Fm Theory(Few Topics)

7/28/2019 Fm Theory(Few Topics)

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Financial Management means planning,organizing, directing and controlling the financialactivities such as procurement (acquire of goodsand services) and utilization of funds of theenterprise. It means applying generalmanagement principles to financial resources of the enterprise.


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Analytical Thinking Continuous Process Basis of Managerial Decisions

Maintaining Balance between Risk andProfitability Coordination between Process Centralized Nature


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Investment decisions includes investment in fixed assets(called as capital budgeting).Investment in current assets arealso a part of investment decisions called as working capitaldecisions.Financial decisions - They relate to the raising of finance

from various resources which will depend upon decision ontype of source, period of financing, cost of financing and thereturns thereby.Dividend decision - The finance manager has to take decisionwith regards to the net profit distribution. Net profits aregenerally divided into two: Dividend for shareholders- Dividend and the rate of it has to be

decided.*Retained profits- Amount of retained profits has to befinalized which will depend upon expansion anddiversification plans of the enterprise.


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To ensure regular and adequate supply offunds to the concern.To ensure adequate returns to theshareholders which will depend upon theearning capacity.To ensure optimum funds utilization .To ensure safety on investment

To plan a sound capital structure


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Estimation of capital requirements Determination of capital composition Choice of sources of funds: For additional funds to be procured, a company hasmany choices like-

Issue of shares and debentures Loans to be taken from banks and financial institutions Public deposits to be drawn like in form of bonds.Choice of factor will depend on relative merits and demerits of each source andperiod of financing.Investment of funds Disposal of surplus:

Dividend declaration. Retained profits

Management of cash Financial controls:


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Raising of Funds it is important to have enough cash and liquidity. A firm can raise funds by the way

of equity and debt.Allocation of Funds

The funds should be allocated in such a manner that they are optimally used. Inorder to allocate funds in the best possible manner the following point must beconsidered

The size of the firm and its growth capability Status of assets whether they are long term or short tem Mode by which the funds are raised.Profit Planning

Profit earning is one of the prime functions of any business organization.Understanding Capital Markets

Shares of a company are traded on stock exchange and there is a continuous saleand purchase of securities. Hence a clear understanding of capital market is an

important function of a financial manager. When securities are traded on stockmarket there involves a huge amount of risk involved. Therefore a financialmanger understands and calculates the risk involved in this trading of shares anddebentures.


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1.Overdraft 2. Bank term loans 3. Asset-based finance This describes financing an asset over its estimated life span using the asset as security for theloan.4. Receivables Finance This form of finance uses outstanding customer invoices as security..5. Invoice discounting Similar to Receivables Finance, this is usually only offered to larger companies with strongcredit management systems.

6. Angel funding An individual invests in a company in return for shares in the company.7. Venture capital There are organisations that specialise in investing in unquoted companies which they believewill offer high returns to investors. There is strong competition for this type of finance and youshould only consider it after assessing all the alternatives.8. Personal resources These include personal savings, money borrowed from family and friends, or profits generatedby the business.9. Conventional loan The easiest way to get car finance is to go to a bank or finance company and take out a loan,which is usually secured against the vehicle itself.10. Hire purchaseThe hire purchase option is often used by small businesses because of the flexibility it offers.

The hire purchase option gives a business the ability to arrange the deal in such a way that themonthly repayments are suitable for the businesss cash -flow and budget by increasing thesize of the deposit or balloon payment, the monthly payments can be made smaller.


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financial institutions, which act as a conduit for thetransfer of resources from net savers to netborrowers, that is, from those who spend less thantheir earnings to those who spend more than their

earnings.The Financial Institutions in India mainlycomprises of the Central Bank which is better known as the Reserve Bank of India, thecommercial banks, the credit rating agencies, thesecurities and exchange board of India, insurancecompanies and the specialized financial institutionsin India .


