INTRODUCTION

1.1 CONCEPT OF FINANCE

Finance is one of the major elements, which activates the overall growth of
the economy. Finance is the life blood of economic activity. It is the master
key which provides access to all other ~resources that are employed in the
production and marketing of goods and services. It guides and regulates
investment decisions and expenditure.

Any organization that is engage in manufacturing and merchandising

activities needs a medium of transactions to fulfill its targets and obligations
for which finance or money required , for day to day and fiscal transactions
is evidently the medium, acceptable to all and which is more liquid was
invented and this is the most amazing subject of
Business named Finance.

Finance is required for every business enterprise has to raise the funds to
start their business activities. The funds are available in the economy from
different sources
i.e.

• Primary market
• Secondary market
• Money market and
• Personal funds.

All these sources are exploited through the issue of long term and short term
Financial instruments. Proper functioning of different functions of an
organization is highly dependent on the availability and utilization of
financial resources.

BUSINESS FINANCE

Business finance refers to an activity or a process which is concerned with

acquisition of funds. Use of funds and distribution of profits by a business
firm. Thus business finance literally means provision of funds at a required
time, applications of funds to the optimum level of productivity and
profitability, retention of surplus profits to strengthen the
Financial base of the business organization.
1.2 FINANCIAL MANAGEMENT

Financial management is the specialized functions directly associated with

the top management. The significance of this function is not only seen in the
'Line' but also in the capacity of 'Staff' in the overall administration of a
company. The finance function has become so important that every business
undertaking has its managerial activities to it and also it's given birth to
financial management as a separate subject.

Financial management refers to that part of the managerial activity, which is

concerned with the planning and controlling of the firms financial resources.
It deals with finding out various, sources for raising funds for the firm. The
sources must be suitable and economical for the needs of the business. The
most appropriate use of such funds also forms a part of financial
management.

Financial management clearly guides the financial manager to select long

term as well as short term funds and its allocation to capital and revenue
expenditure, hence ultimately used as a communication tools to convince the
investors about the performance of a corporate entity. It also helps in
devising ways and exercising appropriate cost controls, which ultimately
help in increasing profitability.

Scope or content of Financial Management

1) Estimating financial requirement
2) Deciding capital structure
3) Selection of sources of funds and its allocation
4) Profit planning and control
5) Maintaining liquidity and wealth maximization
6) Analyzing and interpreting of results
7) Capital budgeting
8) Fair returns to the investors
9) Proper use of surpluses
10) Proper cash management
11) Selecting a pattern of investment
12) Implementing financial controls
OBJECTIVES OF FINANCIAL MANAGEMENT

The ultimate objective of the subject financial management is to fulfill the

basic desire of the firm. In the broader concept it has to meet the
requirements of not only the shareholders but also the stakeholders. It can be
broadly classified as specific and general objectives.

1. Specific objectives

It’s the traditional decision of how finance should be managed in respect of:
a) Liquid Assets
b) Profit Maximization
c) Wealth Maximization

a) Management of liquid assets:

Liquid assets form the requirement of any business enterprise and therefore
financial management should excel in maintaining judicial levels of liquid
assets. There should neither be a shortage of current assets or over stocking
of current assets. The relation between current assets and current liabilities
should be well understood and well maintained. Any imbalance in liquid
assets will have a direct effort on the profitability and hence the financial
manager maintains liquid assets with a constant watch on profitability.

b) Profit Maximization:
Earning profits by a corporate or a company is a social obligation. Profit is
the only means through which an efficiency of organization can be
measured. The objective of an business is to earn profit that gives you more
money in the liquidity system and operational system. It is the profit that
keeps the shareholders, financing bankers and the government happy.
Hence, profit maximization has become another specific objective of
financial management.

c) Wealth maximization:
The concept of wealth maximization refers to the gradual growth of the
value of assets of the firm in terms of benefits it can produce. Any financial
action can be judged in terms the benefits it produces less cost of action. The
wealth maximization attained by a company is reflected in the market value
of shares. It's the process of creating wealth of an organization. The image
offers high returns to the equity shareholders in the stock market, resulting
in the capital appreciation to the owners in course of time, which is called as
"Wealth Maximization".

When the company's profits are more, the manager advises the management
to keep certain amount of the future expansion, through which he increases
the production and market share. The benefit gained will be passed' on not
only to the equity shareholders but also uses such additional profits to
maintain good relations with the creditors, better payment of ages to
workers, develop infrastructure. Create more welfare facilities to the society,
pay prompt taxes to the government and attain self sufficient and earn good
reputation in market, which will be reflected by market value of shares in the
stock exchange. The market price serves as the firm's performance indicator.

