Comprehensive Overview of Financial Management and Capital Budgeting Techniques

in today's fast-changing world financial management is one of the most crucial component for individuals and

enterprises it's no longer about putting your money aside but it's more about managing and expanding it a good

understanding of financial accounting and management is required to run a fund efficiently and successfully and to

achieve business goals financial market encompasses any marketplace where securities are traded such as the stock

market bond market forex market and the dividends market among others as a result when financial market collapse

economic disruption can occur including recession and unemployment because of their importance having a basic

understanding of financial market is crucial and that is why to help you out and enlighten you about the same we have

come up with this course where you can learn the basic of finance so why wait let's get started right away

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suggestions and i will respond to your comments now very quickly let me walk you through the agenda for today's

course in today's course we are going to discuss introduction to finance management business finance foundation

time value of money financial market stock market asset management working capital management and capital budgeting

techniques hi financial management is one of the most sought after course in the area of

economics in fact for those who are aspiring for the

career in the area of banking and finance financial management is a must learn

area well money is something that we quickly

recall for the discussions on finance or financial management of course we are not wrong

in fact the entire domain of financial management revolving around on money i am very sure

at individual level we all know what is finance how finance works in real time

but with the help of this course let's try to put our understanding of financial management into a perspective

so that your journey of understanding financial management in the advanced levels would be smoother

so why delay let's begin our journey welcome to the course on introduction to financial management my name is pawan

kumar chandra so in this course we will be discussing the concept of

finance the definition of financial management in business

the goals of financial management we also discussed the scope of financial management

the functions of finance manager the agency relationship is one of the most important topic to be discussed in

the area of financial management we discuss about it the agent and principal relationship

and we also talk about the financial system we talk about the entire ecosystem of

financial system and how each component in the financial system are interconnected

and we also talk about the safety of investments in business well we have lot to understand let's

begin our journey with the first topic the concept of finance

the concept of finance is basically originated from economics so what is economics

how an individual or a business or a government making use of these limited resources to fulfill the unlimited

dreams or unlimited desires is all about economics so that's the underlying principle of economics so the concept of

finance is derived from these notions so basically when we talk about finance we talk about

cash we talk about banks investments loans

funds and we talk about forecasting so forecasting the need for money we talk about borrowings

where to borrow how much to borrow we talk about investments and we also talk about budgeting so what is budgeting so

budgeting is all about choosing an investment or alternative there are so many investment

alternatives which one is the best project which is the best project to invest in so choosing the best

alternative so this discusses about budgeting as well basically finance is an art or

science of money we said money is the epicenter of this entire discussion of financial

management of course well when we say finance is all about money

we need to understand finances also it's an art of managing money it's a science

of managing money so why we call finance is the science we call the finance as science because

finance dependent on certain principles for deriving the results for example

when we talk about the time value of money we dependent on a compounding or discounting principle

right we talk about conversion of present value of money into future value or we talk about conversion of future

value of money to present value so there are certain principles on which the finance is actually dependent so that's

the reason we call finance is the science because there are certain procedures to be followed to calculate

the values so that's why we call finance is the science

at the same time we claim that the finance is also an art why finance is an art

because when we are doing the calculations when we are analyzing the money

we need to you know we need to understand it it is purely based on the skills and

abilities of an individual how to analyze the financial transactions and how to interpret them how to report them

so it is an art so it is it is completely dependent on the individual who is actually

conducting this analysis of the financial results or the concepts that are related to finance so that's the

reason we call finance is also an art let's jump into the next level of discussion

what are the broad areas of finance basically the finance can be discussed under three important categories

personal finance business finance and then

public finance so these are the categories in which we discuss

the area of finance what is personal finance is it is it something related to an

individual yes personal finance is about

how an individual earn some money how an individual is earning money how income is coming to him or her

what are the sources from which an individual is earning their money for example

when we talk about personal income there are five different heads right so five important heads

income from salary income from house property income from business or profession or income from

capital gain income from other sources so these are the sources from which an individual is earning money

now these are the sources of income finance talks about how an individual is

actually earning from these sources how money is flowing to his bank accounts the next thing is spending

