FINANCIAL MANAGEMENT

Financial management is the area of business management devoted to a judicious use of capital and a careful selection of sources of capital in order to enable a business firm to move in the direction of reaching its goals. ---- J.F. Bradley

NATURE OF FINANCIAL MANAGEMENT

It is neither a pure science nor an art . It deals with various methods and techniques which can be adopted, depending on the situation of business and the purpose of decision. As a science, it uses various statistical and mathematical models and computer applications for solving the financial problems relating to the firm. For example capital investment appraisal, capital allocation and rationing, optimizing capital structure mix , portfolio management etc. Along with the above, a finance manager is required to apply his analytical skills in decision making. Hence , financial management is both a science as well as art.

 It is that part of total management which is concerned primarily with the financial affairs of an organization and the translation of actions , both past and proposed, into meaningful and relevant information for use in management process. It includes the function of budgeting, accounting, reporting, and the analysis and interpretation of the financial significance of past events and future plans. It also includes internal auditing, management analysis, and others. It is not primarily concerned with the technical procedures and methodology of those individual functions , rather, it is characterized by the coordination and correlation of those functions into an effective and broad system of financial control that will assure that they, collectively more than individually , become an integrated part of the management of the organization. It involves the art of interrelating data to obtain a perspective of the total financial situation that will assist managers in program planning and decision making

SCOPE OF FM
Financial management, at present is not confined to raising and allocating funds. The study of financial institutions like stock exchange, capital, market, etc. is also emphasized because they influenced under writing of securities & corporate promotion. Company Finance was considered to be the major domain of financial management. The scope of this subject has widened to cover capital structure, dividend policies, profit planning and control, depreciation policies. Some of the functional areas covered in financial management are discussed as such Determining financial needs Choosing the sources of funds Financial analysis and interpretation Cost-volume profit analysis Working capital management Dividend policy Capital budgeting

OBJECTIVES OF FINANCIAL MANAGEMENT

The main objectives of business is to maximize owners economic welfare. These objectives can be achieved by profit maximization and wealth maximization. PROFIT MAXIMIZATION Profit earning is the main aim of every economic activity. Profit is the measure of efficiency of business enterprise. WEALTH MAXIMIZATION Wealth of the firm is equal to No. of shares owned * Current stock price per share.

PROFIT MAXIMIZATION
ADVANTAGES It is a barometer for measuring efficiency and economic prosperity of business enterprise. It is a main source of finance for the growth of business. It maximizes socio-economic welfare. DISADVANTAGES It exploit workers and consumers. It is the condition of perfect competition. The profit is vague, it cannot be precisely defined. It ignores time value of money. It does not takes into consideration the risk of the prospective earning stream. Effect of dividend policy on the market price of the shares is also not considered.

WEALTH MAXIMIZATION
ADVANTAGES It serves the interest of creditors, employers, management and society. It not only serves shareholders interest by increasing the value of holding but insures security to lender also. Efficient allocation of productive resources will be essential for raising the wealth of the company. DISADVANTAGES It is a prescriptive idea. The objective of wealth maximization is not socially desirable.

COMPARATIVE FINANCIAL STATEMENT BALANCE SHEET

Current financial Position short term Increase in WC means improvement in current financial position of the business. Increase in CA accompanying by the increase in CL of the same amount will not show any improvement in short term financial position. Decrease in WC means current financial position is bad. An increase in inventory may increase WC of business but it will not be good for the business. Liquidity Position If liquid assets like cash in hand & bank, debtors, B/R, etc, shows an increase this will improve the liquidity position of the concern.

Long Term financial Position concern with change in fixed assets, long term liability and capital. The financial policy of concern will be to finance fixed assets by issue of long term loans , long term share capital, debentures and bonds. Increase in FA is more than increase in long term liability than part of fixed assets has been financed from working capital. If increase in long term securities is more than increase in FA than FA have not only being financed from long term sources but part of WC has also being financed from long term sources. Increase in plant and machinery will increase in the production capacity of the concern. Increase in long funded will mean an increase in interest liability. An increase in share capital will not increase any liability for paying interest. Profitability Increase in retained earning , reserves and surplus means the profitability has improved. Decrease in same means issue of dividend, issue of bonus shares or decline in profitability of concern.

