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2. First session

3. What is Finance?
As a term ‘Finance’ is defined in various ways, However a more comprehensive definition of finance could be:
Finance is the set of administrative functions in an organization which manage the flow of cash within an organization so that the organization will have the means to carry out its objectives as easily as possible and in the meantime also meet the obligations as they become due.

4. Main subdivisions of Finance
Finance is traditionally sub-divided into 3 interrelated segments:
Finance
Financial Management
Investments
Financial Markets and Institutions

5. 1. Financial Management Specialty area of finance.
Financial Decision Making
Investment Decision Making
Managerial Decision Making
Specialty area of finance.
Financial management is known by different names.
Interrelated decision making process.
Three main types of financial management decisions.
Important for financial managers to evaluate these decision on an interrelated basis.

6. i. Investment Decisions
Assets are any item owned by an individual or company which has value (i.e. they could be sold).
Long term in nature.
‘Capital budgeting’ decisions.
Example: Sale of a division or business, change in method of advertising, expansion, acquisition, modernization and replacement of long term assets all have potential to impact firm’s expenditures and benefits in the long run and are known as capital budgeting decisions.
Involves determining the type and amount of assets the firm wants to buy and hold.
Example: Spinning machine for a textile unit, setting up an electric power generating facility for a sugar mill.

7. i. Investment Decisions
Involve finding a right balance between long-term and short-term goals.
Explained through example.

8. i. Investment Decisions
Asset side of balance sheet (left-hand side) is related to investment decisions.
Investment decision

9. i. Investment Decisions
Common investment decisions to be undertaken by the financial manager:
In what lines of business should the firm engage?
Should the firm acquire other companies?
Should the firm modernize or sell an old production facility?
Note.

10. ii. Financing Decisions
The second question that a financial manager faces.
Concerned with the ways and sources through which firm obtains and manages long term financing it needs to support long term investments.
A firm’s capital structure refers to the specific mixture of debt and equity the firm uses to finance its investments.

11. ii. Financing Decisions
An important part of manager’s financing decisions is to answer the question, ‘How to raise cash for meeting firm’s capital expenditures?
The answer to this questions involves the right side of the balance sheet, the firm’s capital structure.
Stockholders’ equity representing owner investment into assets of the company. 
Financing decision

12. ii. Financing Decisions
Types of Financing:
Equity financing
Debt Financing

13. ii. Financing Decisions
Common Financing decisions to be undertaken by the financial manager:
How to finance?
Short-term or long-term?
People or banks?
Wait or to invest now?

14. iii. Managerial Decisions
Concerned with day-to-day decision making
Making investing and financing decisions that improve the firms value for its owners.
What should be the growth rate of the firm?
Does a firm need external (debt) financing? If Yes, then work to improve credibility so that financial institutions would grant loans.

15. Functions of Financial Manager
Financial analysis
Discovering full meaning contained within F.S.
Unlock activity pattern.
Financial planning
Deciding how much and where to invest
Financial forecasting
Primary function, estimate financial requirement
Financial control
Tracking performance and evaluating org. progress towards achieving organizational goals
Interrelation with other departments
Very important to regularly interact and maintain relationship

16. Goals of Financial Manager
F.M. makes decisions for stockholders of firm
From stockholders P.O.V what would be a good F.M. decision?
The goal of maximizing stock value avoids a number of problems.
Stockholders are residual owners of a firm.
The goal of financial manager of a corporation is to increase the value per share of the corporation’s stock.

17. Agency Relationships
Goal of a financial manager is to act in best interest of stockholders.
However, in large corporations extreme diversity of ownership.
Dispersion in ownership Greater managerial control
Agency relationship
Two main players
The relationship between stockholder and manager is called agency relationship.

