In general, finance is defined as the provision of money at the time it is

required. Specifically it is defined as procurement of funds and their

effective utilisation.
Finance encompasses the management of money and its related activities,
including lending, investing, and banking. It involves studying how money is
managed by individuals, businesses, and governments

Importance of Finance (Elaborate all the points)

• Finance is a decision making tool
• Helps in planning and budgeting
• Facilitates investments
• Achieves long-term financial goals

Here's a breakdown of these key objectives of Finance:

​ Profitability:​
This involves generating enough revenue to cover expenses and achieve
desired profit margins. It ensures the business is financially viable and can
sustain its operations.
​ Liquidity:​
Maintaining enough cash flow to meet short-term obligations like paying bills
and salaries is crucial. This ensures the business can continue operating
smoothly and avoid potential financial distress.
​ Stability:​
This refers to maintaining a healthy financial position and avoiding excessive
risk. A stable financial position allows a business to withstand economic
downturns and unexpected events.
​ Wealth Maximization:​
This focuses on increasing the long-term value of the business for its owners
or shareholders. This often involves making strategic investments and
managing resources effectively.
​ Risk Management:​
Identifying and mitigating potential financial risks is crucial for long-term
success. This could involve diversifying investments, hedging against
currency fluctuations, or having adequate insurance.
Scope of Finance (Elaborate all the points)
• Estimating Financial Requirements
• Deciding Capital Structure
• Selecting a Source of Finance
• Selecting a Pattern of Investment
• Proper Cash Management
• Proper Uses of Surpluses
• Implementing Financial Controls

Types of Finance
• 1. Personal Finance
• 2. Business/Corporate Finance
• 3. Public (Government) Finance

5 Areas of Personal Finance

1. Income
In many ways, income is the first building block of personal finance.
Income includes all of your incoming cash flow, from salaries or wages to
investment dividends. To manage your own finances well, you’ll need to
keep track of your income.

You can use these figures to create a reasonable budget for your season of
life, determine how much to save and invest, and create a plan for paying
off debt.

2. Spending
If income is your incoming cash flow, spending is your outgoing cash flow.
For most people, the majority of their income is converted to spending.
Spending is both essential (for things like mortgage payments, groceries,
and recurring bills) and discretionary (for things like travel, shopping, and
hobbies).

Managing your spending is the most critical key to handling your personal
finances wisely. This area can make or break your budget and help or hurt
your ultimate financial goals. Ensure that your spending habits don’t
exceed, or even match, your income, and you’ll be able to devote the
remaining funds to the final three building blocks.

3. Savings
Simply put, savings is the portion of your income that is not spent. Some
refer to this as “deferred consumption” – in other words, you’re choosing
not to spend some of your money now so that you can enjoy it later or
access it when you need it most.

Everyone, regardless of income level, should try to accrue savings for both
planned and unplanned expenses. We recommend an emergency savings
fund that will cover at least three months of expenses. Many people also
choose to save for a particular additional expense, like a down payment on
a home or a milestone vacation.

However, once you have your savings account fully funded, continuing to
add to it can actually hurt rather than help. Money that sits in savings
accounts for long periods of time can lose value due to inflation. Once you
have 6-12 months of expenses covered, it may be wiser to put the rest of
your unused income into the fourth area of personal finance: investments.

4. Investing
Technically, investments also require spending up front, but we categorize
them differently from the spending category because these purchases
allow you to earn more income in the future. This is known as a return.
Most investments fall into one of these categories:

●​ Stocks
●​ Bonds
●​ Real estate

Everyone invests because of the potential for a good return, but there are
inherent risks. Some assets appreciate while others depreciate, and it can
be difficult to identify at the outset which assets will go in which direction.
If you’re unfamiliar with investing, it may feel risky or overwhelming – and if
it does, a financial professional can help.
At Marietta Wealth, we help many of our clients manage their investments.
We are a fiduciary, which means we’re ethically bound to work in your best
interest when it comes to your investments. If you’re interested in investing
for the first time or looking for a new partner in managing your
investments, we’d love to help you build a plan that works for your current
reality and future financial goals.

5. Protection
Protections are safeguards most of us use to shield our assets and save for
unexpected costs. Common protections include:

●​ Property or casualty insurance

●​ Life insurance
●​ Health insurance
●​ Estate planning
●​ Retirement planning

Protections help us manage our risks. They also preserve wealth for life’s
unexpected moments, as well as for the long-term future, including future
generations who may eventually inherit what we have.

6. Tax Planning

Role of Finance in Business Decisions

There are three major types of financial decisions – investment decisions, financing decisions,
and dividend decisions.

1. Investment Decisions

Also known as capital budgeting decisions, these are one of the most important types of
financial management decisions. When making investment decisions, managers choose where
and how to allocate resources to generate the best possible returns for the company’s investors.
They carefully evaluate investments such as stocks, mutual funds, and real estate, and invest in
those that are aligned with the company’s short-, and long-term financial goals and risk
tolerance. Managers also forecast future cash flows and assess various financial risks before
making investments. Resources are limited, that’s why an effective capital budgeting strategy
can make sure that the company’s resources are invested efficiently in opportunities that can
grow the company’s value and contribute to wealth maximisation.

