Financial environment, also known as financial environment, refer to the impact on enterprise financial management activities of enterprises of various

internal and external factors combined. According to their relationship with the company, is divided into internal financial management of the environment and corporate external financial management environment. Outside the enterprise environment is an enterprise financial management, financial management, external influences of various factors, such as economic, policy, marketing, finance, law, science and so on. Financial management within the enterprise environment is the impact of financial management within the enterprise various factors, such as the management system, business forms of organization, production and operation conditions, the internal management standards. Study of financial environment, financial management, understand the business realities of their environment and trends, seize the favorable conditions to carry out financial activities and unfavorable conditions for corporate financial decision-making to provide adequate and reliable basis, and suggest

Macro environment is a dynamic factor and keeps changing drastically, leading to increase in avenues, competition and complexity. Efficient financial management calls for better financial decisions. This is only possible when every factor is reviewed which can affect the decision in any way and macro environment is one of the most important factors. This has made financial management more critical and sensitive for any business. Effective evaluation of projects and other situations is very critical in financial decisions. The evaluation calls for analysis of various factors belonging to both macro as well as micro environment. Financial management; a specialized field of general management is affected to a large extent by macro situations. We have to make various decisions related to finance; broadly such decisions include capital budgeting, capital structure & working capital decisions. Capital budgeting facilitates investment decisions, capital structure takes care of decisions relating to mix of sources of funds and, working capital assesses the day to day needs of business. While taking these decisions, one needs to understand the criticality of environmental forces. Since, there is no single factor that makes our macro environment but group of various forces like political, legal, economical, social, technological etc, together build it. An effective financial decision needs assessment of these factors. To evaluate various macro forces, it is necessary to be aware of the system and processes of the country constituting the economy. For e.g. financial system of a country which plays a major role while making financial decision. Awareness about financial environment helps us understand how it constraints or facilitate implementation of decisions. Financial environment comprises of various intermediaries as well as regulatory bodies. A simple example will help us understand the criticality of macro factors thoroughly. A change in credit policy like tightening of prudential norms for banks (for e.g. Increase in Cash Reserve Ratio and Statutory Liquidity Ratio by central bank of a country) will reduce the money supply in the economy. Decreased money supply will push up the interest rates and make credit costlier for people who want to borrow. Costly credit will directly affect the capital structure decision. It will also affect capital budgeting decision while assessing the feasibility of the investment alternative. Since, a higher cost of capital will increase

the percentage of discounting factor (opportunity cost) with which the future cash flows are discounted. This may cause deferring or canceling the capital expenditure (CAPEX) plans. Also, one should be updated with various changes taking place around the world. We are living in an era of globalization where, nothing is stable and information technology has made the access to news and information of the world just a click away. World is becoming a level playing field where, not only national but international factor can also cause a threat. Like, Sub-prime Crisis brought a challenging time for almost entire world. To summarize, financial management and its decisions are greatly based on some major assumptions. These assumptions are greatly based on the macro factors such as country or worldwide interest rates, gross domestic product (GDP) of a country, growth rate of economy, production and sales figures, population census etc. It clarifies to a great extent that financial decisions may go wrong if proper study of macro factors is not done. If the foundation goes wrong, dreaming about a strong building would be equivalent to day dreaming.

Finance and Economics

The relevance of economics. to financial management can be described in the light of the two broad areas of economics: macroeconomics and microeconomics. Macroeconomics is concerned with the overall institutional environment in which the firm operates. It looks at the economy as a whole. Macroeconomics is concerned with the institutional structure of the banking system, money and capital markets, financial intermediaries, monetary, credit and fiscal policies and economic policies dealing with, and controlling level of, activity within an economy. Since business firms operate in the macroeconomic environment, it is important for financial managers to understand the broad economic environment. Specifically, they should (1) recognise and understand how monetary policy affects the cost and the availability of funds; (2) be versed in fiscal policy and its effects on the economy; (3) be ware of the various financial institutions/financing outlets; (4) understand the consequences of various levels of economic activity and changes in economic policy for their decision environment and so on. Microeconomics deals with the economic decisions of individuals and organisations. It concerns itself with the determination of optimal operating strategies. In other words, the theories of microeconomics provide for effective operations of business firms. They are concerned with defining actions that will permit the firms to achieve success. The concepts and theories of microeconomics relevant to financial management are, for instance, those involving (1) supply and demand relationships and profit maximisation strategies, (2) issues related to the mix of productive factors, 'optimal' sales level and product pricing strategies, (3) measurement of utility preference, risk and the