how an individual is spending let's say he has earned 1 lakh and how is spending one lakh

right so spending on for what reasons is spending is it spending for medical expenses or is it spending for

investments or is spending for daily cash requirements or is spending for any to buy any long-term assets

so that is the spending pattern that we analyze in finance in personal finance well

we understood there is an income there is spending now

let's assume the income is more than a spendings let's say is earning one lakh and is

spending say eighty thousand so twenty thousand is something that is called saving

this is the surplus now with the surplus what is it doing or

what is he or she is doing is he or is she

saving this money and keeping it in the bank deposits or how she is making use of that money is she investing this

money or is she buying some long-term assets is all is discussed under personal finance

now let's say the income is lesser than the spendings

right so let's say the income is 80 000 spendings are 1 lakh absolutely there is a deficit right

there is a deficit of 20 000 so how an individual is matching this deficit from where is bringing that

money right you may have to go for borrowings right you may have to borrow money

from the other sources to fill this to bridge this gap of income

earning is 80 000 spending is 1 lakh so 20 000 is the deficit so that is the discussion of personal finance so

how an individual is managing these deficits is the discussion of personal finance

well when there is an income when an individual is earning cash he need to pay the tax

every individual is supposed to pay the tax so how much of taxes is paying on what

areas is actually paying taxes is he paying income tax or is he paying business taxes or is he paying sales tax

or is he paying any other taxes or gift tax or whatever so that is the part of discussion in person

finance again there is something called a retirement again for every individual that there

will be a retirement right so how a individual is planning for the retirement is he spending everything

he's earning or is he saving some money for his retirement so that is the discussion of personal

finance so retirement planning is investing in long-term investment options where he is investing in bonds

or debentures or is investing in long-term assets to on the long-term returns so

that is the discussion of personal finance that is part of person finance well

so these are the things that we discuss when it comes to personal finance

now business finance as the term business finance reflecting

business how a business is dealing with finance how the business is handling the finance financial aspects

well every business will have cash flows cash inflows and cash outflows

so what is cash inflow the sources of money so what are the sources from which

a business is earning money or what are the sources from which the business is borrowing let's say

when the business is good the business may be making profits and these are the cash inflows these are the

positive cash inflows right so when the business is expanding how a business is

catering the needs the financial needs of the business right so from what are the sources the

business is borrowing so that is the discussion of a business finance so what are the sources of

finance so what are the applications of finance so how the business is borrowing money

how business is getting cash flows and how business is making use of those cash flows

finance decisions financial decisions right so how to bring money what are the financing

decisions let us say the business has some money the excess money how business is investing that money in the market

for what rate the business is investing money in the market so that is very important area of

discussions in business finance the dividend decisions these are some of the very critical

decisions for a business so how to pay dividend how much to pay at what intervals the dividend needs to

be paid of course there will be regulations in each country at what intervals they need to pay the dividend

but it is up to the decisions of a company to pay or not to pay the dividends

taxes every company is paying the taxes right so there is no exception for any

business at least in india businesses are paying taxes there is a separate corporate tax which they are supposed to

pay and it will be revised every year so that is the discussion of business finance

so operating and marketing decisions of a company so what are the operating decisions what are the operations

operational aspects of the business and we talk about the marketing aspects how money is required for marketing

activities and also the accounting aspects are very much part of the business finance

csr corporate social responsibility so business

it is not just about earning profit they also have certain social responsibilities social obligations for

example taking care of children's education in the poor societies or to take care of the parks or the

roads or the bridges construction or maintenance of those or to take care of our managed houses or to take care of

any social activities which are at the larger cause for the society so that is also

part of the discussions in business finance well

the third important area in finance is the discussions on public finance

so what is public finance how a particular country is

managing the money how a business how the country is managing its financials right

how a country is handling the demand side of the economics or the supply side of the

economics how the prices are managed because we all know price is the intersection of demand and

supply so how a country is managing these aspects how a country is managing inflation so what is the inflation level

in the country and what is the healthy inflation rate that is required for a country to grow consistently

