financial management....pg
TRANSCRIPT
-
8/4/2019 Financial Management....Pg
1/17
FINANCIAL MANAGEMENTFinancial 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
-
8/4/2019 Financial Management....Pg
2/17
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, capitalallocation 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.
-
8/4/2019 Financial Management....Pg
3/17
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 integratedpart 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
-
8/4/2019 Financial Management....Pg
4/17
SCOPE OF FMFinancial management, at present is not confined to raising and allocating funds.
The study of financial institutions like stock exchange, capital, market, etc. isalso 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
-
8/4/2019 Financial Management....Pg
5/17
OBJECTIVES OF FINANCIAL
MANAGEMENTThe main objectives of business is tomaximize 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.
-
8/4/2019 Financial Management....Pg
6/17
PROFIT MAXIMIZATIONADVANTAGES
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.
-
8/4/2019 Financial Management....Pg
7/17
WEALTH MAXIMIZATIONADVANTAGES
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.
-
8/4/2019 Financial Management....Pg
8/17
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 thiswill improve the liquidity position of the concern.
-
8/4/2019 Financial Management....Pg
9/17
-
8/4/2019 Financial Management....Pg
10/17
COMPARATIVE FINANCIAL
STATEMENT
INCOME STATEMENTGross 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.
-
8/4/2019 Financial Management....Pg
11/17
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.
-
8/4/2019 Financial Management....Pg
12/17
FINANCIAL ANALYSIS
It refers to the process of determining financial strength and weakness of the firm byestablishing 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 thefirm.
Types
On the basis of material used On the basis of modus operandi
External Internal Horizontal Vertical
Analysis Analysis Analysis Analysis
-
8/4/2019 Financial Management....Pg
13/17
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 formaking payments.
Variations and deficiency can be known through the comparison of horizontal
and projected cash flow statement.
-
8/4/2019 Financial Management....Pg
14/17
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.
-
8/4/2019 Financial Management....Pg
15/17
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.
-
8/4/2019 Financial Management....Pg
16/17
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.
-
8/4/2019 Financial Management....Pg
17/17
RATIO ANALYSIS It is the most powerful tool for measuring financial analysis. It measures the
profitability, efficiency & financial soundness of the business.
Acc. to Myers-
Ratio 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