2.

5 - FINANCIAL MANAGEMENT

MODULE 1: INTRODUCTION TO FINANCIAL MANAGEMENT 08 Hours

Introduction to Indian Financial System. General areas of finance, importance of finance in non- finance
areas, Functions of Financial Management, finance and corporate strategy, Financial Goals of a firm,
Emerging role of finance manager in India

INTRODUCTION TO INDIAN FINANCIAL SYSTEM

The economic development of a nation is reflected by the progress of the various economic
units, broadly classified into corporate sector, government and household sector. There are areas or
people with surplus funds and there are those with a deficit. A financial system or financial sector
functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of
deficit.

The Indian financial system is a multifaceted system that facilitates the flow of funds between
savers and borrowers. It's broadly divided into organized and unorganized sectors, with financial
institutions playing a key role in mobilizing savings and allocating them to various borrowers. The
system includes financial markets, institutions, instruments, services, and regulations, all working
together to promote economic growth and development.

Components of the Indian Financial System (or) Structure of Indian Financial System

• Financial Institutions:
These include banks (public, private, and foreign), insurance companies, investment firms, and other
institutions that provide financial services.
• Financial Markets:
These include the money market which deals with short-term debt instruments and the capital market
which deals with long-term debt and equity instruments.
• Financial Instruments:
These are the tools used for transferring funds, such as deposits, loans, bonds, stocks, and other
securities.
• Financial Services:
These are the services offered by financial institutions, such as banking, insurance, investment
management, and financial advisory.
• Regulatory Framework:
The Reserve Bank of India (RBI) and other regulatory bodies, such as the Securities and Exchange
Board of India (SEBI), are responsible for overseeing the financial system and ensuring its stability.

Functions (Importance) of the Indian Financial System:

• Mobilizing Savings:
Encouraging individuals and businesses to save their funds and invest them in various financial
instruments.
• Allocating Funds:
Facilitating the transfer of funds from savers to borrowers, allowing businesses to invest in new projects
and individuals to meet their needs.
• Providing Financial Services:
Offering a range of services, including banking, insurance, investment management, and financial
advisory.
• Promoting Economic Growth:
By providing access to capital and enabling businesses to invest, the financial system plays a crucial
role in promoting economic growth and development.
IIBS - MBA II Semester - 205-Financial Management - Dr. Muneendra Kayam
 • Reducing Risk:
By providing diversification options and insurance products, the financial system helps individuals and
businesses manage their financial risks.

GENERAL AREAS OF FINANCE

Finance is a broad field with several key areas. These include corporate finance, investments, and
financial institutions. These areas often overlap and involve activities like risk management,
quantitative finance, and financial markets. Here's a breakdown of the major areas:
• Corporate Finance: This focuses on the financial decisions made by businesses, including how
they raise capital, manage their assets and liabilities, and make investment decisions.
• Investments: This area deals with how individuals and institutions allocate their capital to
generate returns. It involves understanding different types of securities, analyzing market
trends, and managing investment portfolios.
• Financial Institutions: This includes banks, insurance companies, and other organizations
that facilitate financial transactions and provide financial products and services.
• Public Finance: This deals with the financial activities of governments, including taxation,
budgeting, and debt management.
• Personal Finance: This focuses on managing personal finances, including budgeting, saving,
investing, and planning for retirement.
• Financial Markets: These are venues where financial instruments are traded, such as stocks,
bonds, and currencies.
• Risk Management: This involves identifying, assessing, and mitigating potential risks to
financial assets and operations.
• Accounting: This deals with the recording and reporting of financial transactions, providing
insights into the financial health of businesses and individuals.
• Tax: This area deals with the understanding and compliance with various taxes, including
income tax and sales tax.
• Banking: This area focuses on the operations of financial institutions, including deposits taking,
lending, and payment processing.
• Financial Planning: This involves helping individuals and businesses plan for their financial
future, including retirement, estate planning, and investment strategies.

IMPORTANCE OF FINANCE IN NON- FINANCE AREAS

Finance is rooted in to all areas of business management. Professionals from functional areas
other than finance need to understand the basics of finance to take better business decisions and to
evaluate the financial implications of their decisions. It is imperative for non-finance professionals to
have a working knowledge of finance to better achieve the business objectives of their respective
functional areas.

Finance for non-finance is vital because it helps the manager make the right decisions, as it
helps to examine the financial statements, know how to check the costs and advantages, and how to
decrease the expenses.

It also supports making decisions regarding the pricing of the products in the right manner by
considering all the fees and costs incurred in making that product. It also helps to calculate and take
the right action for the future if needed, and the most vital is that it allows the CEOs to judge the
projects in which the firm is investing.

IIBS - MBA II Semester - 205-Financial Management - Dr. Muneendra Kayam

 For a non-financial manager, it is crucial not only to learn the concepts used by financial
professionals, but it is also important to understand the basic tools of financial analysis and the ability
to use them in a decision-making process.

• Managers can make more accurate budgeting and investment choices.

• The ability to speak the language of finance can improve communication with senior managers
and the finance department.
• Acquiring new competencies in finance can improve career opportunities.
• Financial knowledge helps achieve the company’s financial goals.