so that is also part of the discussions in public finance so

with inflation there is also discussions on gdp across domestic product the budgeting the forex foreign trades and

results these are also part of the discussions in public finance now

financial management in business so we've understood how financial management of finance works in

individuals life or in aspect of country but we'll dive deep into understand what is

financial management in business basically financial management in business is it's an application of

management principles in financial activities it is an art or science of managing

money to meet the predefined objectives so basically it is a process or process of planning organizing

controlling monitoring financial resources with a view to achieve organizational goals and

objectives so every organization will have certain set of objectives and to achieve those

objectives there is a need for financial resources so how a business is handling these financial resources to meet those

objectives is the discussion of financial management in business in business financial management is the

process of handling a company's finances in a way that generates value for the overall business

remember financial management is a organic function in every business

there will be a dedicated department to take care of the financial aspects of a business so they take care of all

transactions they analyze all the transactions they do projections for the business they analyze the requirement

for financial resources right and the person who is responsible to take care of the financial activities

is generally called as a financial manager of course there are different dimensions to see the financial manager

there are various titles in which we can call the financial manager of course but the roles and responsibilities of

finance department is all about taking care of cash inflows and cash outflows at strategic level

financial management is all about planning cash inflows and cash outflows how come company or a business

is planning the cash inflows and cash outflows is the discussion at strategic levels

at tactical levels financial manager or the people who are responsible to take care of financial

aspects at the ground level or the entry level is to record the transactions business transactions analyze and

produce the report for in front of the management to take strategic decisions that are related to the business

so that is at two different levels we can see in an organization now

it's very important to understand what are the goals of financial management there are three important goals for

financial management profit maximization wealth maximization and improving market share of course there

are a series of goals for financial management but ultimately all those things will boil down to these three

important goals profit maximization wealth maximization

and improving the market share of the business

so what is profit maximization profit maximization you all know

a business is an economic entity which is running to make profits there is no business on the planet earth

which is running for charity right if it is purely running for charity then it is not called as business it is a

charitable organization when it is a business they need to earn profit

why they need to earn profit there is various reasons why they need profit so

what is the profit in business it is simple revenues what is the revenue what is the

excess of revenue that business is earning over the cost let us consider a business is generating

10 lakhs of revenues for this year 2022 the cost of producing that product or service is

let's say six lakhs the remaining four lakhs is the profit for a company

now this four lakhs what is the kind of profit it is is a different discussion

altogether right it may be profit before tax right pbt right this is

profit before tax profit after tax earning before interest and tax

earning before tax depreciation and amortizations so what is profit before tax this is the

tax this is the profit before deducting the taxes because every business is supposed

to is liable to pay the taxes to the government so before deducting taxes what is that

company has is profit before tax what is profit after tax it is of course it's a self-explanatory

profit after paying the taxes to the government earning before interest and tax remember

every business will have financial obligations let us say when the business has borrowed some

money on interest basis they are supposed to pay the interest so what is the revenue what is the earnings

before paying interest and taxes that is ebit earning before interest and taxes

eb tda earning before tax depreciation and amortizations remember

if it is a tangible asset a business apply depreciation

if it is intangible asset like copyright patent they'll apply amortization so

depreciation and amortizations are most common in any business right so what is the earnings before tax

before depreciation or before amortization so that is earning before tax depreciation and amortization so

it's need to be very clear what is the profit that we are talking about now how a business can increase the profit

a very important term profit by increasing the units sold by increasing the number of units sold

increasing the price per so price per unit price per product price per service

cost minimization reducing the cost or maybe locating new investment opportunities or maybe acquiring new

business ventures in the same line of business or maybe from the different line of businesses

or it may be an expansion business expansion of our existing business so there are various other ways to on

profit well the theory of profit maximization is

appreciated by many scholars at the same time there are criticisms too

so what are those appreciations what are those a favor towards profit maximization discussions

there are certain arguments that says yes profit is important for a business at the same time there are criticisms

which we will see little later right so now what are the arguments that are in favor of profit

maximization theory the very reason why business exist is for profit

the basic purpose of business is to earn profit in fact profit is considered as the

