset will provide, and accountants
provided information regarding the likely size of those cash
flows. Finance then grew out of and lies between economics and
accounting, so people who work in finance need knowledge of
those two fields.
is concerned with the acquisition, ﬁnancing, and management of
assets with some overall goal in mind. Thus the decision function
of ﬁnancial management can be broken down into three major
areas: the investment, ﬁnancing, and asset management decisions.
Financial management focus on decision on how and what type
of assets acquire, how to raise capital needed to buy assets and
how to maximize the value of firm.
Capital market is a place where buyers and sellers indulge in
trade (buying/selling) of financial securities like bonds, stocks,
etc. The trading is undertaken by participants such as individuals
and institutions. Capital market trades mostly in long-term
The investment decision is the most important of the ﬁrm’s three
major decisions when it comes to value creation. It begins with a
determination of the total amount of assets needed to be held by
Investments relate to decisions concerning stocks and bonds and
include a number of activities: (1) Security analysis deals with
finding the proper values of individual securities (i.e., stocks and
bonds). (2) Portfolio theory deals with the best way to structure
portfolios, or ―baskets,‖ of stocks and bonds. Rational investors
want to hold diversified portfolios in order to limit risks, so
choosing a properly balanced portfolio is an important issue for
any investor. (3) Market analysis deals with the issue of whether
stock and bond markets at any given time are ―too high, ‖too
low,‖ or ―about right.”
Forms of Business organization:-
1)Sole proprietorship is an unincorporated business owned by one
individual. Going into business as a sole proprietor is easy—a
person begins business operations. Proprietorships have three
important advantages: (1) They are easily and inexpensively
formed, (2) they are subject to few government regulations, and
(3) they are subject to lower income taxes than are corporations.
However, proprietorships also have limitations: Proprietors have
unlimited personal liability for the business's debts
is a legal arrangement between two or more people who decide
do business together. Partnerships are similar to proprietorship in
that they can be established relatively easily and inexpensively.
Moreover, the firm’s income is allocated on a pro rata basis to the
partners and is taxed on an individual basis. This allows the firm
to avoid the corporate income tax. However, all of the partners
are generally subject to unlimited personal liability, which means
that if a partnership goes bankrupt and any partner is unable to
meet his or her pro rata share of the firm's liabilities
Corporation:- A legal entity created by a state, separate and
distinct from its owners and managers, having unlimited life,
easy transferability of ownership, and limited liabilities.
corporation is a business entity that is owned by its
shareholder(s), who elect a board of directors to oversee the
organization's activities. The corporation is liable for the actions
and finances of the business – the shareholders are not.
Corporate governance The system by which
corporations are managed and controlled. It encompasses
the relationships among a company’s shareholders, board
of directors, and senior management.
Three categories of individuals are, thus, key to corporate
governance success: ﬁrst, the common shareholders, who
elect the board of directors; second, the company’s board
of directors themselves; and, third, the top executive
ofﬁcers led by the chief executive ofﬁcer (CEO).
Objectives of Financial Management
Provide insights on, for example, rising costs of raw materials that might
trigger an increase in the cost of goods sold.
Tracking liquidity and cash flow
Ensure the company has enough money on hand to meet its obligations.
Keep up with state, federal and industry-specific regulations.
Developing financial scenarios
These are based on the business’ current state and forecasts that assume a
wide range of outcomes based on possible market conditions.
Dealing effectively with investors and the boards of directors.
Ultimately, it’s about applying effective management principles
to the company’s financial structure.
Scope of Financial Management
Financial management encompasses four major areas:
The financial manager projects how much money the company will
need in order to maintain positive cash flow, allocate funds to grow or
add new products or services and cope with unexpected events, and
shares that information with business colleagues.
Planning may be broken down into categories including capital
expenses, T&E and workforce and indirect and operational expenses.
The financial manager allocates the company’s available funds
to meet costs, such as mortgages or rents, salaries, raw materials,
employee T&E and other obligations. Ideally there will be some
left to put aside for emergencies and to fund new business
Companies generally have a master budget and may have
separate sub documents covering, for example, cash flow and
operations; budgets may be static or flexible.
Managing and assessing risk
Line-of-business executives look to their financial managers to
assess and provide compensating controls for a variety of risks,
Affects the business’ investments as well as, for public
companies, reporting and stock performance. May also reflect
financial risk particular to the industry, such as a pandemic
affecting restaurants or the shift of retail to a direct-to-consumer
The effects of, for example, customers not paying their invoices
on time and thus the business not having funds to meet
obligations, which may adversely affect creditworthiness and
valuation, which dictates ability to borrow at favorable rates.
Finance teams must track current cash flow, estimate future cash
needs and be prepared to free up working capital as needed.
Importance of Financial Management
Solid financial management provides the foundation for three pillars
of sound fiscal governance:
Identifying what needs to happen financially for the company to
achieve its short- and long-term goals. Leaders need insights into
current performance for scenario planning, for example.
Helping business leaders decide the best way to execute on plans by
providing up-to-date financial reports and data on relevant KPIs.
Ensuring each department is contributing to the vision and
operating within budget and in alignment with strategy. With
effective financial management all employees know where the
company is headed, and they have visibility into progress.
Three Types of Financial Management
The functions above can be grouped into three broader types of
Relates to identifying what needs to happen financially for the
company to achieve its short- and long-term goals. Where
should capital funds be expended to support growth?
Determine how to pay for operations and/or growth. If interest
rates are low, taking on debt might be the best answer. A
company might also seek funding from a private equity firm,
consider selling assets like real estate or, where applicable,
Working capital management:-
As discussed above, is making sure there’s enough cash on hand
for day-to-day operations, like paying workers and purchasing
raw materials for production.
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