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FINANCIAL IMPORTANCE Finance is the elixir that enables companies to take advantage of possibilities to develop, employ local employees, and in turn support other businesses and the local, state, and federal governments via the remittance of income taxes. THE DEFINITION OF BUSINESS FINANCE It refers to the total amount of money and credit used in a firm. Business financing is necessary for the purchase of assets, products, and raw materials, as well as for all other economic activity. It is specifically essential for all corporate activities. DEFINITION OF FINANCIAL MANAGEMENT Financial management is the corporate function that deals with investing existing financial resources in order to produce increased company performance and return-on-investment (ROI). Financial management experts plan, coordinate, and oversee all corporate transactions. FINANCIAL MANAGEMENT OBJECTIVES Financial management is typically involved with the purchase, allocation, and control of a company's financial resources. The goals might be as follows: 1. Ensure a consistent and appropriate flow of finances to the company. 2. To guarantee acceptable returns to shareholders, which will be determined by earning capability, market price of the share, and shareholder expectations. 3. To guarantee that funds are used efficiently. Once money have been obtained, they should be used as efficiently as feasible. 4. To maintain investment safety, assets should be invested in safe projects to produce a sufficient rate of return. 5. To design a solid capital structure-Capital should be composed in a sound and equitable manner so that a balance between debt and equity capital is maintained. Financial Management Functions 1. Estimation of capital needs: A finance manager must create an estimate of the company's capital requirements. This will be determined by a company's predicted expenses and earnings, as well as future programming and regulations. Estimates must be prepared in a sufficient way to boost the earning capability of the firm. 2. Capital composition determination: Once the estimate is complete, the capital structure must be determined. This includes a debt equity analysis for both the short and long term. This is determined by the amount of equity capital a firm has and the amount of extra cash that must be obtained from other parties. 3. Funding sources: A corporation has various options for obtaining more capital, including- a. Issuance of stock and debentures a. Bank and financial institution loans to be obtained c. Public deposits in the form of bonds to be drawn. The element chosen will be determined by the relative pros and demerits of each source and time of funding. 4. Money investment: The finance manager must select how to invest funds in successful companies so that investment is secure and regular returns are achievable. 5. Surplus disposal: The finance manager must make the choice on net earnings. This may be accomplished in two ways: Dividend declaration include specifying the dividend rate as well as additional advantages such as bonuses. a. Retained profits - The volume must be determined based on the company's growth, innovation, and diversification objectives. 6. Cash management: The finance manager must make cash management choices. Many things demand cash, such as paying employees and salaries, paying energy and water bills, paying creditors, fulfilling current obligations, maintaining enough stock, purchasing raw materials, and so on. 7. Financial controls: The finance manager must not only plan, purchase, and use the funds, but he must also exercise financial control. This may be accomplished by a variety of strategies such as ratio analysis, financial forecasting, cost and profit management, and so on. FINANCIAL MANAGEMENT OBJECTIVES 1) MAXIMIZATION OF PROFITS 2) WEALTH MAXIMIZATION 1. Maximization of Profits A company is established with the primary goal of making large profits. As a result, it is the most essential goal of financial management. The financial manager is responsible for maximising profits in both the short and long term of the firm. The management must be obsessed with increasing profits. He/she should utilise the different approaches and instruments available to him/her for this aim. 2. Wealth Expansion Shareholders are the company's true owners. As a result, the corporation must concentrate on increasing the value or wealth of its stockholders. The finance manager should aim to give as many dividends as possible to shareholders in order to keep them satisfied and boost the company's reputation in the financial market. Financial management makes decisions on dividend declaration and distribution policies. Dividend choices include an appropriate dividend policy connected to dividend declaration or keeping the company's earnings for future growth and development. However, this is dependent on the company's success and the quantity of profit made. Better performance indicates that shares in the financial market are worth more. In a nutshell, the finance manager seeks to maximise shareholder value. FINANCIAL MARKET FUNCTIONS Financial markets fulfil the following vital functions: 1. Price Discovery Facilitation The price of everything is determined by two factors: market demand and supply. As a result, the demand and supply of financial securities and assets influence the price of various financial securities. 2. Savings mobilisation and channelization to the most productive uses As a conduit between savers and investors, financial markets direct savers' funds to the most productive and suitable investment possibilities. 3. Providing Financial Assets with Liquidity Financial markets offer a platform for savers and investors to turn assets into cash, since they may readily sell and acquire financial securities in this market. 4. Reduction of Transaction Costs Before investing in financial assets, investors and businesses must gather information on them, which may be time-consuming. The financial markets assist these investors and businesses by supplying them with all financial securities information, including price, availability, and cost. Financial Market Market Classification The Financial Market is separated into two major categories: the Capital Market and the Money Market. The Capital Market A Capital Market is a marketer who provides medium and long-term money and includes all institutions, organisations, and products. A capital market does not contain institutions and instruments that provide short-term funding, i.e., up to one year. Debentures, shares, bonds, public deposits, mutual funds, and other capital market products are examples. An ideal capital market is one in which capital is allocated effectively, appropriate information is provided to investors, economic progress is facilitated, funding is accessible to traders at a reasonable cost, and market operations are fair, free, competitive, and transparent. A capital market is classified into two types: primary and secondary markets. • Primary Market: A Primary Market is a market in which securities are sold for the first time. It indicates that fresh securities are issued by the corporation via the main market. The main market is also known as the New