Mona singh A-2 FM of ii-sem.ppt

8/20/2019 Mona singh A-2 FM of ii-sem.ppt

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Presentation of Fundamental ofFinancial Management

Presented By:-Mona SinghMBA II SemSection- A2

Presented To:-Prof. Vikas Pathak


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Meaning of FinancialManagement

“Concerns the acquisition, financing, and management of assets with some overalloverall goalgoal in mind.”

FM is a part of overall management Fm is that isthat managerial activity which is

concerned with the planning & controlling of thefirm’s financial recourses. t is helpful in ta!ingimportant decisions of what is invest and how tofinance for it.

"hus, FM is #roadly concerned with acquisition of fund& its proper utili$ation. FM is a process ofmanaging the financial resources, includingaccounting & financial reporting, #udgeting,collecting accounts receiva#le , ris! management &insurance for a #usiness. FM at the #roadest levelcomprises the management of all financial activities

of an organi$ation.


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%efinition

y '.C. (uchhal )*

“Financial Management deals withprocurement of fund & their effectiveutili$ation in #usiness.”

y 'olomon )*

“Financial management is concerned

with the efficient use of an importanteconomic resources, namely capitalfunds.”


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"wo aspect of FM

+rocurement of funds. ffective utili$ation of funds.

Scope of FinancialManagement

The scope of FM may be divided into

following two board categories:• Traditional Approach – Arrangementof funds.•

Modern Approach – !ective


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-ature and characteristics of FM

+art of overall management. Closely related with other disciplines.

Continuous process. %ifferent from accounting. Fast growing. elpful in decision ma!ing. /ider scope. oth science and 0rt.


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1#2ectives of FM

+rofit ma3imi$ation. /ealth ma3imi$ation. 1ther o#2ective)*

4.

+rovide support for decision ma!ing.5. nsure the availa#ility of timely, relevant and

relia#le financial and non 6 financial information.

7. Mange ris!s.

8. 9se resources, efficiently, effectively &economically.

:. 'trengthen accounta#ility.

;. +rovide a supportive control environment.


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'ignificance of FM

4. ssential in all types of organi$ations.5. . For achieving #alance ris! and return.?.

elpful in ta!ing innovative steps.4@. For maintaining optimum level of wor!ing capital.44. +rovide timely information.


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Functions of Financial Manager

nvestment decision)*

"he investment decision are related withselection of assets in which the funds are to #e

invested. "he assets may #e divided into twocategories)*

aA Bong term assets.

#A 'hort term assets. /hat is the optimal firm si$e /hat specific assets should #e acquired /hat assets Dif anyA should #e reduced or

eliminated


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ContEEE

Financing decision)* n finance decision, the financial manager

is required to determine the proportion of

de#t and equity. t is !nown as capitalstructure. t is essential to have a proper#alance #etween de#t and equity to ensurea trade off #etween ris! and return.

/hat is the #est type of financing /hat is the #est financing mi3 /hat is the #est dividend policy De.g.,

dividend*payout ratioA ow will the funds #e physically acquired


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ContEE..

%ividend decision)*

t is a third ma2or financial decision.

"he financial manager decide whetherthe whole amount of profit should #edistri#uted or a portion should #edistri#uted and #alance should #e

retained. %ividend policies should #esuch that ma3imi$es the value ofshares.


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1ther functions of Financial Manager

Biquidity decision.

volution of financial performance.

'upply of funds to all sections of theorgani$ations.

Biaison with financial institutions.

nterpretation of financial data.

Begal o#ligations.


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+rofit Ma3imi$ation

Ma$imi#ation of pro%t is generally considered as animplied ob&ective of %rm. 't is generally held that incase of free competition( businessman not only tries toachieve his personal interest( but he also satis%esinterest of society. A %rm should be guided by the aimof pro%t ma$imi#ation. Those assets and projectssho!d "e se!ected# $hich are pro%ta"!e andthose $hich are not sho!d "e rejected.

Ma$imi#ing a %rm)s earnings after ta$es.

ProblemsProblems

• *ould increase current pro%ts while harming %rm+e.g.( defer maintenance( issue common stoc, to buy

T-bills( etc..


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&riticisms:-• 't is vague .• 't ignores time value of money.• 't ignores ris,.• Too narrow.• 't ignores /uality aspect of

bene%ts.


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Maximization of ShareholderMaximization of Shareholder

Wealth!Wealth! The ob&ectives of wealth ma$imi#ation( as

discussed above( is not only vague but it alsoignores the two basic criteria of %nancialmanagement i.e. ris, 0 time value of money. 'talso ,nown as 1value Ma$imi#ation) or 12et

Present 3alue ma$imi#ation).“Value creation occurs when we maximize theshare price for current shareholders.” Criterion:-•It is based on the concept of cash owgenerated b the decision rather than counting

pro!t. "easuring bene!ts in terms of cash owa#oids the ambiguit associated with accounting

pro!t.


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/hat do mean #y 'ources offinance

'ources of finance means the way wherewe are arranging the capital for effectivelyrun for company.

Finance is said to #e the life #lood of a#usiness. Funds are needed to meet thedifferent types of requirement li!eimplementing a new pro2ect, e3pansion,

moderni$ation, etc. "he #usiness can notrun effectively if it does not have adequatefinance.


