01 Introduction

What is Finance? Optimal procurement as well as usage of finance.
What is Finance?
• The art and science of managing money,
or management of money.
• It is the study of value.
• It is the study of how to make good
decision that involve money.
– What assets to buy?
– How to pay for the assets you buy?
Five Fields of Finance
Public Finance
Institutional Finance
Securities and Investment Analysis
International Finance
Dr. Sumanth
Dr. Sumanth has been
operating a small Health care
centre for several months. He
would like to expand by
employing an assistant and by
purchasing new equipment. He
cannot decide whether the
investment would be justified.
Factors
• equipment must generate cash

ﬂows over its expected life
• number of patients he expects
• price
• cost of paying the proposed
assistant
• percentage return expected on
the capital invested in the
equipment
• ROI
Nature of Finance (1/2)
Dynamic and Evolving Interdisciplinary Decision-Oriented

It considers adjustments Principles from statistics, At its core, finance is
to the commercial, mathematics, accounting, about making decisions.
regulatory, and economic and economics are all Effective resource
settings. applied in finance. allocation is a key
It adjusts to emerging To handle complicated component of financial
technologies, financial financial challenges, a decisions in order to
instruments, and multidisciplinary strategy maximize shareholder
worldwide market is used. wealth.
movements.
Nature of Finance (2/2)
Time Value of Money Risk and Return

The idea that a sum of money Managing the trade-off between risk and
changes in value over time is reward is a key component of finance.
acknowledged in finance. Larger potential return investments
It highlights how crucial frequently carry larger risks as well,
compounding and discounting are necessitating smart risk management.
to financial analysis.
Scope of Finance (1/2)
• Investment Decisions
➢ involves putting money into investments that
yield profits.
➢ evaluating and choosing investments to
increase shareholder wealth.
• Financing Decisions
➢ figuring out the best ratio of equity to debt
to finance operations.
➢ weighing the risk of using various funding
sources against the cost of money.
Scope of Finance (2/2)
• Dividend Decisions
➢selecting how to distribute earnings to
shareholders.
➢striking a balance between the necessity
for corporate reinvestment and the
interests of shareholders.
• Working Capital Management
➢keeping an eye on short-term liabilities
and assets to guarantee liquidity.
➢balancing the expenses of maintaining
working capital with the requirement for
operational efficiency.
Goals of Financial
Management
• Profit maximization (profit
after tax)
• Maximizing Earnings Per Share
• Shareholder’s Wealth
Maximization
Profit Maximisation
• Main aim is earning profit.
• Profit is the parameter of the business
operation.
• Profit reduces risk of the business
concern.
• Profit is the main source of finance.
• It emphasizes short-term
• It ignores time value of money
Wealth
Maximisation
• This concept is to improve the value or

wealth of the shareholders.
• It considers both time and risk of the
business concern.
• It provides efficient allocation of
resources.
• It ensures the economic interest of the
society.
• It emphasizes long-term.
Organization of
Finance Function (1/2)
• Involves budgeting, forecasting,

Financial and strategic financial planning.
Planning and • Ensures alignment between
Analysis financial goals and organizational
strategy.
• Manages the firm's cash,

investments, and financial risk.
Treasury
• Implements strategies to optimize
Management liquidity and minimize exposure to
market risks.
Organization of
Finance Function (1/2)
• Involves making investment and

financing decisions.
Corporate
• Includes capital budgeting, capital
Finance structure decisions, and dividend
policy.
• Identifying and mitigating various

Risk financial risks.
Management • Involves the use of derivatives and
insurance to hedge against risks.
Why do we need
finance?
• To start a business
• For cash flows
• To finance new assets – machinery,
cars and so on
• For new premises or extending an
existing location
• Buying or combining with another
business
• Other reasons include faster
growth, succession, etc.
Inter linkage
• Marketing
– Budgets, marketing research, marketing
financial products
• Accounting
– Dual accounting and finance function,
preparation of financial statements
• Management
– Strategic thinking, job performance,
profitability
• Personal finance
– Budgeting, retirement planning, day-to-
day cash flow issues
Finance and Accounting
Finance Vs. Accounting (1/3)
Aspect Finance Accounting

Primarily management of assets,
Primarily recording, classifying, and
Focus liabilities, investments, and financial
summarizing financial transactions.
strategy.
Historical perspective, focusing on
Time Future-oriented, emphasizing planning,
Perspective recording and reporting past
forecasting, and decision-making.
financial transactions.
Involves strategic decision-making Involves preparing financial
related to investments, capital statements, maintaining financial
Role
structure, risk management, and records, and ensuring compliance
financial planning. with accounting principles.
Guides decision-making by providing Supports decision-making by
Decision-
Making insights into the financial implications providing historical data and
of various choices. financial statements.
Uses tools such as financial modeling, Uses tools like journals, ledgers,
Tools and valuation techniques, and capital financial statements, and
Techniques budgeting to analyze and plan for the accounting principles to record and
future. report financial transactions.
Focuses on the future and making Focuses on documenting and

Historical
Perspective decisions that will impact future reporting past financial
financial performance. performance.
May involve external reporting, but Primarily focused on external

External
Reporting more concerned with internal reporting through financial
decision-making. statements.
Involves financial analysis but Involves internal and external

Auditing typically does not include auditing auditing to ensure accuracy and
activities. compliance.
Key issues in Finance
• Where to raise financial resources?
• Where to invest the resources?
• How best to manage the production-
distribution function?
• How much of profit to distribute and how
much to retain?
Finance
Functions
Finance Decisions of the Firm
Financial decision-making involves procurement of funds
and their optimal utilization through:
1. Investment (utilization of fund)
2. Financing decision
3. Dividend (distribution of fund) and
4. Working capital decision
• https://www.cbsesamplepapers.info/cbse/cbse-class-
12-case-studies-in-business-studies-financial-
management
• https://help33.com/characteristics-of-partnership-
business/
• https://businessjargons.com/sole-proprietorship.html
• https://www.bnpparibasmf.in/learn-
invest/understanding-risk-return
Sources • http://www.ptaindia.com/risk-return-relationship-of-
investments-mystery-revealed/
• https://www.discovery.co.za/investments/risk-friend
• https://www.caclubindia.com/articles/basics-of-
capital-markets-derivatives-26096.asp
• https://www.youtube.com/watch?v=2Sgp6LVPQXY

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What is Finance? Optimal procurement as well as usage of finance.

• equipment must generate cash

Dynamic and Evolving Interdisciplinary Decision-Oriented

Time Value of Money Risk and Return

• This concept is to improve the value or

• Involves budgeting, forecasting,

• Manages the firm's cash,

• Involves making investment and

• Identifying and mitigating various

Aspect Finance Accounting

Focuses on the future and making Focuses on documenting and

May involve external reporting, but Primarily focused on external

Involves financial analysis but Involves internal and external

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