meter for determining the success right so with profit the business is

considered successful and on track and if the profits are not there business is considered

is is a curse is a sin for the society right many time profit is essential for the survival of a business only when the

business is able to make profits they can survive the competition they can survive in the dynamic business world

only profit making business can think of tomorrow

only profit-making company can create future right

that is the reason profit maximization is very important and also we need to understand

profit is accepted by the society as long as the profit is earned in a legitimate way for example the profits

are with legal routes it is accepted the society is okay as long it is win-win

for the society win-win for the business for the employees for the stakeholders to the customers right for everyone so

there is no problem earning the profit it is required it is very important and

society considers it is not a sin as long as it is legitimate there is also an argument that a

business which is loss making is a burden to the society right a business which is under huge losses they may not

be able to pay the salaries they may not be able to pay their

stakeholders they may not be able to pay their suppliers they may not be able to pay dividends they may not be able to

pay taxes or interest on the borrowings though ultimately they'll become a sin or they may become

burden to the society these are the favor in favor of profit max these are

the arguments in favor of profit maximization now

there are certain arguments where profit maximization is criticized the very important

argument against profit maximization is the profit is not clear so what profit are we talking about are

we talking about net profit or we're talking about

a gross profit right we're talking about profit before tax or we're talking about

profit after tax or it is earning before interest and tax or it is profit before interest tax depreciation and

amortization so what profit are we talking about it's not very clear so when we say the ultimate

goal of financial management is to make maximize the profit which profit the business wants to maximize

so that is not clear so that is a criticism against profit maximization theory

duration what is the duration for which profit maximization

goal is set is it long term or it is short term save one year less than one year

many times businesses are compromising on their long-term profits when they are focusing too much on the short-term

profits so that is is the same that's a very you know

unwanted sign of profit maximization goal scale factor

synchronization between size of the business and volume of profit many times you would

have heard that the cost of setting this business is say 10 000

and the profits we can expect from this business is one lakh don't you think it is

something unusual your investment is just 10 000 and you are going to earn one lakh

and there is the smell of illegitimate activities in the business you just invested 10 000 and you are

saying you are going to earn one lakh how is that really possible because when a business is investing 10 000 or 10 000

a business may expect 30 to 30 or 40 or 50 returns considering the risk return factors right how are you able to make

those many times of your initial investment so that is something is a very

big question mark when it comes to profit maximization consideration of time factor

are we considering time factor when we talk about profit maximization the question is unanswered

the profit maximization focusing only on maximizing profit what is the time duration we are

considering to earn that profit is it one year five years 10 years 20 years what is that

is unanswered that is

a criticism on profit maximization theory undue aggression towards profit

maximization may lead to a social evils when a business is too focused on making profits when they are very aggressive

about making profits there will be scope for corruption quality drop

miss selling false promises undue influences

right so it may lead to all those things it ignores risk associated with profits

what is the risk associated with profit remember risk and reward are two faces of a

single coin so how what is the risk we are going to take to earn the profit

is not discussed under profit maximization theories wealth maximization goal so

very important very popular goal of financial management wealth maximization

and this is one of the most you know the recent approach towards financial management

and it is popular too when it compared to profit maximization wealth maximization

goal looks very attractive so before we understand what is that that is catching the attention of the

corporate world let us understand what is wealth maximization what is wealth wealth maximization is basically is an

increasing the value of business to increasing the value of shares held by the

stakeholders when we say stakeholders who are the stakeholders to the business

there are two important categories in which we can segregate we can classify the

stakeholders external stakeholders internal stakeholders

who are the stakeholders who are external to the business creditors

governments suppliers tax authorities

customers media and society so these are the people these are the entities which are outside the business they're

they're outside to the business they're not insiders to the business now who are the insiders to the business

insiders to the business may be shareholders managers

board of directors and employees so these are the people who are internal to the organization so

value of these stakeholders is to be increased how through wealth

maximization we are talking about wealth so how what is wealth

basically wealth maximization means increasing the price of the share or ensuring the dividends are paid to the

shareholders let us say i have invested rupees 100 in a particular share

after one year companies declaring a dividend of rupees 10 that 10 is the value that's a value

