Financial Management - An Overview P-0

Introduction to Financial Management Financial Management is very significant area for a professional who occupies a key position in the modern enterprise. The subject matter of financial management has been changing at a rapid pace and has acquired a critical significance now a days due to increasing influence of foreign finance in Indian capital market and business.

Introduction continued  Financial

management covers all decisions which have financial implications.  In order to take right decision at the right time,one has to be equipped with sufficient past and present information about business and its operations.  The financial implications of decision are evaluated in terms of maximization of value of the firm as reflected in the market price of the share.

Scope of financial function The financial decisions to be taken involves    

What kind of finance to be raised. How much amount of funds to be raised. Available sources for raising the finance. The proportion of various finance options available to be included in the finance to be raised. ( Capital Mix ).

Financial Decisions  

Investment Decisions Decision regarding application of funds raised by the organisation – –

 

Fixed Assets Current Assets

Dividend Policy Decision Declaration of Dividend V/s Retention of profit in Business

Goals / Objects of Finance Function: Profit Maximization:  Wealth Maximization: Profit Maximization is short term Profit is accounting based Profit Maximisation ignores risk Cash is King – Long term and the ‘Truth’ PV of future cash flows is the right indicator of wealth Wealth Accumulation includes risk 

     

Demands on Business       

Governments – Indirect Taxes – VAT,Excise Suppliers – Payments for Goods/Services Employees – Salaries/Wages & Benefits Assets – Cost of using - Depreciation Capital Providers – Interest & Dividend/Bonus Government – Direct Tax – Income Tax Company Itself – Retentions / Reserves

Cost Behavior  Fixed – –

Costs

Remain unchanged for different levels of output. Represent factor which cannot be changed in short run – i.e., capital

 Variable – –

Cost

Changes in proportion to change in output Represents factor which can be varied in short run – e.g. Labour, Raw Material

Forms of Business Organisation  Proprietary

Firms  Partnership Firms  Joint Stock Companies – –

Private Limited Company Public Limited Company

 Other

Traditional – Non Profit Motive Forms - Trust, Cooperative Society, Clubs etc.

Basic Concepts in Accounting & GAAP  

 



Business entity concept Money measurement concept Cost Concept Going Concern Concept Conservatism Concept

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  

Dual Aspect Concept Accounting Period concept Matching Concept Materiality Concept Consistency Concept

Financial Statements: Balance Sheet Profit & Loss Account

Structure of Financial Statement: The Companies Act, 1956 Schedule VI Part I: Format of Balance Sheet  Part II: Profit and Loss  Part III: Notes forming part of the Balance Sheet & Profit & Loss account  Part IV: Balance Sheet abstract 

Part I: Structure of Balance sheet: T Format  2. 3.  5. 6.  8.

Share Capital Preference Equity Reserve & Surplus Shareholders Funds Third Party Funds Secured Loans Secured by Assets

 2.  4.  6.

Fixed Assets Operating for Profits Investments Long Term and Fixed Income Current Assets and Loans & Advances Working Capital Receivables

Part I: Structure of Balance sheet: T Format  2.  4. 5.

Unsecured Loans Long Terms loans without Security Current Liabilities & Provisions Working Capital Payables Recognised Liabilities



2. 3. 

Miscellaneous Expenditures Formation Exp. Initial & Preoperative Exp. Profit & Loss Account debit Balance.

Part II:Vertical Income Statement            

Sales Less: Manufacturing/ Factoring Cost Gross Profit / First Level or Direct Margin on Basic Activities Less: Administrative & Selling Overheads Operating Profits / Second Level Margin after Operational Costs Less : Non- Operating Expenses Add: Non-Operative Income Profit Before Tax (PBT)/ EBT / Net Margin subject to Tax Less: Tax Profit After Tax (PAT)/EAT = Profit Maximisation Less: Dividend Paid Retained Profit = Wealth Maximisation

Sample Balance Sheet Numbers in millions 2003

2002

2003

2002

Cash

696

58 A/P

307

303

A/R

956

992 N/P

26

119

Inventory

301

361 Other CL

1,662

1,353

Other CA

303

264 Total CL

1,995

1,775

Total CA

2,256

1,675 LT Debt

843

1,091

Net FA

3,138

3,358 C/S

2,556

2,167

Total Assets

5,394

5,033 Total Liab. & Equity

5,394

5,033

Sample Income Statement Numbers in millions, except EPS & DPS Revenues

5,000

Cost of Goods Sold

2,006

Expenses

1,740

Depreciation

116

Earning Before Interest & Tax (EBIT)

1,138

Interest Expense

7

Taxable Income (EBT)

1,131

Taxes

442

Net Income (EAT)

689

Earning Per Share (EPS)

3.61

Dividends per share (DPS)

1.08