Assets Liability Management

ASSETS LIABILITY MANAGEMENT:

Asset liability management (ALM) is the administration of policies and procedures that address financial risks associated with changing interest rates, foreign exchange rates and other factors that can affect a company's liquidity.Excess of assets over liability shown that fund is beign use efficiently. 

Number of times ALM mismatch is take place, which can be measuring by following ways:

1. Duration analysis: This is an analysis which shown sensitivity of  price of fixed income investment to a change in interest rate.If interest rate rise then bond price decline and vis- a -versa.

2.GAP analysis:In this analysis the actual performance is compare with potential or desire performance.If the organization is not use it 's resources ot technology then organization will perform below it's potential.

Asstes Liability Management (ALM) Models:

1. CAMELS Rating : It's range is between 1(best) to 5(worst)

1.1  (C)Capital Adequacy:It means amount of banks own capital from it's total capital requirement.

 1.2 (A)Assets Quality:It shown in the left hand side of bank's balance sheet.Quality of loans shown the good or bad assets quality,which affect rating.

1.3 (M) Management:Performance of bank's management is also affect rating.Efficient management increase rating of bank.

1.4 (E) Earning:It also affect banks rating.Good earning numbers increase rating.

1.5 (L) Liquidity:Better liquidity condition of any Bank increase it's rating.Increased liquidity increase the volume of business.

1.6 (S) Sensitivity to Market Risk: If the interest rate of Bank is fluctuate more frequently with market forces then the rating of bank's would affect.

2 ALTMAN'S  MODEL:

    Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5

 Where,

 X1 = Working capital / Total Assets ratio

 X2 = Retain Earnings / Total Assets ratio

 X3 = EBIT / Total Assets ratio

 X4 = MV of equity/ BV of long term debt ratio

 X5 = Sales / Total Assets ratio

ASSETS LIABILITY MANAGEMENT (ALM) ORGANIZATION:

1. ALM Committe consists of following:

    1.1  CEO/CMD or  the ED willbe the head of the committee.
     1.2 The Chief's of investment

     1.3 Resource management or planning

     1.4 Fund managemnt/ Treasury(forex and domestic's)

     1.5 International banking and Economic research

     1.6 Head of Technology division should be invitee

 2 Assets Liability Management Authority

3 ALM Committee od Directors

4 Some Bank may have sub commitee and sub groups

  ALM FUNCTIONS:

1.Liquidity Risk Management: ALM helps in managing the liquidity risk of Banks,which helps banks to take appropriate steps related to the liquidity after analysing ALM.

2. Management of Market risk: ALM hepls banks to manage the market risk by proper management of ALM.

3. Trading risk Management: After analysing the correct ALM,it helps banks to manage it's tading risks on currency or stock market.

4.Funding and Capital Planning: After correct management  of ALM ,it helps banks to make proper planing related to the funding of capital in bank's business.

5.Profit planning and growth projection :ALM hepls banks to make proper planning of projected  profit and growth projections of banks.

     

  Assets Liability management

1 Interest rate risk:

1.1 Immediate impact of changes in interest rate is on bank’s earnings by changing the Net Interest Margin .

1.2 A long-term impact will be on the Market Value of Equity or the Net Worth.

1.3 The interest rate risk when viewed from these two perspectives is known as earnings perspective and economic value perspective respectively.

1.4 RBI introduced guidelines on Modified Duration in 2006.

1.5 the traditional Gap analysis was considered as a suitable method to measure the Interest Rate Risk in the first.

1.6 Place the Gap or Mismatch risk can be measured by calculating Gaps over different time intervals as at a
given date.

1.7 Gap analysis measures mismatches between rate sensitive liabilities and rate sensitive assets (including off-­balance sheet positions).

2 Rate sensitive assets and Rate sensitive liabilities:

 2.1 An asset or liability is considered to be rate sensitive if,Within the time interval under consideration  there is a cash flow.