maximization now let's say the price of the share is 100 by the end of this year the price of the

share is let's say 120. so this 20 is the wealth that is a wealth that is created by the business so wealth is

maximized the share price is increased we calculate the wealth of a business

through various techniques so one of the ways to calculate wealth

of a business is through npv net present value so what is net present value net present

value is the present value of benefits minus present value of all the costs

right so that is a calculation of wealth now what are the arguments in favor of

wealth maximization goal so it takes care of larger interest of the

stakeholders we are not talking about profit we are talking about wealth increasing the value of stakeholders

so it takes care of larger interest of the stakeholders wealth is based on cash flows not on

profits in profit maximization we talk mostly about the profit we talk about

profit before tax profit after tax ebit earning before interest and tax profit after tax right so we these are the

aspects we in terms we discuss the profits but in wealth we're not talking about

the profits we're talking about the cash flows how much cash flows the business is able to generate

long-term perspectives rather than the profit maximization goals when we talk about profit maximization we talk about

how to increase the profits when we talk about wealth maximization we talk about how to increase the value for

stakeholders in the long run remember profit is looked for the short run

wealth is looked at the long run a consideration of time value of money wealth maximization goal

do consider time value of money the rupee on today is worth more than

the rupee that would be on tomorrow right so it gives weightage to that principle

wealth maximization goal considers risk and uncertainty factors and help board members to create

consistent dividend policies well so these are the favored arguments of wealth maximization goal now there

are certain criticisms on wealth maximization also so what are the criticisms on wealth

maximization goals it is prescriptive idea

not a descriptive idea so creation of wealth for the stakeholders is just prescriptive just

prescribing that wealth of the stakeholders need to be increased

how to increase this wealth of the stakeholders is not discussed under wealth maximization theories

wealth is not socially desirable this is one of the most debated criticism on

wealth maximization so why it is not desired why it is not appreciated in the society

there are various reasons the wealth should not be concentrated on few hands

when a business is concentrating on wealth maximization the wealth will be concentrated for example when we say the

end the business is dominated by major players

in the corporate world let's say we talk about alibaba we talk about elon musk

we talk about bill gates we talk about ambani right we talk about mark zuckerberg right we talk about many

others who are actually are the legends in the business and who are creating wealth

so what is happening the wealth of the world is concentrated on a few hands

it is concentrated when the wealth is concentrated on a few hands

what will happen they'll destroy the competition they may destroy the competition they

may ensure there is a dominance of their business in the entire industry and

ultimately that will cause serious problems for the end users the customers so that is one of the arguments put

forth why wealth maximization should not be a consideration for financial management

of course there are debates on that of course there are arguments against which which is not

true but this is something that is discussed in the domain maximization of shareholders

value is a very generic term or it's a weight down when we say maximizing the

stakeholders value when we mention stakeholders it also includes the debentures holders the

bondholders the creditors everyone who are just

invested their money for fixed interest right so what is that they're going to own

when the business is able to create wealth when the business is able to add value

to the business what will what will be the benefit for debenture holders or just receiving a

fixed interest every year and how the value of these stakeholders

increased is the question mark so wealth maximization is not really focusing on

on the debenture holders on the creditors who are receiving fixed interest from the business no matter how

much ever the profit the business is making they're

kept in a separate note they are not considered for the profit they are just

considered for interest payments the decisions of manager to maximize wealth mainly to employees exploitation

when the business is too aggressive on wealth maximization the employees may be exploited

the customers too may be exploited because the business is concentrating on wealth maximization

so that is something that is criticized in financial management improving market share is the third

important goal of a financial management what is improving market share

improving market share is a very generic term like every industry will have players within and every player will

have their own share of business in the industry let's say

we talk about fmcg hvl

nestle itc britannia are leading the market of fmcg sector right here in this term unilever limited is

leading they have a major market share and then comes nestle and then comes itc and then comes britannia and again they

keep competing for the market share so improving market share is a very important

goal of financial management that is also important the financial decisions taken by the financial managers

should be in line with improving market share the decisions taken the financial decisions taken should improve the

