Financial Management....Pg

8/4/2019 Financial Management....Pg

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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


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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.


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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


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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


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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.


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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.


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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.


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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.


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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.


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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.


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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


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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.


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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.


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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.


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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.


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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

Financial Management....Pg

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