Академический Документы
Профессиональный Документы
Культура Документы
MANAGEMENT
M O D U L E :- 1
Introduction to F.M.
&
9
Scope of Financial Management
• Financial Management has undergone
significant changes, over the years in its
scope and coverage.
– Traditional Approach
(Procurement of Funds)
– Modern Approach
(Effective Utilization of Funds)
10
Traditional Approach
(Procurement of Funds)
• The Scope of Finance was treated, in the
narrow sense of procurement or arrangement
of funds.
• The utilization of administering resources was
considered outside the preview of the finance
function.
• It was felt that the Finance Manager had no
role to play in decision – making for its
utilization. CONT..
11
CONT.. Traditional Approach
(Procurement of Funds)
As per this approach, the following aspects only
were included in the scope of financial
management
• Estimation of requirements of finance
• Arrangement of funds from financial institutions
• Arrangement of funds through financial
instruments such as shares, debentures, bonds
and loans, and
• Looking after the accounting and legal work
connected with the raising of funds. CONT..
12
CONT.. Traditional Approach
(Procurement of Funds)
Limitations of Traditional Approach
• Outsider – looking in Approach
• Ignored Routine Problems
• Ignored Non – Corporate Enterprises
• Ignored Working Capital Financing
• No Emphasis on Allocation of Funds
13
Modern Approach
(Effective Utilization of Funds)
The modern approach views the term financial
management in a broad sense and provides a
conceptual and analytical framework for
financial decision making.
According to it, the financial function covers
both acquisitions of funds as well as their
allocation.
Defined in a broad sense, it is viewed as an
integral part of over all management.
14
CONT.. Modern Approach
(Effective Utilization of Funds)
Thus, apart from the issues involved in
acquiring external funds, the main concern of
financial management is the efficient and wise
allocation of funds to various uses.
F.M. is concerned with the solution of
Investment Decision
Financing Decision
Liquidity Decision
Dividend Decision C O N T15. .
Functions
of
Financial Management
• Investment Decision
• Financing Decision
• Dividend Policy Decision
• Liquidity Decision
16
Investment Decision
• The investment decision relates to the selection of
assets in which funds will be invested by a firm.
• The assets acquired for business can be divided into
two parts
– Long – term or fixed assets which are used for
earning over a longer period.
– Short term or current assets which can be
converted into cash within an accounting period.
C O N T17. .
CONT.. Investment Decision
• Accordingly, the asset selection decision of a firm is
of two types
– The first of these involving the first category of
assets is popularly known in the financial
literature as capital budgeting.
– The aspect of financial decision – making with
reference to current assets or short – term assets
is popularly designated as working capital
management.
C O N T18. .
CONT..
• Capital Budgeting Decisions:
– Under these decisions, financial manager has to decide
as to which of the different available alternatives the
best to invest in.
– For this purpose, expected profit accruing from that
asset is evaluated by using different techniques.
• Working Capital Decisions:
– For the efficient management of Working Capital,
financial manager must maintain adequate balance in
liquidity and profitability. If W.C. more, it reduces Profit
and Increase Liquidity and If W.C. less, it risk for liquidity.
– Profitability and Liquidity have inverse relationship.
19
Financing Decision
• The concern of the financing decision is with the
financing – mix or capital structure or leverage.
• The term capital structure refers to the proportion
of debt (fixed – interest sources of financing) and
equity capital (variable – dividend securities /
sources of funds)
• The financing decision of a firm relates to the choice
of the proportion of these sources to finance the
investment requirements.
20
Dividend Policy Decision
• The dividend decision relating to the dividend
policy.
• The dividend decision should be analyzed in relation
to the financing decision of a firm.
• Two alternatives are available in dealing with the
profits of a firm: they can be distributed to the
shareholders in the firm of dividends or they can be
retained in the business which course should be
followed – dividend or retention.
21
Liquidity Decision
• Liquidity Decision is concerned with the
management of current assets.
• Working Capital Management is concerned with the
management of current assets.
• It is concerned with short – term survival.
• Short term – survival is a prerequisite for long term
survival.
• Investment in Current Assets affect the profitability,
liquidity and risk.
• When more funds are tied up in current assets, the
firm would enjoy greater liquidity . CONT..
22
CONT..
Liquidity Decision
• With excess liquidity, there would be no default in
payments, so there would be no threat of
insolvency for failure in payments.
