Finance = (verb) give funds to run a business, (Noun) money management/Funds

management

Finance DEF:
Finance is a field that deals with the allocation of assets and liabilities over time under
conditions of certainty and uncertainty. Finance also applies and uses the theories of
economics at some level. Finance can also be defined as the science of money
management.

Financial management
Financial management refers to the efficient and effective management of money (funds)
in such a manner as to accomplish the objectives of the organization. It is the specialized
function directly associated with the top management.

What do you mean by financial management?

Financial management refers to the efficient and effective management of
botchokoy in such a manner as to accomplish the objectives of the organization. It is
the specialized function directly associated with the top management.

What Is the Meaning of Strategic Financial Management?

Strategic financial management involves a defined sequence of steps that
encompasses the full range of a company's finances, from setting out objectives and
identifying resources, analyzing data and making financial decisions, to tracking the
variance between actual and budgeted results and identifying the reasons..

What do you mean by financial system?

On a regional scale, the financial system is the system that enables lenders and
borrowers to exchange funds. The global financial system is basically a broader
regional system that encompasses all financial institutions, borrowers and lenders
within the global economy.
Finance Vs Accounting
Finance is related/involves in decision making whereas accounting is involves in record keeping

Transaction
transfer of exchange of value,

Entity Principle
entity principle states that the recorded activities of a business entity will be kept separate
from the recorded activities of its owner(s) and any other business entities.

GAAP
The common set of accounting principles, standards and procedures that companies
use to compile their financial statements. GAAP are a combination of authoritative
standards (set by policy boards) and simply the commonly accepted ways of recording
and reporting accounting information.

Going Concern Assumption

An accounting guideline which allows the readers of financial statements to assume that the
company will continue on long enough to carry out its objectives and commitments. In other
words, the accountants believe that the company will not liquidate in the near future. This
assumption also provides some justification for accountants to follow the cost principle.

Corporate life cycle

A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type
of business entity that is owned and run by one natural person and in which there is no legal
distinction between the owner and the business.

Advantages

Disadvantages

youre the boss

you have unlimited liability for debts

as theres no legal distinction between
private and business assets

you keep all the profits

start-up costs are low

your capacity to raise capital is limited

you have maximum privacy

all the responsibility for making day-today business decisions is yours

establishing and
business is simple

retaining high-calibre employees can

be difficult

its easy to change your legal

structure later if circumstances
change

it can be hard to take holidays

youre taxed as a single person

the life of the business is limited.

you can
business.

easily

operating

wind

up

your

your

OR

Advantages
Ease of formation: Starting a sole proprietorship is much less complicated than
starting a formal corporation, and also much cheaper. Some states allow sole
proprietorships to be formed without the double taxation standards applicable to most
corporations. The proprietorship can be named after the owner, or a fictitious name
can be used to enhance the business marketing.
Tax benefits: The owner of a sole proprietorship is not required to file a separate
business tax report. Instead, they will list business information and figures within their
individual tax return. This can save additional costs on accounting and tax filing. The
business will be taxed at the rates applied to personal income, not corporate tax rates.
Employment: Sole proprietorships can hire employees. This can lead to many of the
benefits associated with job creation, such as tax breaks. Also, spouses of the business
owner can be employed without having to be formally declared as an employee.
Married couples can also start a sole proprietorship, though liability can only assumed
by one individual.
Decision making: Control over all business decisions remains in the hands of the
owner. The owner can also fully transfer the sole proprietorship at any time as they
deem necessary

Disadvantages
Liability: The business owner will be held directly responsible for any losses, debts,
or violations coming from the business. For example if the business must pay any
debts, these will be satisfied from the owners own personal funds. The owner could be
sued for any unlawful acts committed by the employees. This is drastically different
from corporations, wherein the members enjoy limited liability (i.e., they cannot be
held liable for losses or violations)
Taxes: While there are many tax benefits to sole proprietorships, a main drawback is
that the owner must pay self-employment taxes. Also, some tax benefits may not be
deductible, such as health insurance premiums for employees
Lack of continuity: The business does not continue if the owner becomes
deceased or incapacitated, since they are treated as one and the same. Upon the
owners death, the business is liquidated and becomes part of the owners personal
estate, to be distributed to beneficiaries. This can result in heavy tax consequences on
beneficiaries due to inheritance taxes and estate taxes
Difficulty in raising capital: Since the initial funds are usually provided by the
owner, it can be difficult to generate capital. Sole proprietorships do not issue stocks
or other money-generating investments like corporations do.