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National Level InstitutionsA wide variety of financial institutions have been set up at the nationallevel. They cater to the diverse financial requirements of theentrepreneurs. They include all India development banks like IDBI, SIDBI,IFCI Ltd, IIBI; specialised financial institutions like IVCF, ICICI VentureFunds Ltd, TFCI ; investment institutions like LIC, GIC, UTI; etc

Industrial Development Bank of India (IDBI) Industrial Finance Corporation of India Ltd (IFCI Ltd) Small Industries Development Bank of India (SIDBI) :-

Industrial Investment Bank of India Ltd (IIBI) :-Life Insurance Corporation of India (LIC) Unit Trust of India (UTI) General Insurance Corporation of India (GIC)

State Level Institutions

Several financial institutions have been set up at the State level whichsupplement the financial assistance provided by the all India institutions.They act as a catalyst for promotion of investment and industrialdevelopment in the respective States. They broadly consist of 'Statefinancial corporations' and 'State industrial development corporations'.RFC in rajasthan
http://business.gov.in/outerwin.php?id=http://www.idbibank.com/http://business.gov.in/outerwin.php?id=http://www.ifciltd.com/http://business.gov.in/outerwin.php?id=http://www.sidbi.in/index.asphttp://business.gov.in/outerwin.php?id=http://www.iibiltd.biz/http://business.gov.in/outerwin.php?id=http://www.licindia.com/http://business.gov.in/outerwin.php?id=http://www.utibank.com/http://business.gov.in/outerwin.php?id=http://gicofindia.com/http://business.gov.in/outerwin.php?id=http://gicofindia.com/http://business.gov.in/outerwin.php?id=http://www.utibank.com/http://business.gov.in/outerwin.php?id=http://www.licindia.com/http://business.gov.in/outerwin.php?id=http://www.iibiltd.biz/http://business.gov.in/outerwin.php?id=http://www.sidbi.in/index.asphttp://business.gov.in/outerwin.php?id=http://www.ifciltd.com/http://business.gov.in/outerwin.php?id=http://www.idbibank.com/


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Reserve Bank of India: The Reserve Bank of India was established in the year 1935 with a view to organize thefinancial frame work and facilitate fiscal stability in India.

The bank acts as the regulatory authority with regard to the functioning of the variouscommercial bank and the other financial institutions in India.

The bank formulates different rates and policies for the overall improvement of the bankingsector. It issue currency notes and offers aids to the central and institutions governments.

Securities and Exchange Board of India: The securities and exchange board of India, also referred to as SEBI was founded in the year1992 in order to protect the interests of the investors and to facilitate the functioning of themarket intermediaries. They supervise market conditions, register institutions and indulge inrisk management.Insurance Companies in India: Specialized Financial Institutions in India: Board for Industrial & Financial Reconstruction

Export-Import Bank Of IndiaSmall Industries Development Bank of IndiaNational Housing Bank


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Industrial Securities: These are securities issued by the corporate sector to finance their long term andworking capital requirements. The Major Instruments that fall under IndustrialSecurities are Debentures, Preference Shares And Equity Shares.1. Debentures

Debentures have a fixed maturity and pay a fixed or a floating rate of interestduring their lifetime. The company has an obligation to pay interest and theprincipal amount on the due dates regardless of its profitability position. Thedebenture holders are not members of the company and do not have any say inthe management of the company. Since these carry a predefined rate of return,there is no scope for any major capital appreciation. However, in case of fixedrate debentures, their market price moves inversely with the direction of interestrates. The debenture issues are rated by the professional credit rating agenciesregarding the payment of interest and the repayment of the capital amount.

2. zero coupon bonds are issued at a discount to their face value and redeemed atthe full face value. The difference constitutes return for the investor.


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3. Preference SharesPreference Shares carry a fixed rate of dividends . These carry apreferential right to dividends over the equity shareholders. This meansthat equity share holders cannot be paid any dividends unless thepreference dividend has been paid in full. Similarly on the winding up of the company, the preference share holders get back their capitalbefore the equity share holders. In case of cumulative preference shares,any dividend unpaid in past years accumulates and is paid later when thecompany has sufficient profits. Now all preference shares in India are`redeemable, i.e. they have a fixed maturity period. Thus, preferenceshares are sometimes called a ` hybrid variety incorporating featuresof debt as well as equity .