2.2 The interest rate resets/re prices contractually during the interval.

2.3 RBI changes the interest rate ( interest od saving bank deposit,export credit,Refinancing,CRR balance ect) in case the interst rate are administred.

2.4 The Gap Report should be generated by grouping rate sensitve liabilities, assets and off- ‐balance  sheet positions into time buckets according to residual maturity or next repricing period, whichever is earlier.

3 GAP analysis:

 3.1 The Gap is difference between Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL) for each time bucket.

3.2 The Gap reports indicate whether the institution is in a position to benefit from rising interest
rates by having a positive Gap (RSA > RSL) or whether it is in a position to benefit from declining
interest rates by a negative Gap (RSL > RSA).

 

Risk management for Financial Institutions

RISK MANAGEMENT:

Risk management is process of Identification, analysing and accept or mitigate uncertaintity in investment decision making.In Risk management fund manager or investor can identify the poterntial loses and take appropriate action in order to minimise it.Inadequate management can lead to suffer heavy loses by firms.For examlpe the recession in 2008 is a example of poor Risk management which lead to default of many financial institutions like Lehman Brothers.

 CLASSIFICATION OF RISK:

1.MICRO RISK

1.1 Liquidity Risk - This is a types of risk arises when any security or share can not traded in a market quikly in order to avoid loses.

1.2 Credit Risk - This is a types of risk in which borrower default to make payment to the lender.In this risk the lender ia unable to recover principal and interest amount which interrupt the future cash flow.

1.3 Market Risk

          1.3.1 Interest rate Risk - It is a types of risk arises when there is a fluctuation of interest rate in     market.This risk affect mostly the bond holders.

         1.3.2 Currency Risk - This is a types of risk arises when there is a fluctuation of one currency against another .This risk is affect mostly the business which run internationally,risk arises if the don't hedge the position in the currency market.

         1.3.3 Equity Risk - This is a risk arises when there is a uncertaintity of fluctuation of shares price or property prices.

         1.3.4 Commodity Risk - This is a risk when there is uncertainties of future prices of commodities,This risk arises when there is a fluctuation of prices of commodities.

 

1.4 Reputation Risk - This is a risk when there is damage of firms reputation due to some issues.

2. MACRO RISK

2.1 Default Risk- This is a risk in which company or individual unable to make payments of debts obligation.

2.2 Legal Risk - This is a risk in which any company or person unable to follow all legal laws or contracts.

2.3 Operational Risk- This is a risk when there is a uncertaintity of losses occured due to operational fault.

2.4 Model Risk - This is types of risk when financial model uses the companies market risk.

2.5 Political Risk- This is a risk arises when there is a fluctuation of government decision on any policy,which affect adversly to firms related to such policy.

 RISK IDENTIFICATION TECHNIQUES:

1. Companies have to do the detail analyse the risk factor associate the business model.

 2. Managers of company have to do the brainstroming on the risks and its factors.

3. Cross Functional Teams of company has to provide multiple viewpoints so that a comprehensive list of risks and their factors is developed.

4.Company has to study the previous risk management plans,so that to identify correct risk of future business plan.

5.Company has to take  advices from stakeholder and domain experts related to the business plans in order to identify coreect risk.

6. Company has to developed the risk parallel with other task and team.

7.Company has to reuse the previous identified risk in order to avaoid its repetition.

MEASURING RISK: Traditional Financial Model

1. Standard Deviation: It shows how much the company share is variate with indexes.

2. Sensitivity analysis: It is a technique used to determine how different values of  independent variable will impact a particular dependent variable under a given set of assumptions.

3. Scenareo analysis:It is a technique use to analyzing possible future events by considering alternative possible outcome.

4. Stress testing: It is a simulation technique used on asset and liability portfolios to determine their reactions to different financial situations.

RISK MANAGEMENT STRATEGIES:

1. Company has to minimise risk by taking insurance of factory or other situation to whome the risk is associate.

2. Companies has to minimise risk by doing hedging in derivatives markets and forward market.

3. Company has to manage its Assets Liability by appointing finance professional.

4. If there is a risk associate to the bank regarding  defaulters then banks has to keep collateral securities against loans. 

