202 FINANCIAL MANAGEMENT

BY

DR. VIKAS BARBATE, ASM,IPS

CONTENTS:
•1. Business Finance: Introduction to Business Finance, Meaning and Definition of Financial Management, Objectives of
Financial Management- (Profit Maximization and Wealth Maximization), Modern Approach to Financial Management-
(Investment Decision, Financing Decision, Dividend Policy Decision), Finance and its relation with other disciplines,
Functions of Finance Manager
•2. Techniques of Financial Statement Analysis: Introduction, Objectives of financial statement analysis, various techniques
of analysis viz Common Size Statements, Comparative Statements, Trend Analysis, Ratio Analysis, Funds Flow Statement &
Cash Flow Statement
•3. Working Capital Management: Meaning of Working Capital, its components& types, Operating Cycle, Factors affecting
working capital, Estimation of working capital requirement. (Total Cost Method & Cash Cost Method)
•4. Capital Structure: Meaning and Factors affecting Capital Structure, Different sources of finance. Concept and
measurement of Cost of Capital (measurement of Specific Cost and WACC), Trading on Equity, Concept of Leverages and its
types.
•5. Capital Budgeting: Meaning, Definition of Capital Budgeting, Time value of money.Tools of evaluation of the project
based on traditional techniques and modern techniques - ARR, Payback Period, Discounted Payback Period, NPV, PI & IRR
N U M E R I C A L P R O B L E M S W I L L B E A S K E D O N F O L L O W I N G TO P I C S O N LY

•1. Common Size Statements

•2. Comparative Statements
•3. Trend Analysis
•4. Ratio Analysis (Calculation of ratios plus its interpretation)
•5. Estimation of working capital requirement (Total Cost Method & Cash Cost Method)
•6. Operating Cycle
•7. Measurement of Specific Cost (Cost of Equity, Preference, Retained Earnings and Debt) and WACC
•8. Capital Structure
•9. Leverages
•10. Capital Budgeting (ARR, Payback Period, Discounted Payback Period, NPV, PI & IRR)
1. BUSINESS FINANCE

• Meaning: Financial Management means planning, organizing, directing and

controlling the financial activities such as procurement and utilization of funds
of the enterprise. It means applying general management principles to financial
resources of the enterprise. It is the act of bringing money into an organization.
Businesses can be financed in a number of ways, each of which features its own
advantages, disadvantages and unique features. Common methods of financing a
business include taking on debt and taking advantage of credit arrangements,
financing through equity investment or earning income through investment
products that bear interest or increase in value.
1. BUSINESS FINANCE

• CONCEPT: In our present day economy, finance is defined as the provision of money at the
time when it is required. Every enterprise whether big, medium or small, needs finance to
carry on its operation and to achieve its targets. Finance is so indispensible today that it is
rightly said to be the ‘lifeblood’ of an enterprise. Without adequate finance, no enterprise
can possibly accomplish its objectives. So, Financial management can be defined as the
process of raising, providing and administering of all money or funds to be used in the
business enterprise. Financial management refers to that part of the management activity
which is concerned with the planning and controlling of firms financial resources. It deals
with find out various sources and application of funds for the firm. The sources must be
suitable and economical for the needs of the business. The most appropriate use of such
funds also forms a part of financial management. As a separate managerial activity, it has a
recent origin. Thus, financial management deals with financial planning, acquisition of
funds, use and allocation of funds, and financial controls.
1. BUSINESS FINANCE-DEFINITIONS

• According to Khan & Jain “Finance is the art and science of managing money”
• According to Guthmann and Dougall, “business finance can be broadly defined
as the activity concerned with the planning, raising, controlling and
administering the funds used in the business”.
• Business finance is “that business activity which is concerned with the
acquisition and conservation of capital funds in meeting the financial needs and
overall objectives of business enterprise”.
• Finance is 1) planning 2) organizing 3) Coordination 4) Controlling of financial
activities such as 1) raising of funds 2) Investment of funds 3) Distribution of
funds for achieving goals of the organisations and stakeholders. (Profit
maximization and wealth maximisaton)
1. BUSINESS FINANCE

• SCOPE OF BUSINESS FINANCE The main objective of financial management is to arrange

sufficient finances for meeting short-term and long-term needs. These funds are procured at
minimum costs so that profitability of the business maximize. With these things in mind, a
financial manager will have to concentrate on the following areas of finance
1) Estimating financial requirement: the first task of a financial manager is to estimate short-
term and long-term financial requirement of the business. For this purpose, he will prepare a
financial plan for present as well as for future. The amount required for purchasing fixed assets as
well as needs of funds for working capital will have to be ascertained.
2) Deciding capital structure: the capital structure refers to the kind and proportion of different
securities for raising funds. After deciding about the quantum of funds required it should be
decided which type of securities should be raised It may be wise to finance fixed assets through
long-term debts. Even here if gestation period is longer, then share capital may be most suitable.
Long-term funds should be employed to finance working capital also, if not wholly then partially.
1. BUSINESS FINANCE

3) Selecting a source of finance: after preparing a capital structure, an appropriate source of

finance is selected. Various sources, from which finance may be raised, include share capital,
debenture, financial institutions, commercial banks, public deposits, etc. if finances are needed
for short period then banks, public deposits and financial institutions may be appropriate.
Selecting a pattern of investment: when funds have been procured then a decision about
investment pattern is to be taken. The selection of an investment pattern is related to the use of
funds. The decision making techniques such as capital budgeting, opportunity cost analysis etc.
may be applied in making decisions about capital expenditures. While spending o various assets,
the principle of safety, profitability and liquidity should not be ignored. Proper cash
management: the cash management is also an important task of finance manager. He has to
assess various cash needs at different times and then make arrangements for arranging cash. Cash
management should be neither there is a shortage of it and nor it is idle. Any shortage of cash
will damage credit worthiness of the enterprise. The idle cash with the business will mean that it
is not properly used.
1. BUSINESS FINANCE

