Financial Management: A Comprehensive Guide to Concepts, Objectives, and Techniques
1. What do you mean by finance?
Finance means the art of management of large amount of money Or finance is the management of money matters of business or business entities.
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2. What do you mean by business finance?
‘Business finance’ is an activity or a process which is concerned with acquisition of funds, use of funds and distribution of profits by a business firm. Thus, business finance usually deals with financial planning, acquisition of funds, use and allocation of funds and financial controls.
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3. What is corporate finance?
Corporation finance is the process of raising, providing and administering of all money/funds to be used in a corporate (business) enterprise.
Ll 4. Define financial management?
Financial management refers to that part of the management activity which is concerned with the planning and controlling of firm’s financial resources. Financial management deals with finding out various sources of raising funds economically and aims to utilise its funds in a best possible and profitable way for efficient operations to achieve the objectives of the business units ll
5. What is Financial Planning?
Financial planning means deciding in advance the financial requirements of business, the sources from which they are to be met and the effective utilisation of the funds so collected. Financial planning is thus a process of determining the company’s financial objectives, financial policies and financial procedures and programmes for effective management of the financial activities of the organisation.)Therefore it involves the formulation of an ideal capital structure which fulfils the objectives of the organization ll7. Give the Differentiate between Financial Management and Financial Accounting.
➢ Decision-making:
The chief focus of Financial Accounting is to collect data and present the data while Financial Management’s primary responsibility relates to financial planning, controlling and decision-making.
ll ➢ Treatment of funds:
In Financial Accounting, the measurement of funds is based on the accrual principle of funds, in financial management is based on cash flows. The revenues are recognised only when cash is actually received (i.E. Cash inflow) and expenses are recognised on actual payment (i.E. Cash outflow).
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8. What do you mean by Profit Maximisation
Profit earning is the main aim of every business to cover its costs to survive and provide funds for growth. Profit is a measure of efficiency of a business enterprise. Profits also serves as a protection against risks which cannot be insured. The accumulated profits enable a business to face risks like fall in prices, competition from other units, adverse government policies etc. Thus, profit maximisation is considered as the main objective of business.
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9. Wealth Maximisation Wealth maximisation objective of an enterprise means maximisation of the shareholder’s wealth measured by EPS, DPS, NPV, EVA and MVA through better & efficient Financial Management. The main aim of Financial management is to see that the value of shares and Stock is maximized by managing the sources and application of funds economically, efficiently & effectivel ll
SCOPE OF FINANCIAL MANAGEMENT :-1. Estimating Financial Requirements
The first task of a financial manager is to estimate short-term and long-term financial requirements of its’ business. For this purpose, he will prepare a financial plan for present as well as for future. The inadequacy of funds will adversely affect the day-to-day working of the concern whereas excess funds may tempt a management to indulge in extravagant spending or speculative activities.
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2. Deciding Capital Structure
The capital structure refers to the kind, quantum and proportion of different securities for raising funds. The kind of securities to be employed and the proportion in which these should be used is an important decision linked to the cost of raising funds which influences the short-term and long-term financial planning of an enterprise.
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3. Selecting a Source of Finance
The need, purpose, object and cost involved may be the factors influencing the selection of a suitable source of financing. If finances are needed for short periods then banks, public deposits and financial institutions may be appropriate; on the other hand, if long-term finances are required then share capital and debentures may be useful.
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4. Selecting a Pattern of Investment
The selection of an investment pattern is related to the use of funds, by applying techniques of Capital Budgeting, Opportunity Cost Analysis etc.
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5. Proper Cash Management
Cash management refers to assessment of various cash needs at different times and then make arrangements for arranging cash. The cash management should be such that neither there is a shortage of it and nor it is idle. Any shortage of cash will damage the creditworthiness of the enterprise. The idle cash with the business will mean that it is not properly used. It will be better if Cash Flow Statement is regularly prepared so that one is able to find out various sources and applications.
Ll 6. Implementing Financial Controls
An efficient system of financial management necessitates the use of various control devices. Like : (a) Return on investment. (h) Budgetary Control, (c) Break Even Analysis., (d) Cost Control, (e) Ratio Analysis (f) Cost and Internal Audit ll.
7. Proper Use of Surpluses
The uitlisation of profits or surpluses is essential for expansion and diversification plans and also in protecting the interests of shareholders. The ploughing back of profits is the best policy of further financing but it clashes with the interests of shareholders ll
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What are debentures?
A debenture is an acknowledgement in writing of a debt taken by a company. In other words, debenture is a certificate issued by a company under its seal acknowledging a debt due by it to its holders. In short, a debenture is an acknowledgement of a debt under the seal of the company
Explain the objectives of finacial management
-Financial management is crucial for any organization as it involves planning, organizing, directing, and controlling financial activities. Here are the primary objectives of financial management:
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Profit Maximization: Ensuring the company earns the highest possible profit by managing costs and increasing revenue llWealth Maximization: Increasing the value of the business for its shareholders by making strategic investment decisions ll
Ensuring Liquidity: Maintaining sufficient cash flow to meet the company’s obligations and avoid insolvency ll
Efficient Utilization of Funds: Making sure that the company’s funds are used effectively and efficiently to maximize returns ll
Financial Discipline: Creating a structured financial environment to ensure compliance with regulations and effective financial planning llWhat are sources of Short term financing of Working Capital? :- (1) INDIGENOUS BANKERS:
Private money lenders are called indigenous bankers. Business enterprises obtain the loan from indigenous bankers to meet their requirements of working capital.