Corporation

It is an independent legal entity owned by shareholders. This means that the corporation
itself, not the shareholders that own it, is held legally liable for the actions and debts the
business incurs.

Advantages
The popularity of corporations is due to following advantages:
1. The liability of the owners towards the creditors is limited to their investment in
the company. This means that in case of liquidation of the company, if the
company's assets are insufficient to meet the liability, nothing is required to be
contributed by the owners. Only the owners' contribution is at stake rather than
their personal assets.
2. The corporation is considered a legal person with perpetual existence. It exists
until it is liquidated and death or change in ownership has no effect on the
corporation.
3. Additional capital can be raised easily through stock markets, etc.
4. The ownership is represented by the number of share certificates held by a
person, and this makes the transfer of ownership very easy.

Disadvantages
Following are the disadvantages of a coporation:
1. Establishing a corporation is a complex process and requires registration with
the central regulatory authority and listing on a stock exchange which required
fulfillment of certain requirements related to the amount of capital, number of
directors, etc.
2. Normally the corporations have a large number of shareholders; they delegate
the governance function to a body of persons called board of directors. The
board of directors hires management to look after the day to day affairs of the
corporation. The management is an agent and the owners are principal. It is
quite possible that the management may act to further their own interests rather
than the interest of the owners of the corporation. When this happens it is called
an agency problem.
3. In case of corporations there is double taxation. First of all the corporate income
is taxed at a flat rate and then the dividends paid to the shareholders is taxed.

Social Welfare System a social welfare system is a program that provides assistance to
needy individuals and families. The types and amount of welfare available to individuals and
families vary for country, state or region.
--In its narrowest sense, social welfare includes those nonprofit functions of society, public or
voluntary, which are clearly aimed at alleviating distress and poverty or at ameliorating the
conditions of the casualties of society.

--All social interventions intended to enhance or maintain the social functioning of

human beings.

Value maximization
The act or process of adding to an individual's net worth by increasing the share price
of the common stock in which that individual has invested. See also: Expected value
maximization principle.
Or
The process of increasing net worth through increased share prices on common stocks
the investor has purchased.

Retained earning
Retained earnings is the percentage of net earnings not paid out as dividends, but
retained by the company to be reinvested in its core business, or to pay debt. It is recorded
under shareholders' equity on the balance sheet.

Variant of partnership
LLP =

A limited liability partnership (LLP) is a partnership in which some or all partners

(depending on the jurisdiction) have limited liabilities. It therefore exhibits elements of
partnerships and corporations. In an LLP, one partner is not responsible or liable for another
partner's misconduct or negligence.

LLC =

A limited liability company (LLC) is the United States-specific form of a private

limited company. It is a business structure that combines the pass-through taxation of a
partnership or sole proprietorship with the limited liability of a corporation.
LP = A limited partnership (LP) is a form of partnership similar to a general
partnership, except that where a general partnership must have at least two general
partners (GPs), a limited partnership must have at least one GP and at least one limited
partner.

Double Taxation
A taxation principle referring to income taxes that are paid twice on the same source
of earned income.
Double taxation occurs because corporations are considered separate legal entities
from their shareholders. As such, corporations pay taxes on their annual earnings, just
as individuals do. When corporations pay out dividends to shareholders, those
dividend payments incur income-tax liabilities for the shareholders who receive them,

even though the earnings that provided the cash to pay the dividends were already
taxed at the corporate level.

General partner

is a person who joins with at least one other person to form a business. A
general partner has responsibility for the actions of the business, can legally bind the
business and is personally liable for all the business's debts and obligations.

Limited Partner
A partner in a partnership whose liability is limited to the extent of the partner's share
of ownership. Limited partners generally do not have any kind of management
responsibility in the partnership in which they invest and are not responsible for its
debt obligations. For this reason, limited partners are not considered to be material
participants.

S corporation

(sometimes referred to as an S Corp) is a special type of corporation

created through an IRS tax election. An eligible domestic corporation can avoid double
taxation (once to the corporation and again to the shareholders) by electing to be treated as
an S corporation.
This gives a corporation with 100 shareholders or less the benefit of incorporation while
being taxed as a partnership.

A corporation has a choice of how it wants to be taxed. It can make the election at the
beginning of its existence or at the beginning of a new tax year. The choices follow.