TYPES OF RISK MANAGEMENT:

1. Currency Risk Management: RBI has issued the guideline to manage the currency risk in following areas:

1.1 Forward Contract: Banks is  managing risk by entering into forward contract if currency,where banks  has to enter in contract of buying and selling of currency at some specified  future date at the price decided today.

1.2 Hedging: Banks is also manage risk by doing hedging of currency in the international commodity market by entering into the sell position at current rate in order to lock the currency price which protect bank on losses happen on price volatility of currency. For example if bank want to buy dollat in future(after 3 month) from the market than it can enter into the buy position (suppose 60rs) and if after 3 month dollar rises to 62 rs than bank have a profit of 2 rs which is compensate the losses of buying at 62rs.Generallt bank get dollar at 60 rupee after 3 month due to hedging.

1.3 Hedging FDI: Bank also do hedging for there FDI clients in order to minimise losses due to currency risk.Banks has to enter into a contract of buying dollar contract at current rate in commodity market.If in future the value of dollar rises or decline the profitability of clients could not affect. For example if any FDI is entering in india at exchange rate of rs60 per dollar and he/she want to exit from the market after 10 yrs and don't know the exchage rate after 10 year.In such case he need to enter in the long term contract(roll over till 10 yrs) of buying dollar at current rate rs 60 per dollar because he need dollar to take back his country.if after 10 year the dollar decline to rs 50 per dollar than he bear loses in derivative market of rs 10 per dollar,but he can also get opportunity to get dollar at rs 50 per dollar on spot market.So the losses of rs 10 per dollar on commodity would be compensate with the profit in spot market.therfore he take back his earnings and capital in dollar to his country at rs 60 per dollar.

2 Market risk management:

Now a days there is a growing of managing market risk by the corporates beacuse volatility of market adversly affect the financial and capital budgeting of the company.

Market risk are classified into following:

2.1 Interest rate risk: This is a kind of market risk affect mostly to the bond owners or the corporates having heavy debts.Profitablity of the corporates fluctuate as the interst rate fluctuate in the market,so they are unbale to predict accurate profitability.This risk can be manage by doing hedging intrerest rate contract in the market.

2.2 Foreign exchange risk:This is a kind of market risk arises due to the fluctuation of currency values.This risk associate mostly to the corporates doing business internationally.

2.3 Commodity price risk:This is types of market risk arises due to the fluctuation of commodity price.This risk arises to the companies related to the commodity busineses. For example,gold loan companies arises this types of risk because if the value of gold fall than the chances of there NPA's is increases.

2.4 Equity price risk: This is one of the main types of market risk that we regularly hear.With the fall of equity prices than it would affect the overall market sentiments.If companies share value falling depict that the company is suffering some kind of problems and affect it's future capital raising programe.

3.MANAGING LIQUIDITY RISK:

Liquidity risk management means measuring  liquidity position and fund requirement under crises scenario.This risk is arises mostly to the Banks because banks need to manage its assets liability management(ALM).Bank can manage this risk by various ways like taking short term loan from another bank for fullfilling its liquidity requirement.

Liquidity risk has three dimension:

1.Funding Risk:Bank generally face the funding risk of sudden withdrawal of heavy amount then bank faces difficulty to arrange cash/fund for this heavy withdrawal.This can be manage by the bank to arrange cash from the other banks who have sufficient funds.

2. Timing Risk:This risk is faces by banks if it can trade in any security on the bases of future price prediction.

3.Calling Risk:This is a risk associate to the collable bond holder beacuse issuer will  redeem it before the maturity,when the interest rate rises and reissue it at low interest rate.

4.OPERATION RISK MANAGEMENT:

Operation risk is a risk associate with the day to day operation activities  of the Company.It can be manage by the companies by using advance technology to track the day to day operations.Also can be manage by appointing the professional managers to handel day to day operations.