Ll(2) CUSTOMERS’ ADVANCE:
Companies may take advance from their customers for meeting out their short-term financial requirements. Sometimes enterprise may ask for some advance money from customers at the time of receiving orders for supply of goods to them.ll (3) TRADE CREDIT:
It is a credit granted by seller to the buyer for a short period. It is made available to companies who have sufficient financial reputation and goodwill ie credit worthiness. Trade credit is granted on an open account basis i.E. The supplier sends the goods to the buyer for the payment to be received in future as per the term of sales’ invoice.
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If the company delays for payment beyond the due date as per the term of sales’ invoice, it is called Stretching accounts payable. In such case, an enterprise may generate additional short term finance by stretching accounts payable but it may have to pay penal interest charges as well as to forgo cash discount.Ll (4) BANK CREDIT:
Commercial banks provide the short-term finance to business concerns by way of :➢ Advancing loans ➢ Cash credit ➢ Overdraft ➢ Discounting and purchase of bills of exchange, promissory notes and hundies.
(a) Cash Credit:
I, It is an arrangement, in which customer is allowed to borrow money upto certain limit. Usually the bank opens a separate account and credits the sanctioned loan. For such cash credit, the banker charges the interest on the actual amount utilised by the borrower.ll (b) Overdraft :
It is a temporary loan given by the banker to customer against the already existing current account. Overdraft means, the current account holder can withdraw the amount more than the credit balance maintained in the account. Interest is charged on the actual amount withdrawn.
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What is capital Budgeting ?
It is a process of making investment decisions in capital expenditure. It is the process of evaluating and secreting long – term investments that are consistent with the goal of shareholders wealth maximization.
In Short, it is the firm’s decision to invest its current funds most efficiently in the long-term assets in anticipation of an expected flow of benefits over a series of years.
Ll methods of studying capital budgeting techniques:-
Capital budgeting is a crucial aspect of financial management, involving the process of evaluating and selecting long-term investments that are consistent with the firm’s goal of maximizing shareholder wealth.
Ll Net Present Value (NPV) :- Concept
NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.
LlApplication
Used to assess the profitability of a project by discounting future cash flows to the present value using a required rate of return (cost of capital).
Ll (IRR)
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Concept
IRR is the discount rate that makes the NPV of a project zero.
Ll Application
It represents the expected annual rate of return from a project. If the IRR exceeds the required rate of return, the project is considered worthwhile.
Ll Evaluation
IRR is compared with the firm’s cost of capital. If IRR > cost of capital, the project is acceptable.
LlPayback Period :-Concept
The payback period is the time required to recover the initial investment in a project.
Ll Application
Used as a simple measure of risk, indicating how quickly an investment can return its initial cost.
LlEvaluation
Projects with shorter payback periods are preferred as they imply quicker recovery of investment and reduced risk.
LlDiscounted Payback Period:-Concept
Similar to the payback period but accounts for the time value of money by discounting cash flows.
LlApplication
Provides a more accurate measure of how long it takes to recover an investment when the time value of money is considered.
LlProfitability Index (PI)
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Concept
PI is the ratio of the present value of future expected cash flows to the initial investment.
LlApplication
It indicates the relative profitability of a project. A PI greater than 1 suggests that the project’s NPV is positive.
LlAccounting Rate of Return (ARR):-Concept
ARR is the ratio of average annual accounting profit to the initial investment.
LlApplication
It provides a quick estimate of a project’s profitability based on accounting information.
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What is a leverage?
Leverage is the analysis of relative change in the income due to change in the sales or capital structure. Leverage is the relative change in the ratio of rate of return on shareholders Equity and the rate of return on the total capitalization when there is change in sales, costs or capital structure.
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What is operating leverage?
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The operating leverage signifies the relationship between changes in volume of sales and operating income i.E.,EBIT.
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The operating leverage may be defined as the tendency of the operating profit to vary disproportionately with sales. It is said to exist when the firm has to pay fixed cost regardless of volume of output or sales.
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Operating Leverage = Contribution / 0perating Profit ll
What is Financial leverage ?
The financial leverage may be defined as the tendency of the residual net income to vary disproportionately with operating profit. It indicates the change that takes place in the taxable income as a result of change in the operating income.
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Financial Leverage= OPERATING PROFIT (EBIT) / PBT ll What is composite leverage ?
OR Combined Lveverage? Both operating & Financial leverages are closely concerned with the firm’s capacity to meet its fixed costs, so these leverages are combined & called Composite leverage.
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Composite leverage = Operative leverage x Financial leverage What is working capital? The working capital refers to the capital required for day-to-day operations of a business enterprise. It is represented by excess of current assets over current liabilities. 37.What is net working capital? It is an accounting concept referring to net current assets, i.E., the excess of current assets over current liabilities. Net Working capital = Current assets – Current liabilities 38.What is seasonal working capital? Working Capital required during a particular season for a Seasonal Products. For example. The sugar industry produces practically all the sugar between December and April and hence the working capital requirements of this industry will be higher during this period as compared to any other period and such working Capital is called seasonal working capital llWhat is working capital?
The working capital refers to the capital required for day-to-day operations of a business enterprise. It is represented by excess of current assets over current liabilities.
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What is net working capital?
It is an accounting concept referring to net current assets, i.E., the excess of current assets over current liabilities.
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Net Working capital = Current assets – Current liabilities ll.