Finance is a vast subject with several branches. The modern business world is changing rapidly in terms of its functioning. One has to be familiar with the terminologies associated with the finance world. By understanding various financial terms and the mechanism in which it functions, one can reach great heights.
This website, ‘Simplified Fiscal Affairs’ presents to you the various topics/concepts in the form of series and imparts the knowledge in a simplified way.
Finance:
- Finance is the core element of every business organisation. It is the major or core element for expansion, diversification, modernization, as well as for establishment of new projects.
- The word ‘Finance’, refers to money, but it is merely not the money, it is a vast concept which is concerned with money and its flow. The word ‘Finance’ is a French word which means ‘Management of Money’.
- Finance is such a powerful medium that, it performs an important role to Operate, co-ordinate and control the various economic activities of the business enterprise.
- Finance is also limited resource like other resources and a business entity needs to manage its finances resourcefully, effectively, efficiently and ensure its optimum utilization.
- The financial policy of any organization mainly determines not only its existence and survival but also the performance and success of that organization.
- Finance is required for investment purposes and also to meet substantial capital expenditure projects.
Financial Planning:
Financial planning refers to a systematic strategy in which the financial consult and or advisor assists the client in making the most of his or her financial resources by the optimum utilization of financial instruments to atain specific financial objectives. Financial planning is a blueprint or road map by the way of which one can achieve the financial objectives in a predetermined duration.
Strategy:
Strategy is an important component when it comes to creating or establishing any kind of financial plan. It is a high level plan or a series of coordinated or predefined activities which are intended to accomplish a particular goal or objective. It is a blueprint or a road map outlining how a person, group or entity needs to undertake activities in order to reach desirable future state or position.
Profit Maximization:
Profit maximization is the core element of any business entity. Any commercial activity commences primarily with the fundamental motive to generate profits and reduce costs. Any economic entity needs to make profits in order to make the necessary expenditures and for the future expansion. profit is the most important element for any business to survive and to undertake further expansion and diversification activities.
Wealth Maximization:
Wealth maximization refers to managing financial resources to raise the value of the company’s shareholders. It is generating the wealth and value of the company’s shareholders and the focus primarily on the long term objectives. It contributes to increasing a firm’s fundamental value which inturn, results in the growth of the share prices. As a measurement index, the share market prices show how well the management is performing as regards to its shareholders therefore wealth maximization is focused more on maximizing the wealth of the shareholders.
The formula to compute shareholders current wealth is:
Number of shares owned × Current stock price per share
Strategic Financial Management:
- It is the process of arranging, planning and regulating an organisation’s financial resources to meet its long term objectives and obligations is known as strategic financial management.
- It focuses on making strategic choices, making an impact on the organisation’s overall sustainability and financial position.
- It integrates financial planning, budgeting, forecasting, risk management and investment decisions.
- Financial Management is a managerial process that is concerned with the planning, organizing, directing and controlling of financial resources.
Horizontal Integration:
- Horizontal integration is a term in the finance world which refers to the process, where a company expands its horizons or operations by acquiring or merging with a competitor in the same industry.
- It is an expansion strategy that involves the acquisition of another company in the same business area.
Financial Manager:
The financial management of a company plays an important role in the success and betterment of the organisation. He/she takes into account the various cash inflows and outflows, various investment decisions, budgeting and forecasting, analysis and presentation of financial statements, financial planning, risk management, capital structuring..
Finance Manager has to study and assess the profitability of various future long term projects before committing the funds.
The main duties and roles of the financial manager are:
- Strategic financial planning.
- Analysis of financial data and reports.
- Taking into consideration, the changing trends, patterns.
- Capital structuring with a balanced proportion of debt and equity.
- Strategic and wise investment decision making.
- Accurate assessment of risks associated and its mitigation to a possible extent.
- Cashflow management.
- Financial reporting and documentation.
- Compliance to the set standards as per the act.
- Strategic financial management.
- Efficient and effective tax planning to reduce the tax obligations while guaranteeing adherence to the tax rules and regulations
- Compliance to the tax laws.
- Effective communication with stakeholders.
Mutual Fund:
- Mutual fund refers to a large pool of money invested in proportions, in the stock exchange by an expert finance manager.
- Mutual funds are ideal for investors who either lack large sums for investment, or for those who do not have the time to research the market, yet want to grow their wealth. The money collected in mutual funds is invested by professional fund managers according to the scheme’s stated objective. In return, the fund house charges a small fee which is deducted from the investment. The fees charged by mutual funds are regulated and are subject to certain limits specified by the Securities and Exchange Board of India (SEBI).
- Actively managed mutual funds refer to those funds which are actively and attentively managed and monitored by the financial experts.
- Passively managed funds refer to those which have a set of predefined rules and regulations. Comparatively lesser fees are charged by these financial experts.
Net Asset Value ( NAV):
NAV abbreviation stands for “Net Asset Value”. The performance of a specified mutual fund is denoted by Net Asset Value (NAV). As shares have a market traded price, similarly, mutual funds are assigned a net asset value per unit. The NAV of mutual funds fluctuates daily depending on the performance of the underlying assets. It is required to be disclosed on a daily basis.
The NAV per unit is the market value of securities of a particular mutual fund divided by the total number of units of the scheme on any specified date.
NET ASSET VALUE (NAV) = Total Value of Securities / Total Number of Units