FINANCIAL MANAGMENT

Definition of Financial Management:

“Financial management is the activity concerned with planning, raising, controlling and administering
of funds used in the business.” – Guthman and Dougal

“Financial management is that area of business management devoted to a judicious use of capital and
a careful selection of the source of capital in order to enable a spending unit to move in the direction
of reaching the goals.” – J.F. Brandley

Nature of Financial Management:

• Financial Management is an integral part of overall management.

• Financial management is a sub-system of the business which has other subsystems like
production, marketing, etc.
• Financial Management is the activity concerned with the control and planning of financial
resources.
• Finance is said to be the life blood of business. Financial management affects the survival,
growth and vitality of the firm.
• Financial management involves with data analysis for use in decision making.
• The financial decisions are directed at increasing/maximization/ optimizing the value of the
firm.
• Financial management essentially involves risk-return trade-off Decisions on investments by
considering the level of risk the firm can assume and satisfy with the accompanying return.
• Financial management is multi-disciplinary in approach. It depends on other disciplines, like
Economics, Accounting etc., for a better procurement and utilization of finances

Objectives of Financial Management:

The main objective of financial management is to arrange sufficient finance for meeting short term and
long-term financial needs of a business.

• Estimating financial short term and long-term financial requirements of the business.
• Deciding capital structure i.e. kind and proportion of different securities for raising funds.
• Selecting a source of finance for long term and short-term finances.
• Selection of investment on fixed assets and working capital.
• Proper cash management
• Implementing financial controls:
• Proper use of surpluses

IIBS - MBA II Semester - 205-Financial Management - Dr. Muneendra Kayam

The other important objectives of financial management are

1. Profit maximization: According to this concept, a firm should undertake all those activities which
add to its profits and eliminate all others which reduce its profits. This objective highlights the fact that
all decisions-financing, dividend and investment, should result in profit maximization.

2. Wealth Maximisation: Another basic objective of financial management is maximization of

shareholders’ wealth. This shareholders wealth maximization is evident from increase in the price of
shares in the market.

Scope of Financial Management:

The scope of finance function includes both rising of funds as well as their effective utilization.
The scope of finance covers financial planning, rising of funds, allocation of funds, financial control etc.
The modern approach considers the three basic decisions, i.e., investment decisions, financing
decisions and dividend decisions within the scope of finance function.

Investment, financing, and dividend decisions are integral components of a company's financial
management, and they are closely interconnected, collectively shaping the company's overall financial
strategy.

1. Investment decisions: Investment decisions directly impact both financing and dividend
decisions. When a company decides to undertake an investment project, it requires funds to
finance it. This leads to financing decisions, where the company must choose the appropriate
mix of debt and equity to raise the necessary capital. If the company opts for more debt, it
might have higher interest obligations, affecting the available funds for dividends. Conversely,
if it raises more equity, it could lead to dilution of ownership and potentially affect shareholders'
dividend expectations.
2. Investment decisions: Financing decisions, in turn, influence investment and dividend
decisions. The cost and availability of financing can affect the feasibility of certain investment
opportunities. If financing is costly or restricted, the company might forego potentially profitable
investments. Moreover, the level of debt in the capital structure impacts the company's financial
risk, affecting its dividend policy. High debt levels may result in the company retaining more
earnings to repay debt, limiting dividend payouts.
3. Dividend decisions: Dividend decisions also play a role in the interrelationship. The company's
dividend policy depends on its financial performance and the available cash flow. If the company
pays out a substantial portion of earnings as dividends, it might have fewer funds available for
investments. This could impact the company's growth prospects and, consequently, its ability
to undertake profitable projects in the future.

Financial managers must carefully assess the company's financial position, growth
opportunities, and capital market conditions to strike an optimal balance between investment,
financing, and dividend decisions. An efficient and well-structured interrelationship between these
decisions can lead to a financially healthy and successful company in the long run.

FUNCTIONS OF FINANCIAL MANAGEMENT

1. Estimation of capital requirements: A finance manager has to make estimation with regards to
capital requirements of the company. This will depend upon expected costs and profits and future
programs and policies of a concern. Estimations have to be made in an adequate manner which
increases earning capacity of enterprise.

IIBS - MBA II Semester - 205-Financial Management - Dr. Muneendra Kayam

2. Determination of capital composition: Once the estimation has been made, the capital structure
has to be decided. This involves short- term and long- term debt equity analysis. This will depend upon
the proportion of equity capital a company is possessing and additional funds which have to be raised
from outside parties.
3. Choice of sources of funds: For additional funds to be procured, a company has many choices
like a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.
4. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures
so that there is safety on investment and regular returns is possible.
5. Disposal of surplus: The decision relates to surplus have to be made by the finance manager. This
can be done in two ways:
a. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.
b. Retained profits - The volume has to be decided which will depend upon expansional, innovation
and diversification plans of the company.
6. Management of cash: Finance manager has to make decisions with regards to cash management.
Cash is required for many purposes like payment of wages and salaries, payment to creditors, meeting
current liabilities, maintenance of enough stock, purchase of raw materials, etc.
7. Financial controls: The finance manager has not only to plan, procure and utilize the funds but he
also has to exercise control over finances. This can be done through many techniques like ratio
analysis, financial forecasting, cost and profit control, etc.