• Higher liquidity is at the cost of profitability.
• A proper balance must be maintained between
liquidity and profitability of the firm.
• The strategy is in ensuring a trade – off between
liquidity and profitability.
• Working Capital Management is day to day problem
to the finance manager. His skills of financial
management are put to test daily. 23
Importance of Financial Management
• Financial Planning and Control
• Essence of Managerial Decision
• Improve Profitability
• Financial Management is a Scientific & Analystical
Analysis
• Continuous Administration Function
• Centralized Nature
• Basis of a Managerial Process
• Measure of Performance
24
Objectives of Financial Management
• Financial Management’s main aim is to use business
funds in such a way that the earnings are maximized.
• Financial Management provides a framework for
selecting a proper course of action and deciding a
viable commercial strategy.
• The main objective of a business is to maximize the
owner’s economic welfare.
• There are two main objectives of Financial
Management:
– Profit Maximization
– Wealth Maximization
25
Profit
Maximization
• Introduction
• Arguments in favour of Profit Maximization
• Limitations of Profit Maximization
26
Introduction
• Profit earning is the main aim of every economy
activity.
• Profit also serve as a protection against risks which
cannot be ensured,
• The accumulated profits enable a business to face
risks like fall in prices, competition from other units,
advertise government policies etc.
• Profit Maximization is the traditional and narrow
approach, which aims at maximizing the profit of
the concern. It is also called as cashing per share
maximization. 27
Arguments in favour of Profit Maximization
• Profit is the Test of Economic Efficiency
• Efficient Allocation of Fund
• Social Welfare
• Internal Resources for Expansion
• Reduction in Risk and Uncertainty
• More Competitive
• Desire for Controls
• Basis of Decision – making
28
Limitations of Profit Maximization
• Quality of Benefits
• Ambiguity – Vague
• Timing and Value of Money – Ignored
• Change in Organization Structure
• Social Welfare may be Ignored
• Ignores Financing and Dividend Aspects
29
Wealth
Maximization
• Introduction
• Arguments in favour of Wealth Maximization
• Limitations of Wealth Maximization
30
Introduction
• The wealth maximization principle implies that the
fundamental objective of a firm should be to
maximize the market value of its shares.
• The wealth maximization objective is consistent
with the objective of maximizing the owner’s
economic welfare.
• This is also known as net present worth
maximization approach, it takes into consideration
the time value of money.
31
Arguments in favour of Wealth Maximization
• The main aim of the business concern under this
concept is to improve the value or wealth of the
shareholders.
• Wealth Maximization considers the comparison of the
value to cost associated with the business concern.
• It provides extract value of the business concern.
• Wealth Maximization considers both time and risk of
the business concern.
• Wealth Maximization provides efficient allocation of
resources.
• It ensures the economic interest of the society 32
Limitations of Wealth Maximization
• The objective of Wealth Maximization is not,
necessarily, socially desirable.
• There is some controversy whether the objective of
maximization
• However, there is always a possibility of conflict of
interest between the shareholders’ interests and
managerial interest.
• Many a time, individuals place their personal
preferences and selfish interests, ahead of the
institutional interest.
33
Profit Maximization versus Wealth Maximization
Profit Maximization Wealth Maximization
Definition or Nature Definition or Nature
• It relates to optimizing the input • Maximizing the wealth in the
– output relationship of hands of shareholders
resources to minimize the Purpose of Concept
wasteful costs. • To enhance the value of the firm
Purpose of Concept and the market value of the
• Maximize the profitability shares.
Formulae Formulae
• Profit = Total Revenue Receipt – • Wealth = No. of Shares * Price
Total Costs Rational
Rational • Maximize value of firm and
• Growth in future and shelter enhancing shareholder value 34
against contingencies
Profit Maximization versus Wealth Maximization
Profit Maximization Wealth Maximization
Time Span Time Span
• Shorter time Period • Long - term value
Time Value of Money Time Value of Money
• Does not give due • Gives due consideration to the
consideration time value of money
Immediate Beneficiaries Immediate Beneficiaries
• First benefits to management • First benefit to shareholder and
and later shareholder then to the organization
Limitation or Constraints
Limitation or Constraints
• Very Long Span of time, so
• Exploitative tendency and
increased efforts on value
gives lower priority to building.
