INTRODUCTION TO FINANCIAL MANAGEMENT

INTRODUCTION TO FINANCIAL MANAGEMENT


Contents

#Concept of finance & financing
#Sources of financing
                   i) Internal sources
                  ii) External sources
#Concept of financial management
                  i)  Short term financing
                  ii) Long term financing
#Functions of financial manager
                   i) Financial planning
                  ii) Raising the fund
                 iii) Investing the fund
                 iv) Financial controlling
                  v) Protection against the outsider Fund
                  vi) Distribution of income
#Decision taken by a financial manager
i) Investment decision
ii) Financing decision
iii) Dividend decision
#Goal of financial management
i) Profit maximization
ii) Shareholders wealth maximization

#Concept of finance & financing

  • What is Finance?

    * Finance refers to collecting & utilizing the fund, In other words, collecting the fund from different sources & utilizing the fund for collecting the assets needed by a firm.
In Broad sense, Collecting the fund from different sources & investing the funds for purchasing the fixed assets needed to setup business & current assets needed to run the business.

  • What is Financing?

The process of collecting and utilizing the fund is called financing.

  •  Discuss different Sources of financing

There are two sources of financing


 i) Internal sources
 ii) External sources

1) Internal sources: Collecting the fund through retained earnings and all kind of reserves and surplus.

2) External sources: Collecting the fund through common stock, preferred stock, bond, debenture &  collecting the loan from financial institution based on maturity period.

  • Describe Concepts of financial management

Financial Management: The process of financial planning, collecting & investing the fund, financial controlling, ensuring protection against outsiders fund & distributing income in order to  maximize the shareholders wealth.

There are two types of sources of financing-

i) Short-term financing:  The process of collecting the fund from the sources, the duration of which sources is less than or equal to 1 year in order to finance the current assets. Like- A/C payable,bills payable, sundry creditors, bank overdraft, cash credit, LC, discounting bills, advanced income, accrual expenses,

2) Long term financing:  The process of collecting long term fund from the sources, the duration of which sources is more than or equal 5 years in order to finance the fixed assets. 2 source of long term financing - owner's equity, long term liabilities & hybrid securities.

  • Illustrate Functions of financial manager

    A financial manager performs 6 functions.
    1) Financial planning: the process of forecasting the financial resources & financial activities of an organization to set up & run a business.
    financial planning includes the following tusk
    > Purposes of fund
    > Assets needed to fulfill the purpose
    > Amount of each type of assets
    > Sources of collecting the fund
    > Investing the fund
    > Distribution of income
     financial planning should be appropriate otherwise the firm has to face 2 types of problem that are shortage of fund & wastage of fund.
     2)  Raising the fund: after financial planning the financial manager has to collect the fund from the identifies sources.
    the financial manager has to consider 3 things for selecting the sources that are -
    i) Nature of the assets
    ii) cost of the sources
    iii) risk related to the sources
    3. Investing the fund: After collecting the fund the financial manager has to invest the fund for financing the assets or occupying the project. there are two basis for investing the fund that are i) Risk; &
    ii) Return
        > If the financial manager is aggressive then he/she will prefer risky project or asset to get the maximum profit.
        > If the financial manager is conservative then he/she will prefer risk free project or asset to get least amount of profit.
        > If the financial manager is moderate then he/she will prefer less risky project or asset to get the minimum amount of profit.
    4. Financial controlling: The financial has to compare actual financial activities or financial performance with financial planning in order to rectify the unexpected deviation.
    5. Protection against outsider fund: the financial manager has to protect the outsider fund through avoiding the embezzlement & disappropriation of fund.
    6. Distribution of income: The financial manager has to distribute the profit as dividend or retained earnings.

    Decision taken by a financial manager

    1. Investment decision: Decision related to assets that means decision taken for types of assets, volume of assets & utilization of assets.
    There are 2 types of investment decisions
    i) Capital budgeting
    ii) Working capital decision
    There are 2 basis for investment decision that is i)Risk & ii)Return
    2. Financing Decision: Decision related to selecting sources of fund and collecting the fund from selected sources.
    There are 2 types of financing decisions
    i) Capital structure decision ii) Current liabilities management. in this case three things must be considered that is i)Nature of assets ii) Cost related to the sources iii) Risk related to the sources.
    3.Dividend Decision: Decision related to distribution of income
    dividend decision can be divided into 2 i) Dividend payout decision ii) Retention decision.
    When does a firm take decision to give dividend?
    i) The financial manager takes dividend payout decision when there is no future financial requirement or for attracting new investors to invest the money. 
    ii) The financial manager takes retention decision when there is future financial requirement or ensuring financial solvency.
    OR improving liquidity position
    OR improving credit ratings
    OR for overcoming the future loss

    Goal of financial management  

    There are two goals of financial management
    i) Profit maximization
    ii) Shareholders wealth maximization  


Finally, we hope that this article helped you to know about introduction to financial management. you may find helpful our other articles.

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