Operation risk management policy framework:

a) The roles and responsibilities of the independent bank-wide Operational Risk Management function and
line of business management.

b) A definition for operational risk, including the loss event types that will be monitored.

c) The capture and use of internal and external operational risk loss data including data potential events (including the use of Scenario analysis).

d) The development and incorporation of business environment and internal control factor assessments into
the operational risk framework.

e) A description of the internally derived analytical framework that quantifies the operational risk exposure
of the institution.

f) A discussion of qualitative factors and risk mitigants and how they are incorporated into the operational risk framework.

g) A discussion of the testing and verification processes and procedures.

h) A discussion of other factors that affect the measurement of operational risk.

 i) Provisions for the review and approval of significant policy and procedural exceptions.

j) Regular reporting of critical risk issues facing the banks and its control/mitigations to senior management
and Board.

k) Top level management board review the bank's progress towards the stated objectives.

l) A system of documented approvals and authorizations to ensure accountability at an appropriate level of
management.

m) Define the risk tolerance level for the bank, break it down to appropriate sub‐limits and prescribe reporting levels and breach of limits.

Risk management system fail because of:

a) There is lack of controling system in the banks/institution,which increase the chances of risk management system fail.

b) Sometime banks does not adequatly recognise the risk of certain product specially new product which sometimes fail risk managent.

c) Sometimes beacuse of  absence/failure of key control structures such as segregation of duties, approvals, verifications, reconciliations, reviews of operating performance etc.

 d) Sometimes banks doen not perform the adequate monitoring,auditing,controlling and communications,which  fails the risk management procedures.

Financial Institution and Markets

CLASSIFICATION OF FINANCIAL MARKETS:

1.Domestic Market:
1.1 Capital Market-It is a types of financial market where capital is raised by companies by issuing Shares,Bonds abd other Long term investments.
1.2 Money Market-It is types of financial market where trading of short term loan between banks and other financial institutions.if one bank required money,it can be borrowed from another bank for short duration of times may be 1-2 days.
1.3 Bill Market-It also a types of financial market where bank can lend money against the bill.it is also known as bill discounting.
1.4 Bank - Bank is also an important part of financial market,where deposit and lending of money takes places.
1.5 Forex Market - It is a types of financial market where trading of currencies taking places,here one can buy doller by paying rupee or vis a versa.


2.International Market:
2.1 Equity- It is types of financial market where shares are traded on different stock exchanges of different countries.
2.2 Debt- It also another types of financial market run internationally where trading of debt instruments like bonds ,commercial papers, mortgages ect takes places.
2.3 Forex - It is largest financial market in the world where exchanges of different countries currencies takes places.


STRUCTURE OF FINANCIAL MARKETS:

 1. Organized sector:
1.1 Money market 
1.1.1 Call money market - It is a short term money market,which allows large financial institutions like Banks , Mutual funds ect to borrowed at inter bank rate.it is for a very short duration of time ,may be between hours to one week.
1.1.2 Treasury bill- It is types of securities issued by the government  at discounted rate.
1.1.3 CP -Commercial papers are a types of short term unsecured instruments issued by the corporates,it is used to finance account recievable,inventory and short term liabilities.
1.1.4 CD's- Certificate of deposit is issued by the banks in order to accept deposits form the public,it carry fixed interst rate and redeem on maturity period.

1.2 Capital market
1.2.1 Equity 
      1.2.1(1) IPO - It is a initial public offer,which is issued when the company going public and issued it's share first time to the public.After some time it is been listed on stock exchange,allows investors to exits or allows new investors to enter into the company.
      1.2.1(2) New issue-It is refer to the issuing share of company to the public first time.
      1.2.1(3) Secondary market- It is a market where shares are traded on stock exchange,where different buyers and sellers do trading on different shares,here company has no role to play in dealing of shares.