2. General objectives
Apart from achieving the specified objectives it should also focus on the
general objectives of financial management like having a goal of
maintaining balanced asset structure or the company, payment of dividend
money to the shareholders on time, providing structured growth and
expansion reserves, efficiency and innovativeness of a company which can
lead it to its successful run in its future periods, optimizing operational
efficiency and ensuring financial discipline by controlling misuse of funds,
Frauds, thefts etc;.

DECISIONS IN FINANCIAL MANAGEMENT

The financial decisions of the firm are interrelated and jointly affect the
market value of shares by influencing returns and risk of the firm. There
should be a proper balance between the return and risk that should be
maintained to maximize the market value of shares of the firm. Such a
balance is called risk-return trade off and every financial decision involves
this trade off. All this decisions directly contribute to the corporate goal of
wealth maximization. The subject financial management guides the
management to have optimal mix of these decisions. The joint value of these
decision increases the value shares. The function of finance involves the
following decisions:
1. Investment decision:
Investment decision is referred to the activity of deciding the pattern of
investment. It covers both short term and long term investment, in other
words capital assets and the current assets. It is a long range financial
decision and deals with allocation of capital.
It has to show how the funds can be invested in assets which would yield
maximum return to the business concern.

2. Financing decisions:
It is an important decision where a business concern has to take maximum
care in financing different proposals. The appropriate mix of finance with
debt to equity directly contributes to the profitability of a business unit. The
instruments that are to be selected must aim at maximizing the returns to the
investors and to protect the interest of creditors. The capital structure of the
company should be flexible and not rigid.

3. Dividend decisions:
The ultimate objective of a business concern is to fulfill the desires of equity
shares namely
(a) High-percentage of dividend and
(b) Maximum returns to shareholders in the form of capital gain.
Hence sound decision should be taken. While taking such a decision, the
finance manager should also take care much for retained earnings, which
will act as solid component of equity capital.
1.3 FINANCIAL INSTITUTIONS
Every country needs the services of financial institutions for accelerating the
pace of development. These institutions not only provide financial assistance
to industrial undertaking but also help in creating infrastructure facilities.
Some institutions undertake entrepreneurial role also. Private entrepreneurs
do not have sufficient funds to undertake development of industry. Their
efforts need to be supplemented by some other institutions. So, financial
institutions are required for the economic development of a country.

ROLE OF FINANCIAL INSTITUTIONS

Financial institutions provide means and mechanism of transferring
resources from those who have an excess of income over expenditure, to
those who can make productive use of the same. The commercial banks and
investment institutions mobilize savings of people and channelise them into
productive uses. Economic development of a country needs sufficient
financial resources, adequate infrastructural facilities and persons who can
take the initiative of setting up units for providing goods and services.
Financial institutions provide all types of assistance required for
development.

TYPES OF FINANCIAL INSTITUTIONS

Financial institutions can be categorized broadly into two categories:
1. Banking institutions.
2. on-Banking Financial Institutions.

ABOUT FINANCIAL INSTITUTIONS:

The formation of The Industrial Finance Corporation of India (IFCI), in
1948 marked the first phase of development of the formal Indian capital
market. While IFCI catered to the need of large industrial units, to finance
the medium and small scale industries which fell outside the scope of IFCI,
state level financial institutions were formed in 1951.Institutions such as The
Industrial Credit and Investment Corporation of India (ICICI). 1955, and the
Industrial Development Bank of India (IDBI), 1964 further deepened the
capital markets. The Indian capital market has seen the mergence of a range
of financial institutions over a 50 year period and comprises the following
institutions:
a) All India Financial Institutions (AIFI)
b) State Level Institutions
c) Sectoral Institutions
d) Investment Institutions
1.4 STATE FINANCIAL CORPORATIONS (SFCs)
State Financial Corporations are the state level development banks for the
development of small and medium scale industries in 18 states of India.
They aim at bringing about balanced regional development by wider
dispersal of industries, promoting greater investment and generating larger
employment opportunities. Besides their paid-up capital, State Financial
Corporation augments their funds by borrowings from Government, RBI,
SIDBI and Banks and by way of issuing Bonds / Debentures, by accepting
Deposits and by sale if Investments made in shares and debentures if
industrial concerns.