Issue Market. This market immediately helps to a firm's capital creation since the corporation goes directly to investors and utilises the cash for investment in machinery, land, buildings, equipment, and so on. • Secondary Market: A Secondary Market is a market in which freshly issued securities and second-hand securities are sold and purchased. A corporation does not directly offer securities to investors in this market. Instead, the company's current investors sell the securities to new investors. The investor who wants to sell securities and the investor who wants to buy securities meet in the secondary market, and the securities are exchanged for cash with the aid of an intermediary known as a broker. The Money Market Money Market refers to a market for short-term money that are intended to be used for a period of up to one year. In general, the money market serves as a source of finances or financing for working capital. The money market transactions comprise the lending and borrowing of cash for a short period of time, as well as the selling and purchase of securities with a one-year term or securities that are paid back (redeemed) within one year. Call money, commercial bills, T bills, commercial paper, certificates of deposit, and other money market products are examples. A Money Market has the following characteristics: 1. This is a short-term market. 2. A money market has no set geographical location. 3. Common money market products include Call Money, Commercial Bills, Certificates of Deposit, and so on. 4. LIC, GIG, RBI, Commercial Banks, and other key institutions are active in the money market. The following are some examples of money market instruments: 1. Call Money: Call Money is money borrowed or loaned on demand for a brief period of time (usually one day). Sundays and other holidays are not included in the call money term. It is widely utilised by banks. It implies that when one bank has a brief cash shortfall, the bank with excess cash loans money to the former bank for one or two days. It is often referred to as the Interbank Call Money Market. 2. Treasury Bills (T. Bills): Treasury Bills are issued by the Reserve Bank of India on behalf of the Government of India (RBI). The Government of India may obtain short-term borrowings via T. Bills, which are offered to the general "public" and banks. Treasury Bills are freely transferable, negotiable instruments issued at a discount. Treasury Bills are the safest investments since they are issued by the Reserve Bank of India. Treasury Bills have maturities ranging from 14 days to 364 days. 3. Commercial Bills: Commercial Bills, also known as Trade Bills or Accommodation Bills, are bills drawn on another organisation. Commercial bills are conventional money market instruments used to credit sales and purchases. Commercial bills have a short maturity time, often 90 days. However, commercial bills may be reduced with the bank prior to maturity. Trade Bills are readily negotiated and transferrable instruments. 4. Commercial Paper: A Commercial Paper is an unsecured promissory note issued by a commercial or public sector company with a predetermined maturity time ranging from 15 days to one year. In 1990, it was launched for the first time in India. Because this instrument is unsecured, it may be provided by corporations with a solid credit rating and reputation. Commercial banks and mutual funds are the primary purchasers of commercial papers. 5. Certificate of Deposits: A Certificate of Deposit is a time or deposit that can be traded on the secondary market (C.D.). It is a bearer certificate of deposits that can only be issued by a bank (C.D.). It is a bearer certificate or title document that can only be issued by a bank. A Certificate of Deposit is a negotiable and transferable financial instrument. Banks provide Certificates of Deposit in exchange for deposits held by institutions and businesses. Certificates of Deposit have terms ranging from 91 days to one year. During a time of low liquidity, CDs may be issued to businesses, corporations, and individuals. It's that time of year when the bank's deposit growth is weak but credit demand is strong. Market Classification of Financial Markets Introduction to Financial Market Classification The word "financial market" refers to a commercial location where various forms of financial securities are traded. Equity shares, derivatives, bonds, and other financial securities are examples of financial securities. In a capitalistic system, financial markets serve as vital mediators between collectors and investors, ensuring the smooth operation of the economy. In other words, financial markets facilitate the movement of cash between individuals with surplus funds and those in need of business capital. As a consequence, numerous forms of financial market instruments exist. This article will provide you a quick overview of the most frequent product types. We shall explore an alternative technique of classifying financial markets in this subject. Market Classification of Financial Markets The financial markets may be roughly categorised into the following categories: • Securities issuance • Maturity Stage • Financial instrument types Based on Securities Issuance The Primary Market Financial securities are directly issued to purchasers in the main market. In this form of market, investors have first dibs on freshly issued securities. The cash profits from the sale are received by the issuing firms and used to support ongoing operations or to drive corporate development. Finally, purchasers acquire the freshly issued securities in the form of: • Initial Public Offering (IPO): An IPO is when a private business goes public by issuing shares to investors while it is in the process of being listed on an exchange. • Follow-on Public Offer (FPO): In an FPO, investors are given shares in a firm that is already publicly traded. • Rights Issue: In this form of share issue, existing shareholders are given the opportunity to purchase additional shares at a predetermined price. The amount of freshly issued shares would be proportional to the investors' existing holdings. Market for Secondary Goods Financial securities issued in the primary market are exchanged over the counter or via an exchange in the secondary market. For example, ABC Inc. issued new shares on the main market through an IPO, and David acquired 100 shares. David has now chosen to sell 50 of these shares for a profit. However, since he cannot sell these shares back to the issuer (ABC Inc.), he must search the secondary market for an investor interested in purchasing ABC Inc.'s shares. This is how the secondary market operates. Essentially, the secondary market allows current investors in securities to leave the market. As a result, it brings together current investors who want to sell and potential investors who want to acquire. In this sense, the secondary market also aids in the determination of market prices for securities based on market demand and supply. CONCLUSION Financial management practises is a discipline that deals with financial choices, including short and long-term organisational objectives, and guarantees that there is a good return on invested money without necessarily accepting excessive financial risk.