1. Unit I: Introduction to Business Finance and Financial Management

2. Concept Of Finance
Finance = Funds or Money (Life Blood of any business Organisation)
Finance = Monetary resources comprising debt or ownership funds of either The State, Company or Person
Finance = The activity by which claims to resources are either assembled from those released by domestic savings, obtained from abroad, or specially created usually bank deposits or notes and then placed in the hands of investors

3. Fields of Finance Business Finance Corporate Finance
International Finance
Public Finance
Private Finance

4. Concept Of Financial Management
Financial Management can be defined as the management of flow of funds and it deals with the financial decision making.
It encompasses the procurement of funds in the most economic and prudent manner and employment of these funds in the most optimum way to maximize the returns for the owner

5. Finance Functions/ Decisions (Management of Cash Flows)
Long Term Functions
Financing Decision
Investment Decision
Dividend Decision
Short Term Functions
Liquidity Function
(Management of Cash Flows)

6. Finance Functions or Scope of Financial Management
Financing Decision
Investment Decision
Dividend Decision
How large should an enterprise be, or How much funds are required for enterprise?
What are various sources for acquiring funds?
What should be composition of the Liabilities or sources of funds?
Investment in Fixed Assets (Capital Budgeting)
Investment in Current Assets (Working Capital Management)
Dividend Pay out
Retained Earnings

7. Financing Decision (Capital Structure)
1.What is the mix of various forms of capital used by the firms?
2. What is the optimal mix of the various sources of capital?
3. How do the expectations of suppliers of each source of capital changes with alteration in the capital mix.
Value Recedes
Value Enhances

8. Financing Decision (Capital Structure)
How large should an enterprise be, or How much funds are required for enterprise?
Manufacturing Organisation
Trading Organisation
What are various sources for acquiring funds?
Long term sources
Short term sources
What should be composition of the Liabilities or sources of funds?
Optimal Capital structure
Debt Equity Ratio
Capital Gearing Ratio

9. Investment Decision Acquisition of Fixed Assets
Land, Building, Machinery, Intangibles
Long Term Assets
(What & When to Buy)
Survival and Growth

10. Investment Decision Investment in Fixed Assets (Capital Budgeting)
Acquisition of old or new asset
Risk or Uncertainty factor
Evaluation of assets
Investment in Current Assets (Working Capital Management)
Profitability vs. Liquidity
Management of individual current assets

11. Dividend Decision Dividend Pay out i. Increase in marketability
ii. Earning for shareholders
iii. Alternative Investment options to shareholders
iv. Legal Restrictions
Retained Earnings
i. Prospective projects
ii. Internal Financing
iii. Taxation
iv. Repayment of Debt

12. Functional Areas or Responsibilities of Financial Manager
Deciding the Financial Needs
Raising the Funds
Allocation of Funds
Allocation of Income
Control of Funds
Evaluation of Performance
Corporate Taxation

13. Organization of Finance Function
Managing Director/ President
Board of Directors
Managing Director/ President
Finance Director/ CFO
Financial Controller
Internal Auditor
Treasurer
Manager Accounts
Management Accountant
Manager Credit
Manager Taxation
Cash Manager
Corporate Finance & Funding Manager
Foreign Exchange Manager
Salaries
Financial Accounts
Statutory Accounts
Debtor Ledger
Creditor Ledger
Cost Accounting
Management Accounting
Budgeting
Credit Assessment
Setting credit limits
Monitoring credit
Chasing overdue balances
Assessment of Duties/Taxes
Payment of Duties/Taxes
Claming Refunds
Tax Planning
Compliance with tax laws
Banking Arrangements
Cash Transmission
Banking Cost
Working Capital Control
Investing Surplus Funds
Export Finance
Project Finance
Interest rates exposure management
Buying/Selling Foreign Currency
Currency Exposure Management

