Unit 1

Significance of Business Finance

1) Timely procurement of funds
2) Optimum utilisation of funds and resources
3) Growth in Profit
4) Maximisation of Market value per share
5) Optimal capital structure
6) Optimum level of risk
7) Future prediction possible
8) Proper management of Earnings
9) Evaluation of financial health of an organisation

FOG
TEMP
1) Timely procurement of funds :
Every organisation require funds for carrying on its
activities and also for expansion. Financial management
provides various tools and techniques which are useful
in ascertaining the amount of funds required at
different point of time. As the requirement of funds is
known to the management in advance, it becomes
possible to make necessary arrangement in advance to
procure the required fund. Thus Financial management
ensures timely procurement of funds for the
organisation.
2) Optimum utilisation of funds and resources :
Financial management helps to make an optimum utilisation
of available financial resources. Every organisation has various
alternatives to invest its funds. The various techniques given
by financial management helps the management to select a
best investment alternative.
3) Growth in Profit
The amount of profit earned by an organisation is
normally regarded as an indicator of its success.
Financial management helps the management to
maximise overall profit of the organisation. It also
helps to maximise earning per share. Financial
management minimises wastage of financial
resources and thus helps in minimisation of cost and
which in turn results in maximisation of profit.
4) Maximisation of Market value per share :
Financial management not only helps to increase the earning
per share but also helps to maximise the wealth of the
shareholder by maximising the market value of the share. The
finance manager has to take all his financial decisions so as to
ensure maximum market value per share.
5) Optimal capital structure :
Capital structure simply means mix of the long term funds.
Financial management helps to decide such a capital structure
which results in increase in earning per share, market value
per share.
6) Optimum level of risk :
Financial management has provided various techniques for
risk management. These techniques helps the management to
maintain the risk at optimum level. The risk arises due to
uncertain results in the business. Financial management
techniques help the management in decision making under
uncertainty.
7) Future prediction possible :
The technique of budgeting and forecasting helps the
management to know in advance the expected performance
in near future. It facilitates optimum utilisation of available
resources. Management can take corrective action at proper
time if it knows in advance the expected adverse deviations in
the future performance.
8) Proper management of Earnings :
The finance manager has to take the financial decisions
so as to maximise the profit. His job/responsibility do
not end here. He has to further decide how the
increased profits of the firm be utilised. The various
models given by the experts of financial management
helps him to decide how much portion of the profit be
distributed as dividend and how much portion be
retained in the business for expansion etc. i.e. in short
financial management helps to decide the optimum
dividend policy.
9) Evaluation of financial health of an organisation
Every organisation prepares financial statements and reports
every year or periodically. These statements contain the details
of financial performance of the company. The various techniques
like Ratio analysis, Fund Flow analysis of the Financial
management helps the management to make detail analysis of
the financial statements. Thus financial management helps to
evaluate the financial health of an organisation.
 Objectives of Business Finance
1) Profit Maximisation
2) Wealth Maximisation
3) To ensure smooth & timely procurement of funds or financial
resources.
4) To ensure optimum utilisation of financial resources.
5) To ensure growth & expansion of the firm.
6) To maintain optimum level of risk.
7) To make optimum utilisation of available earnings or profits.
8) To minimise the overall cost of capital .
9) To develop proper procedures for financial dealings & to maintain
financial discipline in the organisation.
10) To evaluate the financial health of the organisation.

MOME POPE WD
 Scope of Financial Management
1. Financial management is essential in all types of organisations
whether business or non - business, private or public
2. Financial management is needed in all types of economies.
3. Financial management is needed in newly formed companies as
well as in the old & existing companies.
4. The various techniques of Financial management can be applied
for proper production management. In the production
department various short & long term decisions are to be taken.
All these decisions have financial implications & hence the
financial management has a role to play in production
management also.
5. Financial management techniques are also useful for the
Material department, to formulate various policies for proper
material management. The finance manager has to evaluate all
these policies in the light of the objective of the firm.