4. Equity Shares Equity Shares are regarded as high return high risk instruments . These

do not carry any fixed rate of return and there is no maturityperiod . The company may or may not declare dividend on equity shares.Equity shares of major companies are traded on the stock exchanges.The major component of return to equity holders usuallyconsists of market appreciation.


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5. Call Money Market: The loans made in this market are of a short term nature overnight to a fortnight . This is mostly inter-bankmarket . Those banks which are facing a short term cash deficit,borrow funds from the cash surplus banks. The rate of interestis market driven and depends on the liquidity position in thebanking system.

6. Commercial Paper (CP) and Certificate of Deposits (CD) : CPs are issued by the corporates to finance their working capital

needs. These are issued for short term maturities. These areissued at a discount and redeemed at face value. These areunsecured and therefore only those companies who have a goodcredit standing are able to access funds through this

instrument. The rate of interest is market driven and dependson the current liquidity position and the creditworthiness of theissuing company.

The characteristics of CDs are similar to those of CPs except thatCDs are issued by the commercial banks.


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Profit maximization is considered as the goalof financial managementIt means profitability refers to a situationwhere output exceeds Input. It means, thevalue created by the use of resources isgreater that the Input resources . Thus in allthe decisions, one test is used I.e. selectasset, projects and decisions that areprofitable and reject those which are notprofitable.


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1) Ambiguity: It lacks precise connotation. The term profit is amenable to differentinterpretations by different people. For example, profit may be long-term or short-term. It may be total profit or rate of profit. It may be netprofit before tax or net profit after tax. It may be return on total capitalemployed or total assets or shareholders equity and so on.2) Timing of Benefits: It Ignores the differences in the time pattern of the benefits receivedfrom Investment proposals or courses of action. When the profitability is

worked out the bigger the better principle is adopted as the decision isbased on the total benefits received over the working life of the asset,3) Quality of Benefits The term quality means the degree of certainty associated with whichbenefits can be expected. Therefore, the more certain the expectedreturn, the higher the quality of benefits. As against this, the moreuncertain or fluctuating the expected benefits, the lower the quality of benefits.The profit maximization criterion ignores important dimensions of financial analysis viz. risk and time value of money.


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Wealth maximization decision criterion is alsoknown as Value Maximization or Net Present-Worth maximization . widely accepted as anappropriate operational decision criterion for

financial management decision. It removesthe technical limitations of the profitmaximization criterion. It posses the threerequirements of a suitable operationalobjective of financial courses of action. Thesethree features are exactness, quality of benefits and the time value of money.


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PROFIT MAXIMISATION It is one of the basic objectives of financial management.Profit maximization aims at improving profitability, maintaining the stability andreducing losses and inefficiencies.Profit in this context can be seen in 2 senses.1. Profit maximization for the owner.2. Profit maximization is for others.

Normally profit is linked with efficiency and so it is the test of efficiency.However this concept has certain limitations like ambiguity i.e. the term is notclear as it is nowhere defined, it changes from person to person.2. Quality of profit normally profit is counted in terms of rupees. Normally amtearned is called as profit but it ignores certain basic ideas like wastage, efficiency,employee skill, employees turnover, product mix, manufacturing process,administrative setup.3. Timing of benefit / time value of profit in inflationary conditions the value of

profit will decrease and hence the profits may not be comparable over a longerperiod span.4. Some economists argue that profit maximization is sometimes leads tounhealthy trends and is harmful to the society and may result into exploitation,unhealthy competition and taking undue advantage of the position


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Indian financial markets, broadly comprising of segments like asset management, banking,insurance, foreign direct investments (FDI) andforeign institutional investors (FII), effectivelypromote the savings of the economy by directingthem towards suitable investment options. The Indianfinancial sector is well developed, competitive andintegrated to face all traumas (like the recentfinancial turmoil).Insurance Sector Banking Services Mutual Funds Industry in India capital market intermediaries like merchant bankers,bankers to issue


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More the risk more will be the returnTo earn more one has to undertake thoseaventures that are very risky.

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Fm Theory(Few Topics)