market share the telecom sector jio

atl vodafone bsnl right so jio is leading the market they have a major share in the entire industry of telecom

steel industry right steel industry jsw tata

they're leading the industry they have the market share automobiles

maruti suzuki hyundai tata eminem

honda right so they're all the market leaders their major share especially martha suzuki has the major share in

automobile industry in india right so the decisions taken by a business should improve the market share of a business

investors can understand the market share of company through various sources right so how to understand the market

share of a business there are various ways to understand the market share for example

one of the common routes is to analyze the annual reports of a business so understanding the size of the balance

sheet is the way to understand the market share there are other ways like they can go to

published material on companies they can check television they can check newspapers

right there are various sources from which they can understand the market share through

advertisements also right and also increase or decrease in the market share indicates the current

position of the business so if the market share of the company let's say

automobile industry maruti suzuki's got major share in the industry whether it is increasing or

decreasing is also one of the major parameter to understand whether the company is doing good or not

so that is the reason why we need to understand the market share of the business

economies of scale by focusing on economies of scale companies improve the market share so what is

economics of scale by increasing the number of units sold they can reduce the cost incurred in

manufacturing those goods services or producing those goods and services so by producing large number of quantity

selling large number of quantity they can increase the revenue for the business so that is economics of

scale growth in market share also grows the revenue when the market share of a

business is growing that that indicates that the business revenues are also growing and the growing market share

will efficiently manage the competition so if the market share of a company is

increasing the competition is very well managed the very the competition is to an extent it is reduced

so that is the importance of improving market share so what we wanted to understand is improving market share is

a very important goal of financial management the financial manager should take decisions the finance

decisions in line with this particular aspect improving the market share for a business

now how do companies increase market share there are various ways in which

companies can improve the market share for the business reducing cost

increasing the volume of sales promotion improving the efficiency introducing new products to the market

customization or standardization customer loyalty improving the customer loyalty

introducing new technologies talent retention and acquisition of existing firms there are various routes

through which market share can be improved well

market share improvement is also not free from the criticisms there are a couple of criticisms on

improving market share why financial management should focus on improving market share

acquisition may lead to monopoly right when there is a focus on improving market share

there will be scope for monopoly or deopoli so what is monopoly only one company is

ruling the entire market or the entire industry what is deopoli only two companies are

ruling the entire industry right now if you look at indian telecom sector there is a situation of deopoli right

you can see jio to an extent you can say it's a monopoly

but it is not established because jio is got major stake major share in the entire telecom

industry there is also some other players like airtel they also successful in retaining their market

share to an extent right so you can see the situation of deopoli jio and airtel ruling the market so that is not good

because when there is monopoly or a deal police situation the customers will be impacted how

there will be less alternatives because customers cannot go for alternatives they have just jio or they

have a 10 right they cannot go beyond those two players because they have the major share and they are the top players

in this industry and when they have dominance in the industry they can increase the prices

because there is a dependency people have dependency on these companies they can increase the prices

the customers can do little about that or they cannot do anything about that they just need to pay and use the

services because there is no alternative in the market right

unethical practices will increase when there is monopoly or deopoli the unethical practices will increase like

sales like quality drop fake promises

service failures or those things that will increase when there is monopoly or deal body so market share improvement

though it is very important for a business at the same time when the market share is improving the companies

need to also understand that they need to ensure the services are not compromised

or the the offerings are not compromised so that is very important and that is

one of the criticisms of market share improvement what is the scope

of financial management what is a broader perspectives on financial management

there are three important areas under which we can discuss the entire financial management

it is about financing investing and dividend decisions every business will encounter

these decisions they are supposed to take these decisions at large financing decisions

so what is financing decision when a business is growing when the business is too small there will not be

any need for financial resources the financial

requirements they can manage with their own money when the business is growing

at scale they need money right so how a business can

access that capital access that money there are various source through which they can borrow money right there are

shares by issuing shares they can obtain funds by through issuing debentures bonds they can go to venture

capitalists they can go to angel investors they can go to primary markets they can go to secondary markets right

there are various ways they can pledge their assets and they can take loans right

how any of these options are going to help the company is a very important

financial decision to be taken by a finance manager so what source to go what source not to

go if the company is choosing to go for equity

the finance manager should understand there will be a dilution of ownership

right so owners though those who are going to invest in the company will be the owners of this business let's say

the total number of shares issued by the company is 100 if i take

25 shares of this particular company i am the owner of the company for the proportion of stocks held by me that's