1.2.2 Debts
      1.2.2(1) Corporates securities - It a types of debts instruments issued by the corporate housed,which carry fixed intrest rate and also a fixed maturity.
     1.2.2(1) Government securities - It is another types of debt instruments issued by the government,carry fixed intrext rated and fixed maturity.


1.3 Bank market
1.3.1 Schedule commercial banks - These are the  banks which accept deposits from the public and lend it on higher rate to the borrowers,there main aims is to earn profits.
1.3.2 Co-operative banks- These banks are run by a group of people or society,for the welfare of the member of a society or a particular group.
1.3.3 Development banks - These are a banks which helps in the development of the country by providing loans to the company related to development of infrastructure or any govt project helps in country's development.
1.3.4 NBFC'S- These are a non banking finance companies(NBFC's),providing loand to the borrowers and accept deposit through debts instruments.

1.4 Foreign exchange market
1.4.1 Merchant -He is a types of dealer helps in dealing in foreign exchange at al large scale.
1.4.2 Interbank - Here the foreign exchange is takes place between different banks.
1.4.3 Offshore -Foreign exchane market run on international level ,here one can deal in any country all over the world.


2.Unorganized sector:
2.1 Indiginous bank- There are a types of financial  markets work in unorganized market,where accept deposit from the public at lower rate and lend it on higher interest rate to borrowers.
2.2 Money lenders- These are a types of people lend money to the needy people at very high interst rate without any securities,this types of activities mainly illigal in market.

Financial Management (Integrated Ratio analysis)

INTEGRATED RATIO ANALYSIS:
Integrated ratios provide better insight about financial and economic analysis of a firm.

1.Rate of return of asstes (ROA) can be divided into two parts:

   1.1 Net profit margin = Earning after tax(EAT)/Sales
  
    1.2 Assets turnover = Sales /Total assets

2.Return of equity ( ROE) can becalculated  into two ways:
 
    2.1 ( EAT/Sales) x (Sales/ Assets) x (Assets/Equity)

    2.2 (EAT/EBT) x (EBT/EBIT) x (EBIT/Sales) x (Sales/Assets) x (Assets/Equity)

3.Earning power:Earning power is the overall profitability of a firm  is computed by multiplying net profit margin and assets turnover.

     3.1 Earning power = Net  profit margin x Assets turnover

       whereas, Net profit margin = Earning after taxes/ Sales
                     Assets turnover = Sales/Total Assets


    3.2 Earning power = (Earning after taxes/ Sales) x (Sales/Total Assets) x (EAT/Total Asstes)



DUO PONT SYSTEMS:

A breakdown of ROE and ROA into component ratios:

     1.ROA(Return of assets) = (EBIT-Taxes)/Assets
    
      1.2 ROA = (Sales/Assets) x (EBIT-Taxes)/Sales)

   

      2. ROE(Return of equity) = (EBIT-Taxes-interest)/equity
    
       2.1 ROE = (Assets/Equity) x (Sales/Assets) x (EBIT-Taxes/Sales) x (EBIT-Taxes-interest)/EBIT-Taxes

   

GROWTH RATIOS:

1.Internal Growth rate(IGR) : It a internal growth rate which  the company can achieve without external financing.
       IGR = RE/Net assets

2.Sustainable growth rate : It is the growth rate which keeps the financing leverage constant by increasing debt proportionatly  to increase in equity due to increase in RE.
        (SGR) = Retention ratio x ROE
        where, ROE = PAT/ EQUITY
      
      
  

Financial Management 1.3

 Financial Mnagement :
Financial management means acquisition,financing and management of assets with some overall goal in mind.

CLASSIFICATION OF FINANCE FUNCTION:

1 Managerial Finance Functions:
1.1 Investment decisions by finance manager involving the type and volume of assets to be acquired.
1.2 Financial decision involving the decision about the various sources and extent of funds to be obtained.
1.3 Dividend decision by financial manager involving the extent of profit to be allocated and the extent of profit to be retained.