6. Financial management is also useful in the marketing

department. It helps in the marketing department to know the
financial implications of the various marketing and advertising
policies. It also helps in pricing policies.
7. Financial management also plays an important role in personnel
department. It helps in deciding the various incentive plans for
the staff. The finance manager has to play a crucial role while
deciding the pay structures or at the time of revision of pay
structures. The finance manager has to decide about
procurement of funds & its utilisation for the welfare of the
employees.
Sources of Finance
 Capital Market
 Capital market is one of the major element of the corporate firms
operating environment.
 It helps the corporate firms to raise long term funds necessary for
their capital expenditures.
 It is a barometer of the economy of the country and provides
capital formation mechanism.
The securities [capital] market is divided into two interdependent
segments:
1] The primary market provides the channel for creation of funds
through issuance of new securities by companies, governments,
or public institutions. In the case of new stock issue, the sale is
known as Initial Public Offering (IPO).
2] The secondary market is the financial market where previously
issued securities and financial instruments such as stocks, bonds,
options, and futures are traded.
 Broad Constituents in the Indian Capital Markets
Fund Raisers are companies that raise funds from domestic and
foreign sources, both public and private. The following sources
help companies raise funds

Fund Providers are the entities that invest in the capital markets.
These can be categorized as domestic and foreign investors,
institutional and retail investors. The list includes subscribers to
primary market issues, investors who buy in the secondary
market, traders, speculators, FIIs/ sub accounts, mutual funds,
venture capital funds, NRIs ,ADR/GDR investors, etc.
• Intermediaries are service providers in the market, including stock
brokers, sub-brokers, financiers, merchant bankers, underwriters,
depository participants, registrar and transfer agents, FIIs/ sub
accounts, mutual Funds, venture capital funds, portfolio managers,
custodians etc.
• Organizations include various entities such as MCX-SX, BSE, NSE, other
regional stock exchanges, and the two depositories National Securities
Depository Limited (NSDL) and Central Securities Depository Limited
(CSDL).
• Market Regulators include the Securities and Exchange Board of India
(SEBI), the Reserve Bank of India (RBI), and the Department of
Company Affairs (DCA).
 Features of Capital Market
1. Link between Savers and Investment Opportunities:
Capital market is a crucial link between saving and investment
process. The capital market transfers money from savers to
entrepreneurial borrowers.

2. Deals in Long Term Investment:

Capital market provides funds for long and medium term. It does
not deal with channelising saving for less than one year.
3. Utilises Intermediaries:
Capital market makes use of different intermediaries such as
brokers, underwriters, depositories etc. These intermediaries
act as working organs of capital market and are very
important elements of capital market.
4. Determinant of Capital Formation:
The activities of capital market determine the rate of capital
formation in an economy. Capital market offers attractive
opportunities to those who have surplus funds so that they
invest more and more in capital market and are encouraged to
save more for profitable opportunities.
5. Government Rules and Regulations:
The capital market operates freely but under the guidance of
government policies. These markets function within the
framework of government rules and regulations, e.g., stock
exchange works under the regulations of SEBI which is a
government body.

An ideal capital market is one:

1. Where finance is available at reasonable cost.
2. Which facilitates economic growth.
3. Where market operations are free, fair, competitive and
transparent.
4. Must provide sufficient information to investors.
5. Must allocate capital productively.
 ROLE AND IMPORTANCE OF CAPITAL MARKET IN
INDIA

Capital market has a crucial significance to capital formation. For a

speedy economic development adequate capital formation is
necessary. The significance of capital market in economic
development is explained below:-

1. Mobilization Of Savings And Acceleration Of Capital Formation :-

In developing countries like India the importance of capital market is
self evident. In this market, various types of securities helps to
mobilize savings from various sectors of population. The twin
features of reasonable return and liquidity in stock exchange are
definite incentives to the people to invest in securities. This
accelerates the capital formation in the country.
2. Raising Long - Term Capital :-
The existence of a stock exchange enables companies to raise
permanent capital. The investors cannot commit their funds for a
permanent period but companies require funds permanently. The
stock exchange resolves this dash of interests by offering an
opportunity to investors to buy or sell their securities, while
permanent capital with the company remains unaffected.