S Corporation
Formerly called a "Sub section S corporation," an S corporation pays no income tax
and may only be used for small businesses. All of the income or losses of the
corporation for the year are passed through to the shareholders, who report them on
their individual returns. At the end of each year, the corporation files an information
return, listing all of its income, expenses, depreciation, etc., and sends each
shareholder a notice of his or her share as determined by percentage of
stock ownership.
Advantages
Using this method avoids double taxation and allows the pass-through of losses
and depreciation. For tax purposes, the business is treated as a partnership. Since
tax losses are common during the initial years due to start-up costs, many
businesses elect S status and switch over to C corporation status in later years.
Be aware that once a corporation terminates its S status, there is a waiting period
before it can switch back. Typically, S corporations do not have to pay state
corporate income tax.

Disadvantages
If stockholders are in high income brackets, their share of the profits will be taxed
at those rates. Shareholders who do not materially participate in the business
cannot deduct losses. Some fringe benefits, such as health and life insurance,
may not be tax deductible.
C Corporation
A C corporation pays taxes on its net earnings at corporate rates. Salaries of
officers, directors, and employees are taxable to them and deductible to the
corporation. However, money paid out in dividends is taxed twice. It is taxed at
the corporation's rate as part of its profit, and then at the individual stockholders'
rates as income, when distributed by the corporation to them.
Advantages
If taxpayers are in a higher tax bracket than the corporation and the money will
be left in the company for expansion, taxes are saved. Fringe benefits, such as
health, accident, and life insurance, are deductible expenses.
Disadvantages
Double taxation of dividends by the federal government can be a big
disadvantage. Also, most states have an income tax that only applies to C
corporations and applies to all income over a certain amount.
As a separate legal entity, a corporation must submit a tax return each year with
the IRS. For corporations with a fiscal year ending December 31, tax returns are
due on March 15. A corporation must file a tax return even if it does not have
income or no tax is due. C corporations file tax returns on Form 1120 or 1120A.
Some states, including California, also have a state corporate income tax.
Corporations that anticipate a tax liability of $500 or more must estimate their
taxes and make quarterly estimated tax payments. Corporations with employees
are required to pay federal (and sometimes state) payroll and
unemployment taxes.
NOTE: Neither of these taxes applies to money taken out as salaries. Many small
business owners take all profits out as salaries to avoid double taxation and state
income tax. However, there are rules requiring that salaries be reasonable. If a
stockholder's salary is deemed to be too high relative to his or her job, the salary
may be considered to be partially a dividend and subject to double taxation.

What is an Initial Public Offering?

An initial public offering, or IPO, is the first sale of stock by a company to the
public. A company can raise money by issuing either debt or equity. If the company

has never issued equity to the public, it's known as an IPO. Companies fall into two
broad categories: private and public.

What is pre initial public offering?

Typically, these private investors in a pre-IPO placement are large private equity or
hedge funds that are willing to buy a large stake in the company. The size of the
investment means the price paid for shares in a pre-IPO placement is usually less
than the prospective IPO price.

What is a public stock offering?

A public offering is the offering of securities of a company or a similar corporation
to the public. Generally, the securities are to be listed on a stock exchange.

Corporate governance:
The system of rules, practices and processes by which a company is directed and controlled.
Corporate governance essentially involves balancing the interests of the many stakeholders
in a company - these include its shareholders, management, customers, suppliers, financiers,
government and the community.

Free Cash Flow

Free cash flow (FCF) is a measure of how much cash a business generates after accounting for capital
expenditures such as buildings or equipment. This cash can be used for expansion, dividends, reducing debt,
or other purposes.
FCF = Operating Cash Flow - Capital Expenditures

Cash flow
Incomings and outgoings of cash, representing the operating activities of an
organization.
In accounting, cash flow is the difference in amount of cash available at the
beginning of a period (opening balance) and the amount at the end of that period
(closing balance). It is called positive if the closing balance is higher than the
opening balance, otherwise called negative. Cash flow is increased by
(1) selling more goods or services,
(2) selling an asset,
(3) reducing costs,

(4) increasing the selling price,

(5) collecting faster,
(6) paying slower,
(7) bringing in more equity, or
(8) taking a loan.

Basic facts about cash flow/free cash flow.

Financial instrument to must generate cash flows
Timing of cash flows
Investors are risk aversive
To attract investors we give them more profit

Cash flow
The cash flow that are available among the distribution among the share holders.
Formula: fcf= sales revenueoperating cost-taxes-net investment in operating
capital.

