FOUZIA IRAM YASMEEN AHTAR M-Phil - I

MANAGING FIANCIAL RESOURCES

FINANCIAL MANAGEMENT & INSTITUTIONS

Chapter 17
Financial Management and Institutions
6 Identify the likely sources of shortIdentify the functions performed by 1 a firms financial managers. Describe the characteristics and 2 functions of money. term and long-term funds for business operations. major financial institutions. System and its tools. financial system.

7 Describe the financial system and 8 Explain the Federal Reserve 9 Describe the global

3 Identify the various measures of

the money supply.

4 Explain how a firm uses funds. 5

Compare the two major sources of funds for a business.

Finance

Business function of planning, obtaining & managing a companys funds to accomplish its objectives in the most effective way

Financial Manager

Employees responsible for developing and implementing the firms financial plan and for determining the most appropriate sources and uses of funds.

Organization of the Financial Management Function

Chief Executive officer (CEO)

Chief Financial officer (CFO)

Treasurer

Vice president for Financial management

Controller

Organization of the Financial Management Function

VP of Finance
Treasurer
Capital Budgeting Cash Management Credit Management Dividend Disbursement Fin Analysis/Planning Pension Management Insurance/Risk Mngmt Tax Analysis/Planning

Controller
Cost Accounting Cost Management Data Processing General Ledger Government Reporting Internal Control Preparing Fin Stmts Preparing Budgets Preparing Forecasts

Investment Decisions
Most important of the three decisions.

What is the optimal firm size? What specific assets should be acquired? What assets (if any) should be

reduced or eliminated?

Financing Decisions
Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet.)

What is the best type of financing? What is the best financing mix? What is the best dividend policy (e.g., dividendpayout ratio)?

How will the funds be physically acquired?

Asset Management Decisions

How do we manage existing assets efficiently? Financial Manager has varying degrees of operating responsibility over assets. Greater emphasis on current asset management than fixed asset management.

What is the Goal of the Firm?

Maximization of Shareholder Wealth!
Value creation occurs when we maximize the share price for current shareholders.

Strengths of Shareholder Wealth Maximization

Takes account of: current and future profits and EPS; the timing, duration, and risk of profits and EPS; dividend policy; and all other relevant factors. Thus, share price serves as a barometer for business performance.

Risk- return Trade Off

Financial Manager strive to maximize the wealth of their firm shareholders by striking the optimal balance between risk and return.

What is Financial Plan

A document specifying the funds a firm will need for a period of time ,timing of inflow and outflow, sources and uses of funds.

Three Important Questions of Financial Plan

What funds will the firm require during the appropriate period of operations? How to obtain the funds When more cash will be needed

Financial Control

Process of checking actual revenues and expenses

Characteristics of Money

Divisibility
Portability Durability

Stability

Functions of Money

Money as Medium of Exchange

No wastage of time. Higher volume of transactions. Remove the problem of coincidence of wants. Widely acceptable. Increase level of Trade.

Money as a unit of Account

Provide a common measurement for the relative value of goods. The monitory unit may have different name in different countries.

Money as a store of Value

Ability of money to store value over the time. Durability factor enables to convert your income into future purchases. Completely liquid. However inflation can destroy this function.

The Money Supply

M1 M2

THE MONEY SUPPLY

M1 Total value of coins, currency, travelers checks, bank checking account balances, and the balances in other demand deposit accounts. M2 Financial assets that are almost as liquid as cash but do not serve directly as a medium of exchange. Examples: various savings accounts, certificates of deposit, and money market mutual funds. Use of credit cards growing rapidly. Amount of outstanding credit card debt has risen by more than 400 percent in the last 20 years.

Why Organizations Needs Funds?

Reasons

Day to Day operation/activities Inventory Dividends to stockholders Purchase of Land Purchase of Equipment ,Facilities

Generating Funds From Excess cash

Treasury Bill Commercial Paper Repurchase Agreement Certificate of Deposit

Sources of funds

Debit Capital Equity Capital

Debit Capital or Debit Financing

Funds obtained through Borrowing from banks, finance companies, family and friends.

Equity Capital or Equity Financing

Funds provided by the firms owner when they reinvest earnings, make additional contributions.

Short Term Sources of Funds

Trade Credit Short Term Loan Commercial Papers

Long Term Sources of Funds

Public sale of stocks and Bonds Private Placement Venture Capitalists leverage

The Financial system & Financial institution

Financial Intuitions

Savers

Users

Financial

Markets

Non Depository Financial Institutions

Insurance Companies Pension Funds Finance Companies

Insurance

Insurance is one of the oldest activities and is about the sharing of risks Whether its the risk of losing your car, you house or your life, super tanker or even an earth satellite, insurance provides a method of protection Insurance works on the principle that not everyone will suffer the same calamity at the same time

Pension Funds - 1

Theres a British custom that companies provide pensions for their employees after they retire It was 1 of the perks of employment and date from the days when people would spend their lives working for a single employer With some schemes, the employee made a contribution and the employer would match it With others, the employee might not have to make any contribution at all Then when you retired you would receive, for as long as you lived, say twothirds of your final salary Such schemes are called defined benefits schemes because you know what sort of pension you will be getting

Depositary Financial Institutions

A depository financial institution is one that specializes in depository lending, and the services offered by these institutions are a bit different from that of other financial service providers. The depository financial institutions are also known as deposit-taking financial organizations.

Banks
A bank is a financial organization licensed by a government. Its primary activities include providing financial services to customers while enriching its investors.

Kinds of Banks
There are various Types of Banks but basic kinds are:

Commercial Bank Central Bank

Commercial Banks
A commercial bank is a type of financial intermediary and a type of bank. Commercial banking is also known as business banking. It is a bank that provides checking accounts, savings accounts, and money market accounts and that accepts time deposits

How Banks Operate?

Basically, a client places money into his account. The bank will lend that money to other clients and make a profit on the deal. If the client banked say $10,000, the bank can lend $90,000 out because they must maintain a 10 % cash reserve ratio. Any country can decide to alter the cash reserve ratio if needs be.

Electronic Banking
Its features include electronic funds transfer for retail purchases, automatic teller machines (ATMs), and automatic payroll deposits and bill payments. Some banks offer home banking, whereby a person with a personal computer can make transactions, either via a direct connection or by accessing a Web site. Electronic banking has vastly reduced the physical transfer of paper money and coinage from one place to another or even from one person to another

Who Regulates Banks?

Banks are subject to regulation by 3 separate Federal agencies and/or state bank regulators. Federal Agencies: The Comptroller of the Currency charters "national banks"

The Federal Reserve Board, and

The Federal Deposit Insurance Corporation

The Federal Reserve System

Organization of the Federal Reserve System Check Clearing and the Fed Monetary Policy

ORGANIZATION OF THE FEDEERAL RESERVE SYSTEM

The Federal Reserve System is the central banking system. In United States, It was created in 1913, with the enactment of the Federal Reserve Act, and was largely a response to prior financial panics and bank runs, the most severe of which being the Panic of 1907

Check Clearing and the Fed

The System is to provide not only an elastic currencythat is, a currency that would expand or shrink in amount as economic conditions warrantedbut also an efficient and equitable check-collection system

Monetary Policy

It refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. What happens to money and credit affects interest rates (the cost of credit) and the performance of the economy.