shareholders 35
Relationship of Financial Management with
Related Disciplines
• Financial Management and Economics
• Financial Management and Accounting
• Financial Management and Mathematics
• Financial Management and Production
Management
• Financial Management and Marketing
• Financial Management and Human Resource
36
Organization of Finance Function
• The ultimate responsibility of discharging the
finance function is that of the Board of Director,
who discharges this function through the Chief
Financial Officer (CFO)
C.F.O (Director of Finance)
Finance Manager / Accounts Manager /
Treasurer Controller
42
FINANCIAL
SYSTEM
43
CONTENT
• Meaning & Definition of Financial System
• Feature of Financial System
• Functions of Financial System
• Structure of Financial System
• Importance of Financial System
• Weakness of Financial System
44
Meaning & Definition of Financial System
• According to Robinson, the primary function of the
system is , “To provide a link between saving and
investment for the creation of new wealth and to permit
portfolio adjustment in the composition of the existing
wealth.”
• A financial system or financial sector functions as an
intermediary and facilitates the flow of funds from the
area of deficit.
• The word “System” in the term “Financial System”
implies a set of complex and closely connected or
interlined institutions, agents, practices, market,
transactions, claims and liability in the economy.
• It is concerned about money, credit and finance. 45
Flow of Financial System
Seekers of Suppliers of
Funds Funds
(Mainly business
firms and (Mainly
government ) Households)
Income and Financial Claims
46
Feature of Financial System
• Financial System provides and ideal linkage
between depositors and investors, thus encouraging
both savings and investments.
• Financial System facilitates expansion of financial
markets over space and time.
• Financial System promotes efficient allocation of
financial resources for socially desirable and
economically productive purpose.
• Financial system influences both the quality and the
pace of economic development
47
Functions of Financial System
• Link between savers and investors
• Helps in Projects Selection
• Allocation of Risk
• Information Available
• Minimizes Situations of Asymmetric Information
• Reduce Cost of Transaction and Borrowing
• Promotion of liquidity
• Financial Deeping and Broadening
48
Structure of Financial System
• Financial Institutions / Intermediaries
– Regulatory
• SEBI, IRDA,RBI, AMFI, etc
– Intermediaries
• Banks – SBI, PNB, etc
• NBFCs – LIC, UTI, GIC, etc
– Non – Intermediaries
• NABARD, IDBI, IFCI, etc
• Financial Services
– Merchant Banking, Credit Rating
– Leasing , Hire Purchase C O N T49. .
CONT..
Structure of Financial System
• Financial Markets
– Unorganized Market
• Not controlled by RBI or Regulatory Body
• Money lenders, trader, indigenous bankers,
private finance company, chit funds, etc
– Organized Market
• Capital Market (Financial Assets) (Long Term)
– Primary Market
– Secondary Market
• Money Market (Short Term) C O N T50. .
CONT..
Structure of Financial System
• Financial Assets / Instruments
– Primary Securities
• Equity, Shares and Debentures
– Secondary Securities
• Mutual Funds, Insurance and Bank Deposits,
etc
51
Importance of Financial System
• Increase the output of the Economy
• Accelerate the volume and Rate of Savings
• Makes Innovation
• Evaluating Assets, Increasing Liquidity, and
Producing and Spreading Information
• Risk Management Services
• Stability and Resilience
• Disciplining and Guiding the Management
Companies
• Accelerates the Rate of Economic growth
52
Weakness of Financial System
• Lack of Coordination between different Financial
Institutions
• Monopolistic Market Structures
• Dominance of Development Banks in Industrial
Financing
• Inactive and Erratic Capital Market
• Imprudent Financial Practices
53
TIME VALUE
OF
MONEY (TVM)
54
CONTENT
• Concept of Time Value of Money
• Reasons for Time Value of Money
• Basic Valuation Concepts
• Compounding / Future Value Concept
• Discounting / Present Value Concept
• Annuity Due
• Applications of the Concept of TVM
55