Operating Cost
Operating costs are expenses associated with the maintenance and administration of a
business on a day-to-day basis. The operating cost is a component of operating
income and is usually reflected on a companys income statement. While operating
costs generally do not include capital outlays, they can include many components of
operating a business including:

Accounting and legal fees

Bank charges

Sales and marketing costs

Travel expenses

Entertainment costs

Non-capitalized research and development expenses

Office supply costs

Rent

Repair and maintenance costs

Utility expenses

Salary and wage expenses

The formula for operating cost can be expressed in the following way:
Operating Cost = Cost of Goods Sold - Operating Expenses

Cost of Goods Sold - COGS'

Cost of goods sold (COGS) are the direct costs attributable to the production of the
goods sold by a company. This amount includes the cost of the materials used in
creating the good along with the direct labor costs used to produce the good. It
excludes indirect expenses such as distribution costs and sales force costs. COGS
appears on the income statement and can be deducted from revenue to calculate a
company's gross margin. Also referred to as "cost of sales."

Find Value of Firm

Value of firm= fcf

fcf..

(1+WACC) 1 (1+WACC)2
Example:
Vof= 1000,000+3000,000+4000,000
(1.10)1
(1.10)2
(1.10)3
909090 + 5454545 + 3000259
VOF= 9368894

weighted average cost of capital (WACC)

fcf

(1+WACC)

The weighted average cost of capital (WACC) is the rate that a company is
expected to pay on average to all its security holders to finance its assets. The WACC
is commonly referred to as the firm's cost of capital.

Role of Finance Manager

In the area of finance and financial management, finance manager is important authority. Not
only to raise the finance of company, finance manager do also other lots of works for company.
We can explain his role in following words.
1. Role of Finance Manager for Raising Funds of Company
Finance manager checks different sources of company. He did not get fund from all sources.
First, he check his need in short term and in long term and after this he select best source of
fund. He has also power to change the capital structure of company for giving more benefit of
company.
2. Role of Finance Manager for Taking Maximum Benefits from Leverage
Finance manager uses both operating and financial leverage and try to use it for taking
maximum benefit from leverage.
3. Role of Finance Manager for International Financial Decision
Finance manager finds opportunities in international financial decision. In these opportunities,
he does the contracts of credit default swap, interest rate swap and currency swap.
4. Role of Finance Manager in Investment Decisions
Finance manager checks the net present value of each investment project before actual
investment in it. Net present value of project means what net profit at discount rate, will
company gets if company invests him money in that project. High NPV project will be
accepted. So, due to high responsibility, role of finance manager in this regard is very
important.
5. Role of Finance Manager in Risk Management
Happening of risks means facing different losses. Finance manager is very serious on risk and
its management. He plays important role to find new and new ways to control risk of company.
Like other parts of management, he estimates all his risks, he organize the employees who are
responsible to control risk. He also calculates risk adjusted NPV. He meets all risk controlling
organizations like insurance companies, rating agencies at pervasive level. He is able to
convert company's misfortunes into fortunes. By good estimations of averse situations, he
tries his best to safeguard the money of company.

Financial Institutes
1. Investment Banks
Banks that purchases large holdings of newly issued shares and resells them to investors.

2. Commercial Banks
Banks that offer services to the general public and to companies.

3. Financial Services corporations

Are large conglomerate that combine many different financial institutions with a
single corporation.
Financial services are the economic services provided by the finance industry, which
encompasses a broad range of businesses that manage money, including credit unions, banks,
credit-card companies, insurance companies, accountancy companies, consumer-finance
companies, stock brokerages, investment funds etc.(on net)

4. Savings and loan association

Institution that accepts savings at interest and lends money to savers chiefly for home
mortgage loans and may offer checking accounts and other services. (on net)

5. Mutual

saving banks

Are similar to saving and loan association S&ls, but they operate primarily in the
northern states.

6. Credit Unions
Are cooperatives associations whose members are supposed to have a
common bond, such as being a employees of the same firm. Member savings
are loaned only to other members, generally for auto purchases, home
improvement loans and home mortgages. Credit unions are often the
cheapest source of funds available to individual borrows.
or
nonprofit-making money cooperative whose members can borrow from pooled deposits at low
interest rates. (on net)
or

A credit union is a member-owned financial co-operative. These institutions are

created and operated by their members and profits are shared amongst the owners.

7. Life insurance

Take savings in the form of premiums; invest these funds in stokes, bonds, real estates and
mortgages and make payments to beneficiaries. Like insurance companies also offer a variety
of tax-deferred saving plans designed to provide retire benefits.