25 to 25 numbers so i'm 25 percent of ownership belongs to me so ownership is diluted

what if the business is going for debt or bond they need to pay

fixed interest on those loans because all

debts are eligible for interest the bondholders the debenture holders

will get interest on frequent intervals maybe regular intervals maybe quarterly half yearly or one yearly right so the

company is supposed to pay interest on those funds no matter whether the business is doing good

they're supposed to pay the interest so there's a drawback

again this is very important to go for debt or equity or any other

sources like retained earnings what if the business has certain reserves and they wanted to use those results to

expand the business what are the advantages and disadvantages all these things need to be analyzed so that is

the area in which financial management comes into the discussions investing decisions

investing is nothing but it is just what are the options the business has to invest

in the industry let's say it is a a telecom business so what are the opportunities to invest what are the

alternative investment alternatives available and how to analyze those investment alternatives what are the

techniques that are supposed to be used it may be net present value or it may be payback period it may be internal rate

of return it may be break even analysis so what is the technique a business should deploy to understand the

investment alternatives so what is the business which is the business is going to give a quick cash

which is the business is going to give us long term returns which is the business is going to give higher returns

with lesser risk all these decisions are part of investing

sections investing decisions now dividend decisions

unlisted companies pay dividend at what intervals they need to pay the dividend how much dividend they are

supposed to pay under what circumstances a company should pay the dividend when the business is making profits they

generally pay the dividend when there is no profit they're not going for dividend instead they'll just maintain status quo

and when there is a profit they'll go for dividend distribution all these things are part of a financial

management at large well what are the functions of financial

manager so what are the functions performed by a financial manager so what all roles he will play

in his designation in finance department estimation of capital requirement for

the business is one of the very important very critical function of a financial manager why

because understanding the capital requirement understanding the scale of business what

is the scale of business need to be understood then only they can make estimations of capital requirement how

much money is required only when they understand how much money is required for the business they can

understand where to procure the funds let's say the money is required to take care of short-term requirements of the

business they can understand what is the right source to go for funds

once they understand what is the estimation of capital requirement and how to procure funds they need to take

decisions on capital structure so i need 10 lakhs for my business

debt how much i should borrow from equity how much i should borrow from government sources

how much i should take from public right so it's all very important they need to understand how much each

source let us say i need 10 lakhs i want to borrow

8 lakhs from equity 2 lakhs from debt or 5 lakhs from debt 5 lakhs from equity or 5 lakhs from

debt 2 lakhs from equity 3 lakhs from retained earnings right remember even when the business is

using its own capital that is retained earnings when the last year they have made profit and they have returned the

money and that is also has cost they cannot assume that it is free there is a cost implication for the

reserve that is the bank balance in proprietors account right so that is another decision to be

taken by finance manager what is the capital structure to be for this business

a resource allocation understanding for each section how much of financial

resources are required and when is something that financial manager need to understand

disposal of surplus disposing the surplus what is surplus it may be profit

profit how to distribute profit who will be given the first major share of this profit how much to give

these are the decisions to be taken by the finance manager management of cash

is very important because business also need to maintain certain cash to take care of

daily activities right so what is a petty cash that is required to take care of trading

requirements what is the working capital requirement all these decisions to be taken by

the finance the function the financial manager principal

agent relationship in business agency theory so this is one of the most debated topic in the area of financial

management and it is most important areas of discussion often

this is causing a serious problem in the corporate world who is the principal and who is the

agent in business basically principle and agent relationship in business it's a

fiduciary consensual relationship between two people in the business these two people will have

their own set of duties and responsibilities when these two parties

are not able to take care of their duties and responsibilities the conflict of interest arises and that's when the

