Introduction to Financial Management

Financial Management is one of the broadest areas of finance, and the one with the greatest number of job opportunities.

 

Most issues in financial management revolve around 3 questions:

1)    What factors determine the price of a company’s stocks? (I have the theory for this if anyone is interested in knowing)

2)    How can managers make choices that will add value to their companies?

3)    How can managers ensure that their companies do not run out of cash while executing their plans?

 

 

Financial Management is important in all kinds of businesses, including banks and other financial institutions as well as industrial and retail firms. Financial management is also important in governmental operations, from schools to hospitals to highway departments. The job opportunities in financial management range from making decisions regarding plant expansions to choosing what kind of securities to issue when financing an expansion. Financial managers also have the responsibility for deciding the credit terms under which customers can buy, how much inventory the firm should carry, how much cash to keep on hand, whether to acquire other firms (merger analysis), and how much of the firms earnings to plough back into the business versus pay out as dividends.

We of course will be studying the extremely basic fundamentals of financial management. Things like merger analysis and deciding how much dividend to pay are complicated questions that take a lot of skill sharpening and time spent on the subject.

 

Why do we need to study Financial Management?

 

Knowledge of Finance is required to make a range of personal decisions such as investing for retirement or making a decision on whether to lease versus buy a house etc.

 

 

Also one needs to keep in mind that virtually all business decisions have financial implications, so important decisions are made by teams from the finance, marketing, HR, IT, production, accounting, and legal departments. Therefore, if you want to succeed in the business arena, you must not only be highly competent in your own arena but understand the other business disciplines especially finance because it has lasting effects on the health of a company.

 

 

In short, financial management is to do with managerial decisions designed to maximize the value of a firm.

 

In the first lecture on Financial Management at Jai Hind College, Prof. Dhaval also stressed on some additional information that makes for good general knowledge.

 

 

He spoke at length about the BSE Sensex and IPO’s.

 

 

BSE Sensex: The BSE Sensex or Bombay Stock Exchange Sensitive Index is a value-weighted index composed of 30 stocks with the base April 1979 = 100. It consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange. These companies account for around one-fifth of the market capitalization of the BSE.

The base value of the Sensex is 100 on April 1, 1979 and the base year of BSE-SENSEX is 1978-79.

 

At irregular intervals, the Bombay Stock Exchange (BSE) authorities review and modify its composition to make sure it reflects current market conditions.

 

The index has increased by over ten times from June 1990 to today. Using information from April 1979 onwards, the long-run rate of return on the BSE Sensex works out to be 18.6% per annum, which translates to roughly 9% per annum after compensating for inflation.

 

 

The Sensex list is compiled using the concept of Free Float Market Capitalization. (those interested in finding out more may request to do so by posting comments)

 

 

IPO’s or Initial Public Offerings: An Initial Public Offering (IPO) is the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded.

 

In an IPO, the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market.

 

Also referred to as a "public offering".

 

IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPO’s are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value.

 

In recent months high profile IPO’s have been HCC, DLF – more recently, Edelweiss is soon to launch its IPO. In a bull market – the one that is currently impacting the Indian Stock Market, it is a reasonable strategy to buy IPO’s because they are often over subscribed and there are generally high premiums on shares within the 1^st day of trading itself. Eg. The Edelweiss IPO is already attracting about Rs. 800 premium. i.e. the share is being offered at Rs. 700 and on day 1 of trading, there are people willing to buy it for Rs. 1500. In terms of a long terms investment strategy, IPO’s may not be extremely smart buys as the price initially offered is regulated by the company as opposed to a price arrived at by the market forces.

Lec. 1: 22/ 11/ 07, Prof. Dhaval