18. 1. Between shareholders and management
Within the financial management context the primary agency relationships are of 2 types:
1. Between shareholders and management
2. Between shareholders and creditors

19. 1. Stockholders versus managers
Stockholders delegate decision making authority to managers to run the business.
This relationship between stockholder and manager is called agency relationship.
Several problems may exist with this agency relationship:
Managerial abuse of benefits putting cost on firm and its stockholders
Managers acting in their own self interest (behavior towards risk)

20. 1. Stockholders versus managers
Firms incur cost to reduce the conflict.
Agency cost
Direct agency cost
Corp. exp. at the expense of shareholders,
Monitoring cost
Indirect agency cost
Result from managers’ failure to make a profitable investment because of its aversion to risk

21. 1. Stockholders versus managers
Different mechanisms to reduce conflict between shareholders and managers
How to make managers work in stockholder’s best interest?
By using a mixture of reward and punishment strategies:
Managerial Compensation
Direct intervention by stockholders
Threat of firing
Threat of takeover

22. Managerial Compensation
Managerial compensation package must meet two objectives:
Attract and retain able managers
Offer executives incentives to motivate them to take actions that will enhance shareholder wealth(stock price maximization)
Bonus
Performance shares
Executive stock option

24. ii. Direct intervention by stockholders
iii. Threat of takeover
Occurs when:
A firm's stock is undervalued relative to its potential because of inadequate management
Acts as a check on manager performance because:
In a hostile takeover, the senior managers of the acquired firm are typically dismissed.
iv. Threat of dismissal
ii. Direct intervention by stockholders
Today institutional investors hold a large portion of company’s stock and can intervene to nominate members to BOD who’d represent their interest.

25. 2. Stockholders (through managers) versus creditors
Conflict of interest may also exist between stockholders and creditors.
Stockholders through managers may take steps that tend to maximize shareholder value but works against the cause of creditors
Invest in risky projects – if successful all benefits go to stockholders if unsuccessful creditors bear the risk.

26. Practical Illustration >

27. 2. Stockholders versus creditors
Different mechanisms to reduce conflict between shareholders and creditors
Creditors may charge higher rate upfront
Writing detailed debt agreements/covenants

28. Second session

29. What are Financial Statements?
Financial statements are records that outline the financial activities of a business.
Presentation of financial information in a clear manner.
Aiding creditors and investors in making effective credit and investment decisions.

30. Basic Financial Statements used in Financial Analysis
Two basic financial statements that are used in financial analysis:
Balance sheet (statement of financial position)
Income statement (profit and loss statement)

31. Balance Sheet
Financial snapshot of a company at a particular point in time.
Components:
Assets
Liabilities and owner’s equity

32. Income Statement
Income statement reports the primary performance measure of a company i.e. revenue less expenses during an accounting period.

33. Significance/need for the analysis of Financial Statements
It is important to analyze financial statements as this analysis aids in getting information about a company’s:
Liquidity position
Growth rate
Profitability
Capacity to borrow
Credit worthiness
Assessing market risk
Financial strengths and weaknesses

34. 1. Liquidity position
“The ease or convenience with which we can convert a current asset into cash”
Speed
Convenience
Fair price

35. 2. Growth rate 3. Profitability
Financial analysis involving growth rate focuses on whether a company is growing in sales, stock price, profitability etc.
3. Profitability
Taking help from profitability ratios to make important financial decisions

36. 4. Capacity to borrow
Using debt ratios to determine portion of firms total assets financed with creditor’s funds
Long term creditors most interested in firm’s debt ratio
High debt ratio sends warning signal to firms’ creditors

37. 6. Credit worthiness 7. Strengths and weaknesses
Capacity to meet debt obligations in full and on time
Credit ratings help determine CW.
5. Assessing market risk
Analyzing past financial statements to determine trends w.r.t. elements that control market risk
7. Strengths and weaknesses

38. Users of Financial Statements
Internal users
- Management
- Investing public
-Creditors
External users
- Government
- Auditors
- Potential investors

39. Ratio Analysis
“Ratio is the mathematical relationship of one number to another number”.
Financial ration analysis is a valuable tool helping small business owners and managers measure their progress against:
A competing firm/s
Industry average
Previously defined internal goal

40. 5 main categories of Financial Statement ratios
Liquidity ratios
Asset Management Ratio
Debt utilization ratio
Profitability ratio
Market value ratio