Concept of Time Value of Money
56
Reasons for Time Value of Money
• Risk and Uncertainty
• Preference for Consumption
• Investment Opportunities
• Inflationary Economy
57
Basic Valuation Concepts
58
Compounding / Future Value Concept
59
Discounting / Present Value Concept
60
Annuity Due
61
Applications of the Concept of TVM
62
BASICS
OF
RISK
AND
RETURN 63
CONTENT
• Concept of Risk
• Concept of Returns
• Risk – Return Trade off
• Major Risk – Return Decision Area
64
Concept of Risk
65
Concept of Returns
66
Risk – Return Trade off
67
Major Risk – Return Decision Area
68
VALUATION
OF
BONDS
AND
SHARES 69
CONTENT
• Introduction
• Valuation of Bond
• Valuation of Preference Shares
• Valuation of Equity Shares
70
Introduction
71
Valuation of Bond
72
Valuation of Preference Shares
73
Valuation of Equity Shares
74
WORKING CAPITAL
MANAGEMENT
75
CONTENT
• Meaning and Definitions of Working Capital
• Concept of Working Capital
• Components of Working Capital
• Need of Working Capital
• Classification / kinds of Working Capital
• Factors Affecting Working Capital Requirement
• Advantages of Adequate Working Capital
• Disadvantages of Excess or Inadequate Working Capital
• Principles of Working Capital Management
• Approaches for Financing Current Assets
• Estimation of Working Capital Requirement
• Performa for Computation of Working Capital Requirement
76
Meaning and Definitions of Working Capital
77
Concept of Working Capital
78
Components of Working Capital
Current Assets
• Inventories
• Trade Debtors
• Prepaid Expenses
• Loan and Advances
• Investment
• Cash and Bank Balance
Current Liabilities
• Sundry Creditors
• Bank overdrafts
• Short – term Loans
• Provisions 79
Need of Working Capital
80
Classification / kinds of Working Capital
• On the Basis of Concept
– Gross Working Capital
– Net Working Capital
• On the Basis of Time
– Permanent or Fixed Working Capital
• Regular Working Capital
• Reserve Working Capital
– Temporary or Variable Working Capital
• Seasonal Working Capital
• Special Working Capital
81
Factors Affecting Working Capital
Requirement
• Nature or Character of Business
• Size of Business / Scale of Operations
• Production Policy
• Manufacturing Process / Length of Production Cycle
• Seasonal Variations
• Working Capital Cycle
• Rate of Stock Turnover
• Credit Policy
• Business Cycles
82
Factors Affecting Working Capital
Requirement
• Rate of Growth of Business
• Earning Capacity and Dividend Policy
• Price Level Change
• Tax Level
• Other Factors
83
Advantages of Adequate Working Capital
• Solvency of the Business
• Goodwill
• Easy Loans
• Cash Discounts
• Regular Supply of Raw Materials
• Regular payment of salaries, wages and other day –
to – day commitments
• Exploitation of Favorable Market Conditions
• Ability to Face – Crisis
• Quick and Regular Return on Investments
• High Morale 84
Disadvantages of Excess or Inadequate
Working Capital
• Disadvantages of Excessive Working Capital
• Disadvantages of Inadequate Working Capital
– Unable to Adapt to Change
– Trade Discounts are Lost
– Cash Discounts are Lost
– Financial Reputation is Lost
– Insolvency
85
Principles of Working Capital Management
• Principle of Risk Variation
• Principle of Cost Capital
• Principle of Equity Position
• Principle of Maturity Payment
86
Approaches for Financing Current Assets
87
Estimation of Working Capital Requirement
88
Performa for Computation of Working Capital
Requirement
89
MANAGEMENT
OF
COMPONENT
WORKING CAPITAL
90
• Cash Management
• Debtors / Receivables Management
• Inventory Management
91
CASH
MANAGEMENT
92
CONTENT
• Meaning of Cash
• Motives for Holding Cash
• Factors Determining Cash Needs
• Meaning of Cash Management
• Objectives of Cash Management
• Importance of Cash Management
• Cash Cycle and Cash Turnover
• Basic Strategies for Cash Management
• Technique / Processes of Cash Management
93
Meaning of Cash
94
Motives for Holding Cash
• Transaction Motive
• Precautionary Motive
• Speculative Motive
• Compensation Motive / Compensating Balances
95
Factors Determining Cash Needs
• Credit Position of the Firm
• Status of Firm’s Receivable
• Status of Firm’s Inventory Account
• Nature of Business Enterprise