14. Goals / Objectives of Financial Management
Profit Maximisation
Wealth Maximisation
Sales Maximisation
Growth Maximisation
Maximisation of ROI (Return on Investment)

15. Profit Maximisation Meaning of Profit
Owner Oriented Concept: Amount and share of national income which is paid to the shareholders or the supplier of equity capital i.e., the owners of the business.
Operational Concept: Profitability
Profitability = Economic Efficiency
Problems in Profit Maximisation
Ambiguity
Timing of Benefits (Time value of Money)
Quality of Benefits

16. (Monitoring &Control)
Wealth Maximisation
Time value of Money
EVA (Economic Value Added)
Stakeholders view
Government
(Tax)
Shareholders
(Profit/ /Dividend)
Lenders
(Interest)
Regulatory Bodies
(Monitoring &Control)
Supplier
(Sale of RM)
Firm
Firm
Society
(Standard of living )
Employees
(Salary, Growth)
Customers
(Price & Quality)

17. Time Value of Money Compounding Technique
Future Value of a single cash flow
A = P(1+i)n
FV = PV(1+i)n
Here P=Principal amount
A= Amount to be received after n years
i= Rate of interest (i= r/100)
n= Number of years
PV= Present Value of Principal
FV= Future Value of Principal

18. Time Value of Money Discounting Technique
Present Value of a single cash flow
P = A / (1+i)n
PV = FV / (1+i)n
Here P=Principal amount
A= Amount to be received after n years
i= Rate of interest (i= r/100)
n= Number of years
PV= Present Value of Principal
FV= Future Value of Principal

19. Compounding Technique
Time Value of Money
Annuity: An Annuity is a finite series of equal cash flows made at regular intervals.
Compounding Technique
Future Value of a equal cash flows for a definite period
Interest being paid at the end of the year
FV = Annuity[ (1 + i )n – 1] / i
i= Rate of interest (i= r/100)
n= Number of years
Annuity= Equal cash flow
FV= Future Value of Annuity

20. Compounding Technique
Time Value of Money
Compounding Technique
Future Value of a equal cash flows for a definite period
Interest being paid at the beginning of the year
FV = Annuity [{ (1 + i )n – 1} / i] x (1 +i )
i= Rate of interest (i= r/100)
n= Number of years
Annuity= Equal cash flow
FV= Future Value of Annuity

21. Discounting Technique
Time Value of Money
Discounting Technique
Present Value of a equal cash flows for a definite period
Interest being paid at the end of the year
PV = Annuity [{ (1 + i )n – 1} / i(1 + i ) n]
i= Rate of interest (i= r/100)
n= Number of years
Annuity= Equal cash flow
PV= Present Value of Annuity

22. Discounting Technique
Time Value of Money
Discounting Technique
Present Value of a equal cash flows for a definite period
Interest being paid at the beginning of the year
PV = Annuity [{ (1 + i )n – 1} / i(1 + i ) n] x (1 + i )
i = Rate of interest (i= r/100)
n= Number of years
Annuity= Equal cash flow
PV= Present Value of Annuity

23. Time Value of Money Numerical Examples:
Find out the present values of the following:
a. Rs receivable in 7 years at a discount rate of 15%.
b. An annuity of Rs. 760 starting after 1 year for 6 years at an interest rate of 12%
c. An annuity of Rs. 1,000 starting immediately and lasting until 9th year at a discounting rate of 20%.

24. Time Value of Money Numerical Examples:
2. A co. has issued debentures of Rs. 50,00,000 to be repaid after 7 years. How much should the company invest in a sinking fund earning 12% in order to be able to repay debentures?
Novelty industries is establishing a sinking fund to redeem Rs. 50,00,000 bond issue which matures in 15 years. How much do they have to put into the fund at the end of each year to accumulate the Rs. 50,00,000 assuming the funds are compounded at 7% annually.
Mr. X borrows Rs. 1,00,000 at 8% compounded annually. Equal annual installment are to be made for 6 years. How much is the installment amount?