2 Routine Financial function:
 2.1Finance Manager supervise cash receipts and payments and the safeguarding of cash balances.
2.2  Finance manager keeps custody and safeguarding of securities, policies and othervaluable documents.
2.3 Finance Manager keeps  records of financial transactions and reporting.

GOALS OF CORPORATION/ COMPANY:

1. Main and one of the most inportant goal of any company is to maximise wealth of its shareholders by taking appropriate decision making by management.
2. If there is a Agency problem ( conflict between owner and management)arises  in any company,then there should be abolish following ways:
     2.1  By Compensation Plan:There should be an appropriate compensation package for the management show that the conflict with owner is minimize.
     2.2 Board of Directors: There should be the formation of board of directors in the company,so that the proper dicesion making is done by them.
     2.3 Takeover: If agency problem arises then owner should takeover the remaining stake of the investor who create such problems.
     2.3 Specialised monitoring: There should be the specialised monitering system developed by apointing specialised govenment agency so that the agency problem did not arises.
    2.4 Auditors:Company should appoint auditors in order to do correct auditing of its accounts.


IMPORTANT OF ANNUAL REPORTS OF COMPANY:
1.A company annual report is the most vital document consisting of comprehensive information about a company.
2.Anybody can access it depending there requirement.
3.It is use by the shareholder by thaking there further  investment decision after analyzing it.


FINANCIAL FORCATING: It means a formal process of predicting future events,which can affect the enterprise operation.

TOOLS OF FINANCIAL FORCATING:
1.The day's sales method
2.Percentage of sales method
3.Simple regression method.
4.Multiple regression method
5.Proforma income statement.
6.Proforma balance sheet.
7.Proforma fund flow statement
8.Cash budget

STEPS INVOLVED IN FINANCIAL PLANNING:
Steps1: Project next year's operating cash flow
Steps2: Project what additional investment done in company and how much net income paid out as a dividend.
Steps3:Calculate the different between the projected cash flow  and proposed uses.This is the cash which is raised from the sales of new asstes.
Steps4:Finally,construct the performa Balance Sheet that incorporates the additional assets and the increase in debt and equity.

Financial Management 1.2

OBJECTIVES OF CORPORATE FINANCE:

Major objectives of Corporates Finance by Indian Corporates are as follows:-

1. There are two main objectives of Management decision marking in Corporates finance in India are:
1.1) Maximisation of Earning before intrest and taxes(EBIT).
1.2) Earning per sahre (EPS).

2. Maximisation of spread between Return on assets(ROA) and Weight average cost of      capital(WACC).

3.There is no significant difference in the EVA as a corporate finance objective  followed by the firms in public and private sectors.

4. The spread between cash flow return on investment (CFROI) and the  WACC, that is, cash value added (CVA) is the third most important objective  (54 per cent) of corporate finance management for large firms based on market capitalisation.

5.Yet another important objective is the maximisation of market capitalisation.The MVA (market value added) objective is more likely to be followed by public sector firms than private sector units.

6.The overwhelming majority of corporates (70 per cent) consider maximising per cent return on investment in assets as the most important.


EMERGING ROLES OF FINANCE MANAGER IN INDIA:

Reflecting the emerging economic and financial environment in the post liberalisation era since the early nineties, the role/job of finance managers in India has become more important, complex and demanding. The key challenges are in the areas are as follows:

1. Financial Structure: As the economy grow the complexities incrase for the finance managers, there is growing needs of adopting different financial planning for the companies.

2. Foreign exchange management: As the volatility increase in the currency market force finance managers to adopt different techniques to manage the quick fluctutation of currency values.Now days a tools od hedging in currency market is used by managers in order to manage there companies foreign exchange.

3.Investors communications: As the complexities increases there is growing need to communicate enough to the investors by the finance managers in order to retain the in the company.

4.Management control: Now a days, finance managers are also taking part of major finance decision of the company beacuse unless the correct budgeting is not hapenning no besiness is beign getting sucess.