• Management’s Attitude towards Risk
• Amount of Sales in Relation to Assets
• Cash inflows and Cash Outflows
• Cost of Cash Balance
96
Meaning of Cash Management
97
Objectives of Cash Management
98
Importance of Cash Management
99
Cash Cycle and Cash Turnover
100
Basic Strategies for Cash Management
101
Technique / Processes of Cash Management
102
RECEIVABLES
MANAGEMENT
103
CONTENT
• Meaning and Definition of Receivables
• Cost of Maintaining Receivables
• Factors Affecting the Size of Receivables
• Meaning of Receivables Management
• Objectives of Receivables Management
• Dimensions of Receivables Management
104
Meaning and Definition of Receivables
105
Cost of Maintaining Receivables
• Cost of financing
• Administrative Cost
• Delinquency Costs
• Cost of Default by Customers
106
Factors Affecting the Size of Receivables
• Size of Credit Sales
• Credit Policies
• Terms of Trade
• Expansion Plans
• Relation with Profits
• Credit Collection Efforts
• Habits of Customers
• Stability of Sales
• Size and Policy of Cash Discount
• Bill Discounting and Endorsement 107
Meaning of Receivables Management
108
Objectives of Receivables Management
109
Dimensions of Receivables Management
110
INVENTORY
MANAGEMENT
111
CONTENT
• Meaning and Definition of Inventory
• Elements of Inventory
• Motives of Holding Inventories
• Types of Inventory
• Costs Associates with Inventory
• Objectives of Inventory Management
• Importance of Inventory Management
• Inventory Management Techniques
112
Meaning and Definition of Inventory
113
Elements of Inventory
• Raw Material
– Direct Material
– Indirect Material
• Work – in –Progress
• Consumable
• Finished Goods
• Stores and Spares
114
Motives of Holding Inventories
• Transaction Motive
• Precautionary Motive
• Speculative Motive
115
Types of Inventory
• Movement Inventories
• Buffer Inventories
• Anticipation Inventories
• Decoupling Inventories
• Cycle Inventories
• Independent Demand Inventories
• Dependent Demand Inventory
116
Costs Associates with Inventory
• Purchase Cost
• Ordering Cost / Set up Cost
• Carrying Cost
• Stock out Cost
117
Objectives of Inventory Management
• Operating Objectives
– Availability of Materials
– Minimizing the Wastage
– Promotion of Manufacturing Efficiency
– Better Service to Customers
– Control of Production Level
– Optimal Level of Inventories
• Financial Objectives
– Economy in Purchasing
– Optimum Investment and Efficient use of Capital
– Reasonable Price
– Minimizing Costs 118
Importance of Inventory Management
• To Improve Customer Service
• Economics of Scale
• Permits Purchase and Transportation Economies
• Hedges against Price Changes
• Protects against Demand and Lead – time Uncertainties
• Hedges against Contingencies
• Anticipation
• Lot Size
• Specialization
• Protection from Uncertainties
• Inventory as a Buffer 119
Inventory Management Techniques
• Economic Order Quantity
• Levels of Stock
• Perpetual Inventory System
• ABC Analysis
• Just in Time
• Inventory Turnover
• Inventory Control of Spares and Slow Moving Items
120
SOURCES
OF
WORKING CAPITAL
FINANCING
121
CONTENT
• Permanent or Fixed Working Capital Requirement
• Temporary or Variable Working Capital Requirement
122
Permanent or Fixed Working Capital
Requirement
• Equity Shares
• Preference Shares
• Debentures
• Retained Earning
• Loans from Financial Institutions
123
Temporary or Variable Working Capital
Requirement
• Indigenous Bankers
• Installment Credit
• Outstanding Expenses and Deferred Incomes
• Account Payable / Creditors
• Trade Credit
• Commercial Banks
• Bills Discounting
• Commercial Paper
• Certificates of Deposit
• Factoring 124
REGULATION
OF
BANK FINANCE
125
CONTENT
• Recent RBI Guidelines Regarding Working Capital
Finance
• Various Committee Reports on Working Capital
126
Recent RBI Guidelines Regarding Working
Capital Finance
127
Various Committee Reports on Working
Capital
• Sheja Committee Report 1969
• Tandon Committee Report 1975
• Chore Committee Report 1979
• Marathe Committee Report 1984
128
Sheja Committee Report 1969
129
Tandon Committee Report 1975
130
Chore Committee Report 1979
131
Marathe Committee Report 1984
132
Thank You . . .
133