INTRODUCTIONINTRODUCTIONRAIS AHMADRAIS AHMADM.COM., MBA (FINANCE), MA (ECO)M.COM., MBA (FINANCE), MA (ECO)M.PHIL IN PROGRESSM.PHIL IN PROGRESSFELLOW MEMBER OF PAKISTAN INSTITUTE OF FELLOW MEMBER OF PAKISTAN INSTITUTE OF PUBLIC FINANCE PUBLIC FINANCE ACCOUNTANT (FPA 2379)ACCOUNTANT (FPA 2379)CA INTERCA INTERCORRESPONDANCE COURSES:CORRESPONDANCE COURSES:

ISLAMIC LAWISLAMIC LAWHADITH HADITH FROM INTERNATIONAL ISLAMIC UNIVERSITY FROM INTERNATIONAL ISLAMIC UNIVERSITY ISLAMABADISLAMABAD

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STRATEGIC FINANCIAL STRATEGIC FINANCIAL MANAGEMENTMANAGEMENT

FinanceFinance studies and addresses studies and addresses the ways in which individuals, the ways in which individuals, business, and organizations raise, business, and organizations raise, allocate, and use monetary allocate, and use monetary resources over time, taking into resources over time, taking into account the risks entailed in their account the risks entailed in their projects.projects.

The term "finance" may thus The term "finance" may thus incorporate any of the following:incorporate any of the following:

The study of money and other assets; The study of money and other assets; The management and control of those assets; The management and control of those assets; Profiling and managing project risks; Profiling and managing project risks; The science of managing money; The science of managing money; As a verb, "to finance" is to provide funds for As a verb, "to finance" is to provide funds for

business or for an individual's large purchases business or for an individual's large purchases (car, home, etc.). (car, home, etc.).

The activity of finance is the application of a set of techniques that individuals and organizations (entities) use to manage their money, particularly the differences between income and expenditure and the risks of their investments.

An entity whose income exceeds its An entity whose income exceeds its expenditure can lend or invest the expenditure can lend or invest the excess income. On the other hand, excess income. On the other hand, an entity whose income is less than an entity whose income is less than its expenditure can raise capital by its expenditure can raise capital by borrowing or selling equity claims, borrowing or selling equity claims, decreasing its expenses, or decreasing its expenses, or increasing its income.increasing its income.

The lender can find a borrower, The lender can find a borrower, a financial intermediary, such as a financial intermediary, such as a bank or buy notes or bonds in a bank or buy notes or bonds in the bond market. The lender the bond market. The lender receives interest, the borrower receives interest, the borrower pays a higher interest than the pays a higher interest than the lender receives, and the lender receives, and the financial intermediary pockets financial intermediary pockets the difference.the difference.

A bank aggregates the A bank aggregates the activities of many borrowers activities of many borrowers and lenders. A bank accepts and lenders. A bank accepts deposits from lenders, on deposits from lenders, on which it pays the interest. which it pays the interest. The bank then lends these The bank then lends these deposits to borrowers.deposits to borrowers.

A specific example of A specific example of corporate finance is the sale corporate finance is the sale of stock by a company to the of stock by a company to the public. The stock gives public. The stock gives whoever owns it part whoever owns it part ownership in that company.ownership in that company.

Of course, in return for the stock, Of course, in return for the stock, the company receives cash, which it the company receives cash, which it uses to expand its business in a uses to expand its business in a process called "equity financing". process called "equity financing". Equity financing mixed with the sale Equity financing mixed with the sale of bonds (or any other debt of bonds (or any other debt financing) is called the company's financing) is called the company's capital structure.capital structure.

Finance is used by individuals Finance is used by individuals (personal finance), by governments (personal finance), by governments (public finance), by businesses (public finance), by businesses (corporate finance), as well as by a (corporate finance), as well as by a wide variety of organizations wide variety of organizations including schools and non-profit including schools and non-profit organizations. organizations.

In general, the goals of each of In general, the goals of each of the activities are achieved the activities are achieved through the use of appropriate through the use of appropriate financial instruments, with financial instruments, with consideration to their consideration to their institutional setting.institutional setting.

Finance is one of the most Finance is one of the most important aspects of business important aspects of business management. management. Without proper financial planning a Without proper financial planning a new enterprise is unlikely to be new enterprise is unlikely to be successful. successful. Managing money (a liquid asset) is Managing money (a liquid asset) is essential to ensure a secure future, essential to ensure a secure future, both for the individual and an both for the individual and an organization.organization.

THE FINANCIAL MANAGER'S THE FINANCIAL MANAGER'S RESPONSIBILIESRESPONSIBILIES

The financial manager's task is The financial manager's task is to acquire and use funds so as to acquire and use funds so as to maximize the value of the firm. to maximize the value of the firm.

Forecasting and planningForecasting and planning

The financial manager must The financial manager must interact with other executives as interact with other executives as they look ahead and lay the they look ahead and lay the plans, which will shape the firm's plans, which will shape the firm's future.future.

Major investment and Major investment and financing decisionsfinancing decisions

A successful firm usually has rapid A successful firm usually has rapid growth in sales, which requires growth in sales, which requires investments in plant, equipment and investments in plant, equipment and inventory. The financial manager inventory. The financial manager must help decide what specific must help decide what specific assets to acquire and the best way assets to acquire and the best way to finance those assets. to finance those assets.

For example, should the firm For example, should the firm finance with debt, equity, or finance with debt, equity, or some combination of the two, some combination of the two, and, if debt is used, how and, if debt is used, how

much should be long term much should be long term and and how much should be how much should be short short term?term?

Coordination and controlCoordination and control

The financial manager must The financial manager must interact with other executives interact with other executives to ensure that the firm is to ensure that the firm is operated as efficiently as operated as efficiently as possible.possible.

Dealing with the financial marketsDealing with the financial markets

The financial manager must deal The financial manager must deal with the money and capital with the money and capital markets. The general financial markets. The general financial markets where funds are raised, markets where funds are raised, where the firm’s securities are where the firm’s securities are traded, affect each firm and where traded, affect each firm and where its investors either make or lose its investors either make or lose money.money.

Risk managementRisk managementAll businesses face risks, including All businesses face risks, including natural disasters such as fires and natural disasters such as fires and floods, uncertainties in commodity floods, uncertainties in commodity and security prices, volatile interest and security prices, volatile interest rates, and fluctuating foreign rates, and fluctuating foreign exchange rates. However, many of exchange rates. However, many of these risks can be reduced by these risks can be reduced by purchasing insurance or by purchasing insurance or by hedging in the derivatives markets. hedging in the derivatives markets.

The financial manager is The financial manager is usually responsible for the usually responsible for the firm's overall risk firm's overall risk management program, management program, including identifying the including identifying the risks that should be hedged risks that should be hedged and then hedging them in the and then hedging them in the most efficient manner.most efficient manner.

In summary, financial managers In summary, financial managers make decisions regarding which make decisions regarding which assets their firms should acquire, assets their firms should acquire, how those assets should be how those assets should be financed, and how the firm should financed, and how the firm should manage its existing resources. If manage its existing resources. If these responsibilities are these responsibilities are performed optimally, financial performed optimally, financial managers will help to maximize managers will help to maximize the values of their firms.the values of their firms.

HedgingHedging: Any technique designed : Any technique designed to reduce or eliminate financial to reduce or eliminate financial risk; for example, taking two risk; for example, taking two positions that will offset each other positions that will offset each other if prices change.if prices change.

DerivativeDerivative: A financial instrument : A financial instrument whose value is based on another whose value is based on another securitysecurity