determination of value, and (4) the rationale of depreciating assets. In addition, the primary principle that applies in financial management is marginal analysis; it suggests that financial decisions should be made on the basis of comparison of marginal revenue and marginal cost. Such decisions will lead to an increase in profits of the firm. It is, therefore, important that financial managers must be familiar with basic microeconomics. To illustrate, the financial manager of a department store is contemplating to replace one of its online computers with a new, more sophisticated one that would both speed up processing time and handle a large volume of transactions. The new computer would require a cash outlay of Rs 8,00,000 and the old computer could be sold to net Rs 2,80,000. The total benefits from the new computer and the old computer would be Rs 10,00,000 and Rs 3,50,000 respectively. Applying marginal analysis, we get:

Benefits with new computer

Rs 10,00,000

Less: Benefits with old computer Marginal benefits (a) Cost of new computer 3,50,000 Marginal Benefits Rs 6,50,000 (a)

Cost of new computer Rs 8,00,000 Less: Proceeds from sale of old computer Marginal cost (b) Net benefits [(a) - (b)] Rs 2,80,000 Marginal Rs 5,20,000 Net 1,30,0000 cost benefits (a) (b) (b)

As the store would get a net benefit of Rs 1,30,000, the old computer should be replaced by the new one. Thus, a knowledge of economics is necessary for a financial manager to understand both the financial environment and the decision theories which underline contemporary financial management. He should be familiar with these two areas of economics. Macroeconomics provides the financial manager with an insight into policies by which economic activity is controlled. Operating within that institutional framework, the financial manager draws on microeconomic theories of the operation of firms and profit maximisation. A basic knowledge of economics is, therefore, necessary to understand both the environment and the decision. techniques of financial management.

here are various sources of finance such as equity, debt, debentures, retained earnings, term loans, working capital loans, letter of credit, euro issue, venture funding etc. These sources are useful under different situations. They are classified based on time period, ownership and control, and their source of generation. Sources of finance are the most explored area especially for the entrepreneurs about to start a new business. It is perhaps the toughest part of all the efforts. There are various sources of finance classified based on time period, ownership and control, and source of generation of finance. Having known that there are many alternatives of finance or capital, a company can choose from. Choosing right source and right mix of finance is a key challenge for every finance manager. The process of selecting right source of finance involves in-depth analysis of each and every source of finance. For analyzing and comparing the sources of finance, it is required to understand all characteristics of the financing sources. There are many characteristics on the basis of which sources of finance are classified. On the basis of time period, sources are classified into long term, medium term, and short term. Ownership and control classifies sources of finance into owned capital and borrowed capital. Internal sources and external sources are the two sources of generation of capital. All the sources of capital have different characteristics to suit different types of requirements. Lets understand them in a little depth. ACCORDING TO TIME-PERIOD: Sources of financing a business are classified based on the time period for which the money is required. Time period are commonly classified into following three: o Long Term Sources of Finance: Long term financing means capital requirements for a period of more than 5 years to 10, 15, 20 years or may be more depending on other factors. Capital expenditures in fixed assets like plant and machinery, land and building etc of a business are funded using long term sources of finance. Part of working capital which permanently stays with the business is also financed with long term sources of finance. Long term financing sources can be in form of any of them: o Share Capital or Equity Shares o Preference Capital or Preference Shares o Retained Earnings or Internal Accruals o Debenture / Bonds o Term Loans from Financial Institutes, Government, and Commercial Banks o Venture Funding o Asset Securitization o International Financing by way of Euro Issue, Foreign Currency Loans, ADR, GDR etc. Medium Term Sources of Finance: Medium term financing means financing for a period between 3 to 5 years. Medium term financing is used generally for two reasons. One, when long term capital is not available for the time being and second, when deferred revenue expenditures like advertisements are made which are to be written off over a period of 3 to 5 years. Medium term financing sources can in the form of one of them: o Preference Capital or Preference Shares o Debenture / Bonds o Medium Term Loans from Financial Institutes Government, and Commercial Banks o Lease Finance

