The Finance Function Notes

Finance: The term “Finance” is understood as provision of funds as and when needed. It refers to the science that describes the management, creation and study of money, banking, credit, investments, assets and liabilities.

Business finance: Business Finance refers to that business activity which is concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of business enterprises.

Financial management: According to IF. Bradley “Financial Management is the area of business management devoted to the judicious use of capital and a careful selection of sources of capital in order to enable a business firm to move in the direction of reaching its goals”.

Functions of financial mangement:

  • Estimation of financial requirements of a firm.
  • Selection of right and appropriate source of funds for raising the funds.
  • After selecting the right source, raising the funds required by the firm.
  • Lastly accumulating, proper allocation of funds to different profitable avenues becomes essential.

Objectives of financial management:
Financial management has three main objectives they are –

  • Maintaining of adequate Liquid Assets
  • Maximisation of profit
  • Maximisation of wealth.

Profit Maximisation is a primary objective and a social obligation. Profit is a tool through which efficiency of the organisation can be measured. The growth and survival of a company depends upon its ability to earn profit. The profit earned can be preserved for meeting future deficiency.

Wealth maximisation: Wealth Maxmisation refers to creation of wealth of the concern. In other words, it refers to the increase in the market value of shares.

Goals of financial management:

  • Profit maximisation
  • Wealth maximisation
  • Maximising firm value
  • Acquiring sufficient fund.

Economic environment for business: Economic Environment refers to all those economic factors, which have a bearing on the functioning of a business. Business depends on the economic environment for all the needed inputs. It also depends on the economic environment to sell the finished goods.

Financial Markets: Financial markets represent an important segment of the financial system. It refers to an outlet where financial products, financial services and financial securities are traded.

Financial markets can be classified:

  • Money market and capital market
  • Primary market and secondary market
  • Organised and unorganised market
  • Foreign exchange market
  • Broad, deep and shallow market.

Secondary market: Secondary market is, a market for all those securities and stock which are already issued to the public. It deals with sale/purchase of already issued equity/debts by corporates and others. It is also known as stock market.

Intermediaries of secondary markets:

  • Market Intermediaries Registration and Supervision Department (MIRSD).
  • Market Regulation Department (MRD).

Capital market: Capital market is, the market for long term finance. Capital market is the medium that channelises the small savings of the community and makes it available for industrial outlets.

Money Market: Money market basically deals with short term financial assets, which are close substitute of money.

Financial Dualism: The financial system of most developing countries are ‘characterised by coexistence and cooperation between the formal ’ and informal financial sectors. The coexistence of these two sectors is known as ‘financial dualism’.

Financial institutions: Financial institutions render financial services of dealing in financial assets i.e. mobilise the savings against financial claims. Financial Institutions range from pawn shops and money lenders to banks, pension funds, insurance companies, brokerage houses, investment trusts and stock exchanges.

Financial instruments: Financial instruments range from the common – coins, currency notes and cheques; mortgages, corporate bills, and stocks – to the more exotic – futures and swaps of high finance.

Aims of finance functions:

  • Acquiring Sufficient and Suitable Funds.
  • Proper Utilization of Funds
  • Increasing Profitability.
  • Maximizing Firm’s Value.

Different goals of financial management:
(a) Specific Goals:

  • Profit Maximisation
  • Wealth Maximisation

(b) Other Goals:

  • Maintaining balanced asset structure
  • Ensuring efficiency in business operations
  • Ensuring financial discipline
  • Planning judicious utilisation of funds
  • Maintaining liquidity of funds.

Decisions of financial management:

  • Investment decisions.
  • Financing Decisions.
  • Dividend Decision.

Role of financial markets:

  • Growth in Income
  • Productive Usage.
  • Capital Formation
  • Price Discovery
  • Sale Mechanism
  • Information Availability.

Features of primary market:

  • New long term capital.
  • Issued by the company directly.
  • Issue new security certificates.
  • Setting up new business.
  • Facilitating capital formation.
  • Converting private capital into public capital.

Functions of primary market:

  • Facilitate capital growth.
  • Issue new stocks.
  • Raise funds from the public.
  • Issuance of new securities by corporations.
  • Methods of issuing securities.

Functions of Capital Market:

  • Allocation functions
  • Liquidity functions
  • Indicative function
  • Savings and investment functions
  • Transfer function
  • Merger function.

Features of money market:

  • Short term financing
  • No fixed place
  • Liquidity adjustment
  • Existence of sub-markets
  • Prevalence of healthy competition
  • Highly developed industrial system
  • International attraction
  • Uniformity of interest rate
  • Highly organised banking system.

Scope of financial management:

  • Financial Estimation.
  • Planning of the capital structure.
  • Selecting right source of funds.
  • Investment of funds.
  • Analysing the financial performance.
  • Planning of profit.
  • Ensuring liquidity.

Objectives of financial management:
1. Specific Objectives:

  • Profit Maximisation.
  • Wealth Maximisation.

2. General Objectives:

  • Balanced asset structure
  • Liquidity
  • Proper planning of funds
  • Efficiency
  • Financial discipline.

Factors constitute economic environment of business:

  • Economic system
  • Economic planning
  • Industry
  • Agriculture
  • Infrastructure
  • Financial & fiscal sectors
  • Removal of regional imbalances.
  • Price and distribution controls.
  • Economic reforms
  • Human resource
  • Per capital income and national income.

Types of financial markets:

  • Money market and capital market.
  • Primary market and secondary market.
  • Organised and Unorganised market.
  • Foreign Exchange market.
  • Broad, deep and shallow market.

Different instruments ‘traded in money market:

  • Treasury bills
  • Commercial bills
  • Certificates of deposits
  • Inter-bank participation certificates
  • Commercial papers
  • Money at call or call money