Ch 1 - Introduction To Financial Management

Chapter 1 INTRODUCTION TO FINANCIAL MANAGEMENT

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Content Meaning and objective of financial management  Functions of a finance manager  Correlation with other functional areas  Important forms of business organization  Regulatory framework affecting financial decisions 

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FINANCIAL MANAGEMENT

Financial Management means efficient use of economic resources namely capital funds. Financial Management is concerned with the managerial decisions that result in the acquisition and financing of short term and long term credits for the firm. In short, Financial Management deals with Procurement of funds and their effective utilization in the business to achieve business objectives. Financial Management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources. SESSION-1 3

OBJECTIVE OF FINANCIAL MANAGEMENT

Objective :  To ensure that the various financial decisions are taken in such a way that they result in the maximization of shareholders’ wealth.  The three major financing decisions are: (a) Investment Decision (b) Financing Decision (c) Dividend Decision SESSION-1

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FUNCTIONS OF A FINANCE MANAGER

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* 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

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* 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

Sole Proprietorship

Partnerships

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Companies

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Sole Proprietorship

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* 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 all business 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 in lack of growth. SESSION-1

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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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Partnerships 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. SESSION-1

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Companies A group of persons working together towards a common objective is a company. It represents different kinds of associations, be it business or non-business. *A company is collectively owned by the shareholders, who assign the task of management to their elected representatives called the directors. * It is a distinct legal “person” separate from its owners (i.e shareholders). * It can own assets, incur liabilities, enter into contracts, sue and can be sued in its name. * The liability of a company is limited to the share capital subscribed to by them. *A company can be either a private company or a public limited company. SESSION-1 11

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Chemical Allied Products Export Promotion

DISTINCTION BETWEEN A PRIVATE COMPANY AND A PUBLIC COMPANY

Feature

Private Company

Public Company

Minimum number of members2 7 Maximum number of members 50 No restriction Minimum number of Directors 2 3 Subscription of shares A Private limited company A Public limited company cannot invite members of can invite members of the the public to subscribe to its public to subscribe to its shares. shares. Transfer of shares A Private limited company A Public limited company usually imposes restrictions permits free transfer of its on transfers of shares. shares.

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Feature

Private Company

Public Company

Appointment of Small Shareholder Director

Not Applicable

Applicable if the Co.’s paid up capital is Rs. 5 crore or more and having atleast one thousand small shareholder

Quorum for GM

2 personally present

5 members personally present

Passing of Not applicable resolutions by postal ballot

Applicable to only listed public company

Statutory Meeting

Not Applicable

Shall hold within a period of one month nor more then 6 months from the date at which the company is entitled to commence business

Audit Committee

Not Applicable

Applicable to every public company whose paid up capital is not less than five

REGULATORY FRAMEWORK

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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  

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Industrial Policy of a nation is the true determinant of foreign investment 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 in the global arena. Policy Focus:  Deregulating Indian industry;  Allowing the industry freedom and flexibility in responding to market forces and  Providing a policy regime that facilitates and fosters growth of Indian industry.

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

Summary

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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

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