Financial Management Kiran What is Finance Management of

Financial Management Kiran

What is Finance? ü Management of Money. ü Definition of Finance/Financial Management : § “Finance is a simple task of providing the necessary funds (money) required by the business of entities like companies, firms, individuals and others on the terms that are most favorable to achieve their economic objectives. ” ü Raising, providing & managing of the funds in business. ü The most critical requirement of the business.

Importance of Finance ü Required to procure other resources. ü Most essential for smooth running of the business. ü Needed for modernization, diversification, expansion & development of the business. ü Enables research & marketing activities. ü Development of backward areas. ü Credit worthiness.

Sources of Finance ü There are two types of Finances: 1) Short term Finance : § Required for day-to-day working. § Working Capital § To fill the financial gap. 2) Long term Finance : § Development of the business. § Modernization. § Expansion.

Sources of Short-term Finance 1) Trade Credit § Credit obtained by the suppliers of the goods. § Payment is made in installments. 2) Bank Loan § Borrowing of loans from the banks. § Overdraft from the banks. 3) Advance Payments § Advance from the customers. § Delivery is made after the payment.

Sources of Short-term Finance 4) Short term public deposit/Installment Credit § Finance is raised from the public for a short term. § Purchase of assets on installment. 5) Indigenous Bankers § Borrowing of loans from the moneylenders. 6) Credit Card § Corporate Credit Card. 7) Lease § Payment is made for the usage but no ownership.

Sources of Long-term Finance 1) Shares § Division of capital into “Shares”. § Issue of shares to the public. § Issue of dividend to the customers. 2) Debentures § § Debts or loans borrowed by the companies. Fixed interest is paid to the debenture holder. A debenture holder is only a creditor of the company. Shares cannot be converted into debentures whereas debentures can be converted into shares.

Financial Institutions 1) Industrial Finance Corporation of India (IFCI) : ü Set up in 1948 to provide long term financial assistance to industry. ü Loans are given to public limited companies & co-operative societies. ü First Development Financial Institution established by the Indian government after independence.

Financial Institutions 2) State Financial Corporations (SFCs) : ü State Financial Corporation Act was passed 1951. ü Loans are given to small scale & medium scale industries in their respective states.

Financial Institutions 3) Industrial Development Bank of India (IDBI) : ü Industrial Development bank Act 1964. Initially owned by RBI till 1976. ü Provides long term finance to companies. ü It grants loans to IFCI & SFCs.

Financial Institutions 4) EXport & IMport Bank of India (EXIM) : ü Set up in 1982 to provide financial assistance to exporters & importers. ü Plays a major role in partnering Indian industries, particularly the Small and Medium Enterprises, in their globalization efforts.

Long Term Public Deposits ü To meet the long term financial needs. ü Company can accept these deposits for period not exceeding 60 months. ü 8 – 10% of interest is allowed. ü One fourth of the paid up capital. ü A company wishing to invite public deposits makes an advertisement in the newspapers. aid up capital of the company.

Venture Capital ü Money provided by investors to startup firms and small businesses with perceived long-term growth potential. ü High risk but chances of high returns. ü Financing projects involving new technology. ü IT & Biotechnology industries.

Mutual Funds ü First started in India in 1964. ü Mutual funds are set up by both Private & Public sector undertakings. ü A type of professionally managed investment fund that pools money from many investors ü Reinvest those funds for earning profits & distribute the dividends.

Financial Markets ü A financial market is a broad term describing any marketplace where buyers and sellers participate in the trade of assets such as Bonds, securities etc. There are two types of Financial Markets: 1) Money Market 2) Capital Market. ü What is Security? A thing deposited or pledged as a guarantee of the fulfillment of an undertaking or the repayment of a loan, to be forfeited in case of default. ü What is a Bond? A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate.

Financial Markets 1) Money Market : § § Deals with short term funds. Rate of interest is high. Usually money is borrowed for the period of less than a year. Commercial banks & Indigenous bankers are the creditors. 2) Capital Market : § § Deals with long term funds. Rate of interest is low. Usually money is borrowed for the period of more than a year. Financial institutions, Finance Corporations etc are the creditors.

Stock Exchange ü A stock exchange is an exchange or stock market where stock brokers and traders can buy and/or sell stocks (also called shares), bonds, and other securities. ü First Stock Exchange in the World – London (1773). ü First Stock Exchange in India – Bombay (1875). ü They are regulated by the government. ü DEMAT Account.

Bombay Stock Exchange NASDAQ, USA

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