agency problem arises in general in a generic example

let us talk about mechanic so mechanic right

how agency problem arises with mechanic let's say

consider you have a car and there is a problem there is a left pulling issue in your

car and you will take your car to the garage and you will show it to the mechanic

mechanic know that just by doing wheel balancing this problem can be sorted and it will just cost the owner say

less than 5000 to do that wheel alignment now

when the car is given to the mechanic a mechanic is a agent the owner is the principal

when principal has assigned certain duties to the agent it is a duty of the agent to take care

of the best interest of the owner that is supposed to happen

when that is not happening that is when the agency relationship the urgency problem will arise

the car is given to a mechanic and mechanic know that it is costing less than 5000 despite that the mechanic will

suggest the owner to go for a very major repair work or to

replace some spare parts in the car which will cost owner say 20 000. mechanic knows that it is just costing

5000 to the owner if that is going for wheel balancing but still is suggesting some

replacing some spare parts which is of no use so the agency problem arises

same with the doctor same with the lawyer there is just cough and cold

that you can get it tested and you can take medicine that just over the counter medicine but still you have gone to the

doctor to check but doctor knows that it is a very common flu which can be

you know that can be cured with two to three days of medication which will cost less than thousand rupees to

the patient but doctor if the doctor is not doing that if the

doctor is suggesting to go for some scanning some major medical tests which are of no use even medi the doctor is

aware of that that is when the agency relationship agency problem arises

in this situation now when it comes to a business how agency problem arises

in business there are two parties involved one is agent and one is

principal who is the agent and who is the principal in a company principal is

the shareholder right the shareholders who are actually

invested in the business they are the owners of the business who is the agent agent is the board of directors or

directors or the chairman who is actually entitled to take care of the operations of the business the entire

business because the shareholders may not be able to participate in the day-to-day activities of the business

and that is the reason they are hiring board of directors or top officials of the company

including ceo now it is the duty of ceo or board of

directors to take care of the best interest of shareholders the decisions that ceo or the board of directors take

should be in the best interest of the principal who is the principal the

shareholders when the decisions of board of directors is not in line

with the requirements of the business when that is not in the larger interest of the business when

that is not in the larger interest of the principal that's when agency problem arises

there are so many examples in this context you can take satyam case where

rambling raju was the key person in mahindra and mahindra who

actually manipulated the accounts which is not in the best interest of the

shareholders the shareholders have not told him that to alter the annual reports to impress

the society to impress the governments or impress to impress the investors it was not in the best interest of

stakeholders right same holds true with malia

when he was in the position to take key decisions to

the business when the shareholders choose him as the ceo or

or a board member of a particular group he is not supposed to take the decisions that will harm the interest of the

shareholders right there are so many cases where agency problem arises and it's very

damaging to the business when this kind of situations arises there will be

survival question business may survive or it may just vanish because when there is a compromise

to the best interest of the shareholders that is agent and principal relationship in agent and principal relationship

agent is hired by principal and principal pay rewards to agent for the work for the duties performed by the

agent but when the agent is not impressed about the rewards that you would expect

from principal you may find other routes to increase his financial rewards and that's when you'll get into the agency

problem now this is the time to understand the

financial system so why we need to discuss about financial

system when we talk about financial management of a business we need to understand

business is part of the system and finance is

very much connected with the financial system a business is a part of the entire

ecosystem of a country right so we need to understand the financial system how financial system of a country is

functioning and how a business is connected to the financial system a financial system of a country

can be broadly discussed under three areas financial instruments

financial markets and financial intermediaries

it may be any country it may be for india it may be for any country but these are the

areas when we can discuss the financial system let's understand what are financial instruments

what are the financial instruments we talk about and how these financial instruments are relevant to the business

financial instruments are the assets for

a business or for any entity

these financial instruments will have economic value that's very important they'll have economic value

and these financial instruments are traded in the market it may be in the exchange or it may be in the over the

counter market it may be traded on unlisted or stock exchanges or it may be traded

in over the counter environment a financial instruments will have legal validity legal tender

that's the reason these are considered as instruments especially financial instruments

these instruments can be real or virtual it may be intangible asset or it may be a tangible