o Hire Purchase Finance o Short Term Sources of Finance: Short term financing means financing for period of less than 1 year. Need for short term finance arises to finance the current assets of a business like inventory of raw material and finished goods, debtors, minimum cash and bank balance etc. Short term financing is also named as working capital financing. Short term finances are available in the form of: o Trade Credit o Short Term Loans like Working Capital Loans from Commercial Banks o Fixed Deposits for a period of 1 year or less o Advances received from customers o Creditors o Payables o Factoring Services o Bill Discounting etc. ACCORDING TO OWNERSHIP AND CONTROL: Sources of finances are classified based on ownership and control over the business. These two parameters are an important consideration while selecting a source of finance for the business. Whenever we bring in capital, there are two types of costs one is interest and another is sharing of ownership and control. Some entrepreneurs may not like to dilute their ownership rights in the business and others may believe in sharing the risk. o Owned Capital: Owned capital is also referred as equity capital. It is sourced from promoters of the company or from general public by issuing new equity shares. Business is started by the promoters by bringing in the required capital for startup. Owners capital is sourced from following sources: o Equity Capital o Preference Capital o Retained Earnings o Convertible Debentures o Venture Fund or Private Equity Further, when the business grows and internal accruals like profits of the company are not enough to satisfy financing requirements, the promoters have choice of selecting ownership capital or nonownership capital. This decision is up to the promoters. Still, to discuss, certain advantages of equity capital are as follows: It is a long term capital which means it stays permanently with the business. There is no burden of paying interest or installments like borrowed capital. So, risk of bankruptcy also reduces. Businesses in infancy stages prefer equity capital for this reason. Borrowed Capital: Borrowed capital is the capital arranged from outside sources. These include the following: o Financial institutions, o Commercial banks or o General public in case of debentures. In this type of capital, the borrower has a charge on the assets of the business which means the borrower would be paid by selling the assets in case of liquidation. Another feature of borrowed capital is regular payment of fixed interest and repayment of capital. Certain advantages of borrowing capital are as follows: o There is no dilution in ownership and control of business. o o

Cost of borrowed funds is low since it is a deductible expense for taxation purpose which ends up saving on taxes for the company. o It gives the business a leverage benefit. ACCORDING TO SOURCE OF GENERATION: o Internal Sources: Internal source of capital is the capital which is generated internally from the business. Internal sources are as follows: o Retained profits o Reduction or controlling of working capital o Sale of assets etc. The internal source has the same characteristics of owned capital. The best part of the internal sourcing of capital is that the business grows by itself and does not depend on outside parties. Disadvantages of both equity capital and debt capital are not present in this form of financing. Neither ownership is diluted nor fixed obligation / bankruptcy risk arises. o External Sources: External source of finance is the capital which is generated from outside the business. Apart from the internal sources finance, all the sources are external sources of capital.

Deciding the right source of finance is a crucial business decision taken by top level finance managers. Wrong source of finance increase the cost of funds which in turn would have direct impact on the feasibility of project under concern. Improper match of type of capital with business requirements may go against smooth functioning of the business. For instance, if fixed assets, which derive benefits after 2 years, are financed through short term finances will create cash flow mismatch after one year and the manager will again have to look for finances and pay the fee for raising capital again.