FUNCTIONS:
State Financial Corporation performs the following functions:
1. They provide financial assistance to industries by way of term loans,
direct subscription to equity / debentures, discounting of bills of exchange
and providing guarantees.
2. They meet the term loan requirement of small and medium scale
industries for acquisition of fixed assets like land, building, machinery and
equipment.
3. They provide loans for setting up of new industrial units as well as for
expansion and modernization of the existing unit.
4. They' also promote the development of medium and small-scale industries
in backward areas of the country.
4. Under the special capital scheme, SFCs provide equity type of support up
to Rs.4 lakhs on short term to entrepreneurs for bridging the gap in equity or
promoters contribution, entrepreneurs with viable projects but lacking
adequate funds are assisted under the scheme.
6. SFCs operate a number of schemes on behalf of the SIDBI. These include
Schemes for women entrepreneurs, modernization scheme, and equipment
finance scheme, schemes for hospitals and nursing homes, schemes for ex-
servicemen, single window scheme and special capital scheme.
NUMBER OF STATE FINANCIAL CORPORATIONS:
At present there are 18 SFCs in the country, 17 of which were set up under
the SFCs Act 1951Tamil Nadu Industrial Investment Corporation Ltd. Set
up in 1949 under the Companies Act as Madras Industrial Investment
corporation also functions as a full fledged SFC.

I. Andhra Pradesh State Financial Corporation.

2. Assam Financial Corporation.
3. Bihar State Financial Corporation.
4. Delhi Financial Corporation.
5. Gujarat state Financial Corporation.
6. Harayana Financial Corporation.
7. Himachal Pradesh Financial Corporation.
8. Jammu & Kashmir State Financial Corporation.
9. Karnataka State Financial Corporation.
10. Kerala financial Corporation.
11. Madhya Pradesh Financial Corporation.
12. Maharashtra State Financial Corporation.
13. Orissa State Financial Corporation.
14. Punjab Financial Corporation.
15. Rajasthan Financial Corporation.
16. Tamil Nadu Industrial Investment Corporation Limited.
17. Uttar; Pradesh Financial Corporation.
18. West Bengal Financial Corporation.
1.5 CONCEPT OF FUNDS MANAGEMENT
Funds Management represents the core of sound financial planning.
Management of net funds available for investment and external funds
purchased from other banks or financial institutions. Funds management
attempts to match the cash flow needs of a bank against maturity schedules
of its deposits as loan demand increases or decreases. Funds management is
more of a Treasury function, which deals mainly with control of interest
Rate risk and liquidity risk, and the pricing of loans in specific time periods.

The analysis of the term Funds Management consists of two things i.e.
Funds and management.

In its simple sense, funds mean 'cash' or pool of resources or 'pool of

money'. Funds also mean excess of current assets over current liabilities .i.e.
working capital.

Funds also means sum total of share capital+long-term loans-(non

businessassets+fictitious assets).

Management on the other hand, a distinct process consisting of planning,

organizing, and coordinating and controlling performs to determine and
accomplish the stated objectives by the use of human beings and other
resources.

MEANING
Funds Management refers to all those managerial activities or efforts which
are concerned with the ascertainment of finance needed by the firm,
determination of the sources, Collection of funds in time and control over
the utilization of funds.
Thus, we can say, Funds management is the process of:
a) Ascertainment of finance needed by the firm
b) Determining the sources
c) Collection of funds at right time and
d) Effective utilization of funds.
OBJECTIVES OF FUNDS MANAGEMENT
As blood is to human being, Finance is to a business. So every business firm
has to manage the funds effectively in order to achieve the following
objectives:

• To ensure maximum operational efficiency through effective

employment of funds:-
The very objective of the corporation is financial decisions that are
concerned with -the raising of funds from different sources and their
effective utilization towards achieving the goal of maximization of profits.

• To built up adequate reserves for financing growth and expansion:-

Another important objective of Funds management is to maintain reserves of
funds. This means in the process of maintaining obligations on time. The
collections of Funds must be expedited and cash outflows should be
controlled to conserve the financial resources. So to attain the probability the
corporation should maintain the cash reserves. This helps in the financial
growth and expansion.

TOOL FOR FUNDS MANAGEMENT:-

The preparation of statement of changes in financial position or what we call
popularly "Funds flow' statement" helps to determine what are the changes
that has taken place in the financial position of the corporation and also help
to determine whether the funds have been raised from the best available
sources, and whether they have been utilized in the best possible way.
Unlike the tradition financial statement like balance sheet and income
statement which Provides only financial position of corporation as on a
particular date, Funds Flow Statement furnishes the useful financial data
regarding operations of the corporation's funds
It summarizes the sources from which funds have been obtained and the uses
to which have been applied.
Even though it is not mandatory to prepare Funds Flow statement because of
its immense benefits almost all the firms are preparing the Funds Flow
statement.