2. Financing Decisions

Companies require a steady and reliable source of funds for operating. Financing decisions are
very important in this regard as they involve finding out the best mix of debt and equity to fund
the company’s operations. This means that other than profits earned, companies have two main
options to source funds – The first is by issuing new shares, which is a part of equity financing.
Secondly, companies can take out loans which is called debt financing.

Even if the company is not profitable yet, it has to pay interest on the borrowed funds by the set
date. The risk of not being able to make these payments is known as default risk, and financing
managers have to carefully manage it. On the other hand, shareholder funds do not have the
same immediate pressure, as there is no obligation to pay returns or repay capital at a specific
time. The manager’s goal is to find the right balance between equity and debt financing, as well
as balancing the cost of capital with the associated risks to make sure that the company’s
financial structure is sustainable in the long term.

3. Dividend Decisions

When a company earns a profit, it can either retain it for reinvestment purposes or distribute it
amongst its shareholders as dividends. Financial managers create the company’s dividend policy
which dictates how profits are allocated between retained earnings and dividend payouts. They
consider various factors such as the company’s long-term growth plans, its liquidity needs, and
the expectations of its shareholders. So here too a balance is needed between making sure there
are sufficient funds available for the company’s future investments or operational needs, as well
as keeping the shareholders happy.

Factors Affecting Financial Decisions

Let’s take a look at some factors affecting financial decisions:

Factors That Affect Investment Decisions

●​ Rate of Return – The expected rate of return on investment is an essential factor to

evaluate before making financial decisions related to investments. Managers look to
invest in opportunities that offer the highest returns based on the company’s risk
profile.
●​ Cash Flows of the Venture – Managers project cash flows to estimate the future
performance of the investment. If the cash flow estimate is positive and consistent, it
means that the investment will generate enough income to cover daily operational
costs and provide returns.
 ●​ Investment Criteria – With capital budgeting techniques, managers evaluate
investment proposals by considering factors such as interest rates, internal rate of
return, cash flows, net present value, and payback period. This helps them assess the
viability and profitability of the investment proposals so they can decide on the most
suitable ones.

Factors That Affect Financing Decisions

●​ Cash Flow Position – A positive cash position can make it easier for companies to get
better terms for financing loans.
●​ Cost – Different sources of funds have different costs. Lower financing costs are
preferred by managers as they reduce the overall expense to the company and
ultimately increase the profitability. But managers don’t always select the source with
the lowest cost. They weigh the costs against the benefits of different financing
options before deciding.
●​ Floatation Cost – When a company issues new securities, the expenses incurred are
called flotation costs. Underwriting fees, legal costs, brokerage, commissions, and
administrative expenses are some examples of flotation costs. These costs are lower
in equity compared to debt. Low flotation costs mean higher net proceeds from the
financing, which is why equity is generally preferred by managers in this aspect.
●​ Risk – The risk associated with financing options also impacts the manager’s
decisions. Debt financing has higher financial risk due to fixed interest payments and
repayment obligations. If the company fails to repay the loan on time it can have
considerable financial and reputational consequences. Equity financing on the other
hand isn’t as risky, but it does dilute the ownership of the company.
●​ Control Consideration – Debt financing has no impact on the ownership of the
company whatsoever, but equity financing leads to the dilution of existing
shareholders’ control. If the aim is to raise funds while maintaining the shareholders’
current level of control, debt financing is preferred.
●​ Market Conditions – It’s easier for companies to raise funds when the interest rates
are lower or there is a high demand from investors, but when the market is on a
downtrend, financing options are limited and more costly.

Factors That Affect Dividend Decisions

●​ Earnings – A company’s earnings are the biggest factor in determining dividends.

Companies with higher earnings can pay out higher dividends, while those with lower
earnings pay either low dividends or suspended dividend payments entirely for a
period.
●​ Shareholder Expectations – Based on a company’s past performance and dividend
policies, investors have specific expectations regarding the frequency and size of
dividend payments. Managers need to balance these expectations with the company’s
financial health and long-term financial goals to maintain investor satisfaction as well
as the company’s reputation.
●​ Tax Implications – Dividends can be subject to different tax rates compared to capital
gains, so taxes also impact a company’s dividend decisions. If taxes are too high the
amount of dividends paid out are lowered.
●​ Dividend Stability – Companies with a stable dividend policy are more attractive to
shareholders, especially those who invest with the goal of generating an income. A
stable dividend also raises the reputation of a company.
●​ Growth Opportunity – Companies that are looking to grow quickly in the short term
generally choose to reinvest profits rather than pay out dividends to their
shareholders. Investing in new projects or expanding their operations can mean
higher long-term returns, which makes it more advantageous for growth-oriented
companies to retain earnings for growth rather than distributing them as dividends.
●​ Cash Flow – In case a company’s profits aren’t very stable, there is a need for
adequate and consistent cash flow to sustain dividend payments. Companies that
have enough cash available to meet dividend commitments without compromising
their operational needs or financial stability are more attractive to investors.