5.Investment Planning: Finance manager has to make investment plannig before he/she has to take any major investment decision.he should take into  consideration each and every aspect related to the company in project report,so that any future financial crises would not arise.



The main elements of the changed economic and financial environment are the
following:
 1.Considerable relaxation in industrial licensing framework in terms of the modifications in the Industries Development (Regulations) Act.

2.Abolition of the Monopolies and Restrictive and Trade Practices (MRTP) Act and its replacement by the Competition Act.

3.Repeal of Foreign Exchange Regulation Act (FERA) and enactment of a liberalised Foreign Exchange Management Act (FEMA).

4.Abolition of Capital Issues (Control) Act and the setting-up of the Securities and Exchange Board of India (SEBI) under the SEBI Act for the regulation and development of the securities market and the protection of investors.

5.Enactment of the Insurance Regulatory and Development Authority (IRDA) Act and the setting-up of the IRDA for the regulation of the insurance sector and the consequent dismantling of the monopoly of LIC and GIC and its subsidiaries.

6. Emergence of the capital market at the centre-stage of the financing system and the disappearance of the erstwhile development/public financial/term lending institution from the Indian financial scene.

7. Emergence of a highly articulate and sophisticated money market.

8. Globalisation, convertibility of rupee, liberalised foreign investments in India, Indian foreign investment abroad.

9.Market-determined interest rate, emergence of highly innovative financial instruments .

10.Growth of mutual funds; credit rating, other financial services.

11. Rigorous prudential norms, credit risk management framework for banks and financial institutions.

12. Access to Euro-issues, American Depository Receipts (ADRs).

13. Privatisation/disinvestment of public sector undertakings.

Financial Management 1

ROLE OF FINANCIAL MANAGER:

1.Cash raised from investor : primary role of Finance Manager is to raised money/ cash from investors willing to invest in the business model of the particular company.

2.Cash invested in firm: After raised money, finance manager invest it on the particular company for whom the money would raised.Money which is raised invested only in that company for which it has raised,not is any other company.

3.Cash ganerated by Operations: After the money has been invested in a particular company, cash been ganerated by the day to activities of the company ( through production or by giving services).No business be run long if cash is not generated for the longer period of time.

4.1 Cash reinvested: After the cash is generated the company,finance manager reinvested back in the company for the future  business expansion.

4.2 Cash returned to investors: Financial manager returned some part of cash generated by the business to the investors in the form of divident.


TYPES OF FINANCIAL MARKETS:

1. Primary market: It is a market where selling of shares of company been don initially,here company sell its shares first time in market through IPO (Initial public offer). In this market generally shares are sold at discounted rates in order to attract retail investors.Here company recieve fund invested by the investors because share been issued directly by the company.

2. Secondry market: It is a market where selling and buying of shares take place through stock exchanges like BSE and NSE.Many shares of large numbers of companies are listed on NSE/BSE, where any investor can invest through a DMAT account.In this market company where investor invest money did not reciev money because investor purchase share from another investor.

3. OTC( Over the counter) market: This market is generally not very popular. Here share been transfered though written agrements.it is basically an illigal market.


 TYPES OF FINANCIAL INSTITUTIONS:

1. Banks: It is main Financial institute, where deposit and lending of money takes place.Here a account holder deposit money in a bank account, bank give that money to the borrowers at higher interst rate compare to depositors.

2.Insurance companies: It a types of finance company which is in a business of insure any business or life by recieving small amount as a premium.

3.Brokrage firms: This are a types of finance company which helps in buying and selling of securities( shares , debentures ect).

4.Mutual funds: This are also a finance institure where fund been pooled from the investors and invested in a predetermined objectives.

5. Finance companies: This are a types of finance companies where deposits and lending take places. They does not recieve money directly from the public but they recieve through debentures, but they can lent same as the bank lents the money.They are also deals in all types of finance like consumer durable finance, Home loan , vehical loans,mortgage loan ect.