4) Implementing financial control: an efficient system of financial management

necessitates the use of various control devices. Financial control devices generally
used are: (a) Return on Investment, (b) Budgetary control, (c) Break-even
analysis, etc. the use of various control techniques by the finance manager will
help him in evaluating the performance in various areas and take corrective
measures whenever needed. Proper use of surpluses: the utilization of profits or
surpluses is also an important factor in financial management. A judicious use of
surpluses is essential for expansion and diversification plans and also in
protecting the interest of shareholders.
1. BUSINESS FINANCE

OBJECTIVES OF FINANCIAL MANAGEMENT Financial management is concerned

with procurement and use of funds. Its main aim is to use business funds in such a way
that the firm’s value or earnings are maximized. There are various alternatives
available of using business funds. Each alternative course has to be evaluated in detail.
The pros and cons of various decisions have to look into before making final selection.
The main objective of a business is to maximize the owner’s economic welfare. This
objective can be achieved by: Profit maximization: profit earning is the main aim of
every economic activity. A business being an economic institution must earn profit. To
cover its costs and provide funds for growth. No business can survive without earning
profit. Profit is a measure of efficiency of a business enterprise. Profits also serve as a
protection against risks which cannot be ensured. The following arguments are
advanced in favour of profit maximization as the objective of business.
1. BUSINESS FINANCE

When profit earning is the aim of business then profit maximization should be the obvious
objective. Profitability is the barometer for measuring efficiency and economic prosperity of a
business enterprise, thus, profit maximization is justified on the grounds of rationality. Economic
and business conditions do not remain same at all the times. There may be adverse business
conditions like recession, depression, severe competition etc. a business will be able to survive
under unfavorable situation, only if it has some past earnings to rely upon. Therefore, a business
should try to earn more and more when situation is favourable. Profitability is essential for fulfilling
social goals also. A firm by pursuing the objective of profit maximization also maximizes socio-
economic welfare. Wealth maximization: Wealth maximization (shareholders' value maximization)
is also a main objective of financial management. Wealth maximization means to earn maximum
wealth for the shareholders. So, the finance manager tries to give a maximum dividend to the
shareholders. He also tries to increase the market value of the shares. The market value of the shares
is directly related to the performance of the company. Better the performance, higher is the market
value of shares and vice-versa. So, the finance manager must try to maximise shareholder's value.
1. BUSINESS FINANCE

Approaches of business finance:

Traditional Approach: The scope of finance function was treated, in the narrow
sense of procurement or arrangement of funds. The finance manager was treated
as just provider of funds, when organisation was in need of them. The utilisation
or administering resources was considered outside the purview of the finance
function. It was felt that the finance manager had no role to play in decision-
making for its utilisation. Others used to take decisions regarding its application
in the organisation, without the involvement of finance personnel. Finance
manager had been treated, in fact, as an outsider with a very specific and limited
function, supplier of funds, to perform when the need of funds was felt by the
organisation.
1. BUSINESS FINANCE

Modern Approach: Since 1950s, the approach and utility of financial

management has started changing in a revolutionary manner. Financial
management is considered as vital and an integral part of overall management.
The emphasis of Financial Management has been shifted from raising of funds to
the effective and judicious utilisation of funds. The modern approach is analytical
way of looking into the financial problems of the firm. Advice of finance manager
is required at every moment, whenever any decision with involvement of funds is
taken. Hardly, there is an activity that does not involve funds.
GOALS/OBJECTS OF FINANCE FUNCTION

1. Profit Maximization
2. Wealth Maximisation
O R G A N I Z AT I O N O F F I N A N C E F U N C T I O N

Board of Directors
Executive Committee

Vice President Vice President (Finance) Vice President (Marketing)

(Production)

Finance Controller Treasurer

1)Accounting & Costing 1)Receivables Managememnt
2)Annual Reporting 2)Taxes and Insuranch
3)Internal Auditing 3)Cost Management
4)Budgeting 4)Securities
5)Statistics & finance 5)Banking Relations
6)Record Keeping 6)Real Estates
7)Dividend ddistributions
DUTIES AND RESPONSIBILITIES OF FINANCE EXECUTIVES
A) Recurring duties:
1) Deciding the financial needs.
2) Raising the funds required
3) Allocation of funds
i) Fixed Assets Management
ii) Working capital Management
4) Allocation of income
5) Control of funds
6) Evaluation of performance
7) Corporate Taxation
8) Preparation of annual accounts, financial reports, carrying internal audits etc.
B) Non- recurring duties: Preparation of financial plans, plan for company promotion, financial
restructure, handle liquidity crises, valuation of firms etc
THE FIELDS OF FINANCE

• 1) Business Finance
• 2) Corporate Finance
• 3) International Finance
• 4) Public Finance: (Government s)
CONCLUSION

Business finance is a term that includes a wide range of activities and disciplines
revolving around the management of money and other valuable assets. Making
wise and profitable investments can finance business operations with no strings
attached. Each type of financing should be used with caution and vigilance.
Taking on too much debt can dilute company performance metrics such as the
debt-to-assets and times-interest-earned ratios, as well as reducing profit margins.
Financing too heavily through equity can cause original company founders to lose
control of the company completely over time. Investing too much money in risky
investments can cause a company to lose its cash reserves quickly.