An Overview of Financial

Management

Brief Outline
 Career Opportunities

 Responsibility and Role of the

Financial Staff
 Forms of Businesses

 Goals of the Corporation

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Career Opportunities in
Finance
 Financial Markets
 Investments
 Financial management

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Responsibility of the Financial
Staff
 Maximize stock value by:
 Forecasting and planning
 Investment and financing decisions
 Coordination and control
 Transactions in the financial markets
 Managing risk

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 Role of Finance in a Typical
Business Organization
Board of Directors

President

VP: Sales VP: Finance VP: Operations

Treasurer Controller

Credit Manager Cost Accounting

Inventory Manager Financial Accounting

Capital Budgeting Director Tax Department

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 Role of The Financial Manager

(2) (1)

Firm's Financial Financial

(4a)
operations manager markets

(3) (4b)

(1) Cash raised from investors

(2) Cash invested in firm
(3) Cash generated by operations
(4a) Cash reinvested
(4b) Cash returned to investors
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Financial Manager as a Decision
Maker

 Capital Budgeting decisions ( real assets)

 Capital structure Decisions ( Financial
assets / Securities)
 Dividend Decisions
 Working Capital Decisions

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 The Financial System
 Definition: Interrelationship among
companies, institutions, markets and
instruments
Supplier of User of
funds funds

Individuals
Companies
Government
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A Financial Market
 A market is a venue where goods and
services are exchanged.
 A financial market is a place where
individuals and organizations wanting to
borrow funds are brought together with
those having a surplus of funds.

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 Funds are channelized thru
“intermediaries”
 Commercial banks, DFIs, insurance
companies, mutual funds, provident funds,
NBFCs etc.

 Funds move in the form of “financial

instruments”.
 Coins, currency notes, cheques/drafts,
corporate bonds/debentures, T-bills, govt.
or, gilt-edged securities, equity shares,
preference shares , mutual fund units,
futures and options 1-9
Regulatory Bodies
 RBI
 SEBI
 MoF
 DCA
 IRDA
 PFRDA
 AMFI
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Forms of Business Organization:

 Sole proprietorship

 Partnership

 Cooperative Society

 Private Limited Company

 Public Limited Company

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Each of these can be judged
from
 Ability to raise finance

 Sharing of risk between owners and creditors/lenders

 Extent of control exercisable by owners

 Nature of regulatory framework applicable

 Tax burden for the entity and the owners.

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Proprietorship
 Owned by one person, Can be setup easily
 No separate legal status than its owner
 Owner enjoy all rewards and risk
 Personal liability is unlimited.
 Income gets added to other income of the
proprietor for taxation purpose
 Ability to raise funds is limited
 Not a legal entity, registration is not
required

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Partnership
 Can be set up easily
 Owned by two or more person
 Partners bear the risk and reward
 Firm is not a legal entity
 Undertake a partnership deed (capital contribution, rights,
duties obligations etc.)
 Governed by Indian Partnership Act 1932
 Personal liability is Unlimited (limited liability partnership is
now allowed in India)
 Ability to raise funds is limited
 Possible conflict among partners is the major problem

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 Co-operative Society
 Society aims at promotion of economic interest of
its members.
 Under the Government of India Act, 1935,
cooperatives were treated as a provincial subject.
So each state has their own Co-operative acts.
 Registration required with “Registrar of Co-
operative Society”
 Managed through managing committee elected
by members.
 Often influential members exploit the society for
personal gain
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Private Limited Company
 A corporate body with minimum 2 and
maximum 50 person subscribing to the
share capital.
 Public can not subscribe to its capital.
 Separate legal entity than that of owners
(owns assets, incurs liabilities, sue or can
be sued)
 Promoters mostly enjoy unchallenged
control over the firm.
 Shares are not freely tradable.
 Governed by Companies Act 1956
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Public Limited Company
 A corporate body with minimum 7
shareholders
 No upper limit on number of shareholders
 Managed by Board of Directors
 Public to subscribe to share capital
 Free transfer of shares (i.e. ownership can
change without affecting the operation)
 Governed by Companies Act 1956

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Public Limited Company, contd..
 Initial Public Offering (IPO) of Stock
 Raise cash from general public in return of share
ownership
 Subsequent issues of stock (FPO, i.e. follow
on public offering)

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 Goals of Financial Management
 Maximization of Stakeholders wealth
 Shareholders are residual stakeholders
(customers, suppliers, employees,
bondholders/creditors, government,
shareholders, etc.) of a company.
 Maximization of shareholders wealth (as
reflected in the market price of
equity/shares)

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 Managerial Actions to Maximize
Shareholders Wealth
 What determines share prices ?
 A company’s ability to generate cashflows
now and in future.
 Increase price of output?
 Reduce cost of inputs?
 Reduce manpower cost?
 Reduce investment in plant & equipment?

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Is stock price maximization the
same as profit maximization?

 Current stock price relies upon current

profit, as well as future profit and cash
flow.
 Some actions may cause an increase in
profit, yet cause the stock price to
decrease (and vice versa).

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Other Goals of the Corporation
 Do firms have any responsibilities to
society at large?
 Should firms behave ethically?

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Some words of wisdom

- M Damodaran, Ex-Chairman, SEBI

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