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'ources of Finance. 0ccording to +eriod.

Bong term sources, vi$. shares, de#enture, long*term loans, etc 'hort term sources, vi$. advances from commercial #an!s,

pu#lic deposits, advances from customer and trade creditors etc.

. 0ccording to 1wnership.

1wn capital, vi$. share capital, retained earning and surpluses

etc. orrowed capital, vi$. de#enture, pu#lic deposits and loan etc.

. 0ccording to source of eneration.

nternal sources, vi$. retained earning and depreciation fund etc.

3ternal sources, vi$. securities such as share and de#enture,

loan, etc.


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'hort*"erm 'ources of Finance

"rade Credit)

t is an informal arrangement #etween the #uyer andseller. "here is no legal instrument or document forgranting trade credit. t is popularly !nown as G'undry

Creditor’ or G0ccounts paya#le’. na! Finance)

an!s are the main institutional sources of wor!ing capitalfinance in ndia. an! finance is availa#le in differentforms. an! do not provide 4@@H of the credit limit. "hey

deduct margin money to ensure security. For e3ample, ifthe margin requirement is 5@H, #an! will give only >@Hof the value of assets !ept as security.

f b , %


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Types of ban, %nance: Types of ban, %nance:•*ash credit•4verdraft•Purchasing5discounting of the bill•6etter of credit•7or,ing *apital 6oan *ommercial Paper: A commercial paper is a short-termPromissory 2ote issued by a company(negotiable by endorsement and delivery( issuedat such discount on face value as may bedetermined by the issuing company.

Accrued $penses and 8eferred income: 'n addition to trade credit( accrued e$pensesand di!ered income are other spontaneous


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Accrued e$penses are more automatic sourcesince by de%nition they permit the %rm toreceive services before paying for them.

6ong-Term Sources ofFinance*apital mar,et is one of the most important sourcesof long-term %nancing. 't includes a wide variety of

%nancial instrument including shares anddebentures which facilitate 9ow of funds fromsurplus units to de%cit unites. Types of capita!

/uity Share *apital: The amount of raised by the issue of e/uityshares is ,nown as e/uity share capital. Types ofshare capital as follows:•

Authori#ed Share *apital•


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Preference Share: The amount of share capital which is raised by theissue of preference shares is called preference share

capital. Types of Preference shares:•*umulative preference shares•2on cumulative preference shares•Participating preference shares•2on participating preference shares•edeemable preference shares•'rredeemable preference shares•*onvertible preference shares

•2on convertible preference shares

8ebentures : A company has authority( if permitted by

memorandum and article of association( to invitemembers of general public to contribute to its loan


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The loan capital can be raised by a company by theissue of an instrument called 18ebenture).

Types of 8ebentures•Secured or Mortgage 8ebentures•edeemable 8ebentures•Simple or 2a,ed 8ebentures•Perpetual 8ebentures•egistered 8ebentures•;earer 8ebentures•4n the basis of convertibility- -2on-*onvertible 8ebentures -Fully-*onvertible 8ebentures

-Partly-*onvertible 8ebentures

etained arnings: At time of distribution of pro%t company hasretained some amount of pro%t and re invest in

business it)s called retained earning.


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Meaning of udget

udget is a numeric representation of themanager’s plan for specified period of time.t is commonly used #y #usiness firms,government agencies, non profit ma!ing

organi$ation and even households. %efinitiony rown and oward)* “a #udget is a predetermined statement of

management policy during a given periodwhich provides a standard for comparisonswith the results actually achieved.”


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*lassi%cation ofbudgets

4n thebasis oftime

4n the basisof function

4n the basisof 9e$ibility

. *urrent?. olling

. *ost of

production?. Purchase@. *apital

$penditure

. *ashB. PersonnelC. esearchD. Master


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Cash udget

Cash #udget is an estimate of cash receiptand payments. t is prepared after preparingall other functional #udget #ecause financialrequirements of all the #udgets are ta!eninto consideration for preparing cash #udget.

%efinition

y uthmen and %ougal)*

“Cash #udgets is an estimated of cash receiptsand dis#ursement for a future period oftime.”


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Fle3i#le udget

0 fle3i#le #udget is prepared form a range, i.g.for more than one level of activity. "hus, afle3i#le #udget might #e developed that wouldapply to range of production, say :@@@ to 4@@@@

units. 9nder this approach, if actual productionslips to >@@@ units from a pro2ected 4@@@@ units,the manager can use it to determine #udgetedcost at >@@@ units of output.

“0 #udget which #y recogni$ing the difference#etween fi3ed, varia#les and semi varia#lecosts, is designed to change in relation to thelevel of activity attained.”


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Iero ase #udgeting

Iero #ase #udgeting, as the name suggests,e3amines or reviews a program or functionfrom a Gscratch’. "he technique suggeststhat an origination should not only ma!e

decision a#out proposed new programs, #utshould also review the appropriateness ofthe e3isting programs from time to time.'uch a review should #e done of suchresponsi#ility centers where the proportion

of costs is relatively high. No activity orexpense is allowed simply because itwas being allowed or done in the past.


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Mona singh A-2 FM of ii-sem.ppt

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