3. Promotion Of Industrial Growth :-

The stock exchange is a central market through which resources are
transferred to the industrial sector of the economy. The existence
of such an institution encourages people to invest in productive
channels. Thus it stimulates industrial growth and economic
development of the country by mobilizing funds for investment in
the corporate securities.
4. Ready And Continuous Market :-
The stock exchange provides a central convenient place where
buyers and sellers can easily purchase and sell securities. Easy
marketability makes investment in securities more liquid as
compared to other assets.

5. Technical Assistance :-
An important shortage faced by entrepreneurs in developing
countries is technical assistance. By offering advisory services
relating to preparation of feasibility reports, identifying growth
potential and training entrepreneurs in project management, the
financial intermediaries in capital market play an important role.
6. Reliable Guide To Performance :-
The capital market serves as a reliable guide to the performance and
financial position of corporate, and thereby promotes efficiency.

7. Proper Channelization Of Funds :-

The prevailing market price of a security and relative yield are the
guiding factors for the people to channelize their funds in a
particular company. This ensures effective utilization of funds in
the public interest.

8. Provision Of Variety Of Services :-

The financial institutions functioning in the capital market provide a
variety of services such as grant of long term and medium term
loans to entrepreneurs, provision of underwriting facilities,
assistance in promotion of companies, participation in equity
capital, giving expert advice etc.
9. Development Of Backward Areas :-
Capital Markets provide funds for projects in backward areas. This
facilitates economic development of backward areas. Long term
funds are also provided for development projects in backward
and rural areas.

10. Foreign Capital :-

Capital markets makes possible to generate foreign capital. Indian
firms are able to generate capital funds from overseas markets by
way of bonds and other securities. Government has liberalized
Foreign Direct Investment (FDI) in the country. This not only
brings in foreign capital but also foreign technology which is
important for economic development of the country.
11. Easy Liquidity :-
With the help of secondary market investors can sell off their
holdings and convert them into liquid cash. Commercial banks
also allow investors to withdraw their deposits, as and when
they are in need of funds
The capital market is bifurcated into following two categories : -
1) Primary market.
2) Secondary market.
• 1) Primary market :- It is a mechanism through which the
securities are issued by the companies directly to the investors
either individual or institution. The primary market performs the
important function of transfer of savings, especially of the
individuals to the companies who are in need of money.
• In the primary market the new issue of securities is made in the
form of public issue or right issue. In India the securities normally
used for raising the funds through the primary markets are
shares, bonds, debentures, etc.
• The different financial institutions or financial intermediaries play
an important role in issuing the securities to the investor on
behalf of the companies. These intermediaries may work in the
primary market as Lead Managers to the issue, Underwriters,
Advisors, etc.
• The regulatory framework for the issue of securities in the
primary market is provided by the Companies Act 1956, The
Securities Contract (Regulation) Act 1956 and the Guidelines
issued by SEBI.
2) Secondary market :- Secondary market is a market for
subsequent purchase and sale of the securities. An investor can
subscribe the securities initially from the company by making an
application to the company. If he has not subscribed the
securities at the time when they are initially issued by the
company then he can purchase these securities from the
Secondary market. Similarly he can dispose off his securities in
the Secondary market. Thus we can say that the securities take
birth in the primary market but its subsequent movements takes
place in the Secondary market. Secondary market is that portion
of capital market in which only previously issued securities are
transacted. The corporate firms are not allowed to raise new
funds from this market by issue of securities. The Secondary
market provides liquidity of investment. It helps the firms to fix
the price of the securities of its new issue. It provides the full
information to the investors publicly. It helps to offer competitive
prices of the securities to the investors. The Secondary market is
represented by the Stock exchanges