FINANCE AND CORPORATE STRATEGY

Finance and corporate strategy are intertwined, with financial strategy acting as a vital component of
overall corporate planning. Finance ensures the efficient use of resources, risk management, and
alignment of investments with long-term business objectives. Corporate strategy, on the other hand,
defines the company's path, balancing market opportunities with resource constraints. Here's a more
detailed look at their relationship:
Financial Strategy as a Supporting Element of Corporate Strategy:
• Resource Allocation - Financial strategy guides how a company allocates its resources
(capital, human resources) to different business units or projects, aiming to maximize overall
firm value.
• Decision Making - It provides the financial context for corporate decisions, such as which
markets to enter, what products to develop, or how to position the company competitively.
• Long-Term Goals - Financial strategy ensures that investments and financing decisions align
with the company's long-term strategic goals, such as growth, market share, or profitability.
How Financial Strategy Influences Corporate Strategy:
• Market Entry Decisions: The financial resources available can influence a company's ability
to enter new markets.
• Product Development: Financial strategy helps determine which new products and services
to develop based on their financial viability.
• Competitive Positioning: Financial resources can impact how a company positions itself
competitively, whether through price wars, marketing campaigns, or product innovation.
• Mergers and Acquisitions: Financial strategy plays a crucial role in evaluating and financing
potential acquisitions.

IIBS - MBA II Semester - 205-Financial Management - Dr. Muneendra Kayam

FINANCIAL GOALS OF A FIRM

1. Revenue goals: All businesses should strive for revenue and business growth. These can be divided
into revenue growth which can be a sales maximization and market share growth
2. Profit goals: Unlike revenue goals, which focus on generating as much money as possible, profit
goals specifically aim to increase how much profit your company has after costs have been deducted.
3. Cash flow goals: For small businesses or businesses that are just starting out and are not yet
profitable, one of your main goals should be to improve your cash flow.
4. Investment goals: You’ll want to invest your revenue to grow your business. By setting an
investment goal that is SMART(Specific, Measurable, Achievable, Relevant and Time bound), business
can employ strategies, such as revenue and profit, to meet investment target. Investment goals can
be measured in a set amount or a percentage of your revenue.
5. Debt and financial obligations goals:
Financial goals for a business aren’t just about trying to make as much money as possible. As a
company, you’ll have to meet debts and financial obligations.
6. Return on investment (ROI) goals:
Return on investment goals focused on how much needed to earn to meet target return.

EMERGING ROLE OF FINANCE MANAGER IN INDIA

The emerging role of a finance manager in India involves strategic business partners, actively involved
in decision-making, risk management, and financial planning. This shift includes leveraging
technology, understanding market trends, and contributing to the company's overall financial health
and long-term goals.

1. Strategic Partnership and Decision-Making: Finance managers are now considered strategic
partners to the CEO, influencing key decisions related to investments, financing, and overall business
strategy. They analyze financial data, forecast future trends, and advise senior management on
opportunities to maximize profits and shareholder value.
2. Risk Management and Compliance: Identifying and mitigating financial risks, such as market,
credit, and operational risks, is a key responsibility. Ensuring compliance with financial regulations and
industry standards is crucial.
3. Financial Planning and Budgeting: Developing and implementing financial plans, budgets, and
forecasts to support the company's strategic objectives. Monitoring performance against budget,
identifying deviations, and taking corrective action.
4. Leveraging Technology: Adopting new technologies, such as data analytics and AI, to improve
efficiency and decision-making in areas like forecasting, risk assessment, and financial reporting.
Understanding and integrating technology into finance operations is essential for staying competitive.
5. Understanding Market Trends and Capital Markets: Staying informed about current market
trends, capital market developments, and their impact on the company's financial performance.
Analyzing investment opportunities, assessing capital structure, and making informed decisions about
funding and investments.
6. Working Capital Management: Managing day-to-day financial activities, including cash flow,
accounts receivable, and accounts payable, to ensure the company's short-term financial stability.
Optimizing working capital to maximize efficiency and minimize costs.

IIBS - MBA II Semester - 205-Financial Management - Dr. Muneendra Kayam

Important Questions

1. Explain the various types of decisions which are to taken by financial manager in the emerging
business scenario.
2. Explain the role of finance manager in the changing scenario of financial management in India.
3. "Finance function of a business is closely related to its other functions". Discuss with suitable
examples.
4. Write about the scope of Financial Management.
5. What role should the financial manager play in a modern enterprise? Explain.
6. Explain the "Emerging role of finance manager in India".
7. Identify the various types of decisions which are to taken by a financial manager in the emerging
business scenario.
8. Define Financial Management. Explain its functions.
9. Explain the importance of Finance in Non-finance areas with suitable examples.
10. When can there arise a conflict between shareholders' and managers' goals? How can it be
resolved?

IIBS - MBA II Semester - 205-Financial Management - Dr. Muneendra Kayam