COMPARATIVE FINANCIAL STATEMENT INCOME STATEMENT

Gross Profit Increase or decrease in sales should be compared with increase and decrease in COGS. An increase in sales will not always mean increase in profit. If increase in sales is more than increase in COGS than Co. is having profit. Operational Profit/ Expenses Increase in operating profit will result from increase in sales position and control of operating expenses. A decrease in operating profit may be due to increase in operating expenses or decrease in sales. Some expenses may increase due to the expansion of business activity or other may go up due to managerial inefficiency. Net Profit Increase or decrease in net profit tell us about the overall profitability of the concern. Non operating expenses such as interest paid , losses from sales of assets, payment of tax, writing off deferred expenses etc. decrease the fig. of OP.

 After deducting all non operating from operational profit or operating profit we get the fig. of Net Profit. Some non operating incomes like dividend received, interest, commission, discount received, increases the net profit. An increase in net profit gives an idea about the progress of the concern. After than, the overall profitability is analyzed by GP,OP and NP.

FINANCIAL ANALYSIS
It refers to the process of determining financial strength and weakness of the firm by establishing strategic relationship between the items of the balance sheet, profit & loss account and other operative data. The purpose of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and financial soundness of the firm. Types

On the basis of material used

On the basis of modus operandi

External Analysis

Internal Analysis

Horizontal Analysis

Vertical Analysis

CASH FLOW STATEMENTS

Cash flow statements are statements of changes in the financial position of the business due to inflow and outflow of cash. Statement of cash flow is required for short range financial planning. Cash flow statements are useful for the management in assessing the capability of business to meet its short term commitments towards creditors for goods and expenses. ( can be prepared month wise.) SIGNIFICANCE It is useful in the evaluation of cash position of a firm. How much cash will be generated into the firm and how much is needed for making payments. Variations and deficiency can be known through the comparison of horizontal and projected cash flow statement.

 A series of intra firm and intra firm cash flow statement revels whether firms liquidity is improving or declining. It explains causes for poor cash position. Most useful & appropriate than fund flow analysis. CFS prepared according to acc. Std. AS 3, which is more suitable for making comparison. CFS provides the information of all activities relating to operating, investing & financing activities.

FUND FLOW STATEMENT

FFS is a technical device designed to highlight the changes in the financial position of the business enterprise between two balance sheets. The term funds refers to the working capital which is excess of CA over the CL. In this, WC increase with increase in CA, WC decrease with increase in CL and via-vis. FFS has 2 sides i.e inflow & outflow and both of them are equal. Acc. to Mr. Robert N. Anthony. FFS describes the sources from which additional funds are derived and the uses to which these funds were applied. SIGNIFICANCE Tool of managing working capital. Knowledge of changes in WC. Knowledge of funds from operation. Knowledge of inflow of funds.

Knowledge of application of funds. Knowledge as to the payment of CL out of CA. Knowledge as to purchase of FA out of non-current sources. Helps borrowing operation. Knowledge of supplementary information. Acts as a process of budgeting.

LIMITATION OF FFS Does not contain non- current transaction. It is historic in nature related to past analysis but it is not prepared with much accuracy. It fails to reveal continuous changes. It is not a substitute of Balance Sheet, it gives some additional information. It is not a original in nature. Does not provide the information about changes in cash.

RATIO ANALYSIS
It is the most powerful tool for measuring financial analysis. It measures the profitability, efficiency & financial soundness of the business. Acc. to MyersRatio Analysis is a study of relationship among the various financial factors in a business RA is a tool to present the figures of financial statement in simple, concise & intelligible form. RA, in this way is the process of establishing meaningful relationship between two figures or set of figures of financial statement. SIGNIFICANCE Managerial Uses: Decision making, Forecasting & Planning, Communicating, Co-ordination, Controlling and other uses. Stakeholders Tax audit requirement