8. Mutual Funds
They give main facilities savings and borrowing , trade securities, Exchange holding funds..
Exchange trading funds can easily transfer
ETFs
An exchange-traded fund (ETF) is an investment fund traded on stock exchanges,
much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and
trades close to its net asset value over the course of the trading day. Most ETFs track
an index, such as a stock index or bond index.

money market fund

A money market fund (also called a money market mutual fund) is an open-ended mutual
fund that invests in short-term debt securities such as US Treasury bills and commercial paper.

9. Traditional funds
Are retirement plan funded by corporations or government agencies for their workers
and usually administered by the trust department of commercial banks or by life
insurance companies.

10.

Hedge funds

Its like mutual funds but it has small number of high wealth people and it is not for
poor people.
Hedge funds are alternative investments using pooled funds that may use a number of different strategies in
order to earn active return, or alpha, for their investors.

Memorandum of Association
A Memorandum of Association (MOA) is a legal document prepared in the formation and registration
process of a limited liability company to define its relationship with shareholders.

Article of Association

The Articles of Association is a document that contains the purpose of the company as well as the duties and
responsibilities of its members defined and recorded clearly. It is an important document which needs to be
filed with the Registrar of Companies.

Power of Attorney
The authority to act for another person in specified or all legal or financial matters.
o

a legal document giving power of attorney to someone.

Trade mark number = 223190 may be logos

Trade secret = Secret recipe
A secret device or technique used by a company in manufacturing its products.

Financial Markets
1. Physical Asset market
Are also called tangible or real asset markets those for such products as wheat, real
estate, autos, computer and machinery.
Financial Asset Market
deal with stocks, bonds, notes, mortgages, and other financial instruments.
2. Spot market &Future Market
Are markets where assets are being bought or sold for on the spot delivery. (literally,
within few days) or the delivery at some future date, such 6 months or year into the
same.\
3. Money Market
Those are the markets for short term, highly liquid debt securities.Capital Market
Are the markets for intermediate- or long-term debt and corporate stocks.
4. Mortgage Markets
Deal with loans and residential, agricultural, commercial and industrial real estate.
Consumer Credit Market
Involve loans for autos, appliances, educations, vocations and so on.
5. World, National, Regional, Local Markets
Also exist. Depending on the organizations size and scope of operations it may be
borrow all around the world or it may be confined to strictly local even neighborhood
market.
6. Primary Market
are the markets in which corporation raise new capital. The primary market is the part
of the capital market that deals with issuing of new security finance securities. Companies,
governments or public sector institutions can obtain funds through the sale of a new stock or
bond issues through primary market.

Secondary Market

where investors purchase securities or assets from other investors, rather than from issuing
companies themselves. The national exchanges - such as the New York Stock Exchange and
the NASDAQ are secondary markets.

IPO = initial Public offering

It is the subset of primary market. Here firms go public by offering share into the public
for first time.
SEO = Seasoned Equity offering
A seasoned equity offering or secondary equity offering (SEO) or Capital increase is a
new equity issue by an already publicly traded company. Secondary offerings may involve
shares sold by existing shareholders (non-dilutive), new shares (dilutive) or both.

7. Private markets

On the private market transactions are directly between two parties and can take any form the
parties agree to.
Public Markets
Transactions in public markets are conducted on organized exchanges. Securities traded on
public markets use standardized contracts because they involve so many parties.

Conglomerate
Large companies merged together having single classified product.
or
A conglomerate is a corporation that is made up of a number of different, seemingly unrelated businesses. In
a conglomerate, one company owns a controlling stake in a number of smaller companies, which conduct
business separately. Each of a conglomerate's subsidiary businesses runs independently of the other business
divisions, but the subsidiaries' management reports to senior management at the parent company.
The largest conglomerates diversify business risk by participating in a number of different markets, although
some conglomerates elect to participate in a single industry,
Income statement VS Cash flow statement
Basis for
Compariso
Income Statement
n

Meaning

The income statement is a part of

financial statement which is used to
show the revenues, gains, expenses and
losses for a particular accounting period.

Cash Flow Statement

The cash flow statement is a part of
financial statement which is used to
reflect the inflows and outflows of cash
for a particular accounting period.

Divided into Two activities

Three activities

Basis

Accrual

Cash

Objective

To know the profitability of the entity.

To know the present and forecast future

cash flows.