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Finance Function
Nikunj PatelAssistant Professor
Institute of Management,
Nirma University,
Ahmedabad
Career Opportunities in Finance
• Financial Analyst – prepares and analyze firm’s financial plans and
budgets; other duties include financial forecasting, financial ratio
analysis.
• Capital budgeting analyst/manager – evaluation/recommendation of
proposed asset investments, implementation of approved projects.
• Project finance manager –arranges financing for approved asset
investments; coordinates with investment bankers and legal counsel.
• Cash manager - maintain and control firm’s daily cash balances;
manages cash collection, short-term investment/borrowing,
disbursement activities and banking relationships.
• Credit analyst/manager – administers firm’s credit policy by
analysing/managing the evaluation of credit applications, extending
credit, monitoring/collecting A/R’s.
What Is Finance?
Finance is the study of how and under what
terms savings (money) are allocated between
lenders and borrowers.
Finance is distinct from economics in that it
addresses not only how resources are
allocated but also under what terms and
through what channels
Financial contracts or securities occur whenever
funds are transferred from issuer to buyer.
CONCEPT OF FINANCIAL MANAGEMENT
• Financial management deals with the study of procuring
funds and its effective and judicious utilisation, in terms of
the overall objectives of the firm, and expectations of the
providers of funds.
• The purpose is to achieve maximisation of share value to
the owners i.e. equity shareholders.
• “Financial Management is concerned with the efficient use
of an important economic resource, namely, Capital Funds”
—Solomon
• “Financial Management deals with procurement of funds
and their effective utilisation in the business” —S.C.
Kuchhal
SCOPE OF FINANCIAL MANAGEMENT
Broadly, it has two approaches:
• Traditional Approach-Procurement of Funds
• Modern Approach-Effective Utilisation of Funds
Traditional financial management:
(i) Estimation of requirements of finance,
(ii) Arrangement of funds from financial
institutions,
(iii) Arrangement of funds through financial
instruments such as shares, debentures, bonds
and loans, and
(iv) Looking after the accounting and legal
work connected with the raising of funds.
Limitations
• No Involvement in Application
of Funds
• No Involvement in day to day
Management
• Not Associated in Decision-
Making Allocation of Funds
SCOPE OF FINANCIAL MANAGEMENT
Broadly, it has two approaches:
• Traditional Approach-Procurement of Funds
• Modern Approach-Effective Utilisation of Funds
Modern financial management:
The emphasis of Financial
Management has been shifted from
raising of funds to the effective and
judicious utilisation of funds. The
modern approach is analytical way of
looking into the financial problems of
the firm.
AIMS OF FINANCE FUNCTION
• Acquiring Sufficient and
Suitable Funds
• Proper Utilisation of
Funds
• Increasing Profitability
• Maximising Firm’s Value
FUNCTIONS OF FINANCE
• Understanding the universe and importance of finance,
finance manager is associated, in modern business, in all
activities as no activity can exist without funds
(A) Investment Decision or Long-term Asset mix decision
(B) Finance Decision or Capital mix decision
(C) Working Capital or Liquidity Decision or Short-term asset
mix decision
(D) Dividend Decision or Profit allocation decision
FUNCTIONS OF FINANCE
• Capital budgeting– What long-term investments or projects should
the business take on?
• Capital structure– How should we pay for our assets?
– Should we use debt or equity?
• Working capital management– How do we manage the day-to-day finances of
the firm?
• Dividend Decision– How much should be distributed as dividends?
DECISIONS, RETURN, RISK, AND MARKET VALUE
Capital Budgeting
Decisions
Capital Structure
Decisions
Dividend
Decisions
Working Capital
Decisions
Return
Risk
Market Value of
the Firm
Financial Manager
• Financial managers try to answer some, or all, of
these questions
• The top financial manager within a firm is usually
the Chief Financial Officer (CFO)• Treasurer – oversees cash management, credit
management, capital expenditures, and financial
planning
• Controller – oversees taxes, cost accounting, financial
accounting, and data processing
Corporate Organization Chart
Function of Financial Manager
Operations
(plant,
equipment,
projects)
Financial
ManagerFinancial
Markets
(investors)
1a.Raising
funds2.Investments
3.Cash from
operational
activities
4.Reinvesting
1b.Obligations
(stocks, debt
securities)
5.Dividends or
interest
payments
Finance function – managing the cash flow
Sole Proprietorship
• Advantages
• Easiest to start
• Least regulated
• Single owner keeps all of
the profits
• Disadvantages
• Limited to life of owner
• Equity capital limited to
owner’s personal wealth
• Unlimited liability
Business owned by one person
Partnership
• Advantages
• Two or more owners
• More capital available
• Relatively easy to start
• Disadvantages
• Unlimited liability
• Partnership dissolves
when one partner dies or
wishes to sell
• Difficult to transfer
ownership
Business owned by two or more persons
Company
• Advantages
• Limited liability
• Unlimited life
• Separation of ownership
and management
• Transfer of ownership is
easy
• Easier to raise capital
• Disadvantages
• Separation of ownership and
management (agency
problem)
• Double taxation (income
taxed at the corporate rate
and then dividends taxed at
personal rate, while
dividends paid are not tax
deductible)
A legal “person” distinct from owners