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Financial Management

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Financial Management

  1. 1. Financial Management Financial management is mainly concerned with the proper management of funds. The finance manager must see that funds are procured in such a manner that risk, cost and control considerations are properly balanced and there is optimum utilization of funds. [email_address]
  2. 2. According to Soloman , “Financial management is concerned with the efficient use of economic resources”. According to Phillippatus , “Financial management is concerned with management decision that result in acquisition and financing of long-term and short-term credits for the firm”. [email_address]
  3. 3. Objectives of Financial Management <ul><li>Basic Objectives </li></ul><ul><li>Other Objectives </li></ul><ul><li>Basic Objectives : The basic objectives are </li></ul><ul><li>Profit Maximisation </li></ul><ul><li>Maintenance of liquid assets </li></ul><ul><li>Wealth Maximisation </li></ul>[email_address]
  4. 4. Other Objectives <ul><li>Ensuring a fair return to shareholders </li></ul><ul><li>Building up reserves for growth and expansion </li></ul><ul><li>Ensuring maximum operational efficiency by efficient and effective utilization of finances. </li></ul><ul><li>Ensuring financial discipline in the organization </li></ul>[email_address]
  5. 5. Scope of Financial Management <ul><li>Estimating financial requirement </li></ul><ul><li>Deciding capital structure </li></ul><ul><li>Selecting a source of finance </li></ul><ul><li>Selecting a pattern of Investment </li></ul><ul><li>Proper cash management </li></ul><ul><li>Implementing financial controls </li></ul><ul><li>Proper use of surpluses </li></ul>[email_address]
  6. 6. Need of Financial Management or Financial Decisions <ul><li>Financing Decisions </li></ul><ul><li>Investment Decisions </li></ul><ul><li>Dividend Decisions </li></ul>[email_address]
  7. 7. Functional Areas of Financial Management <ul><li>Determining Financial Needs </li></ul><ul><li>Selecting the source of Funds </li></ul><ul><li>Financial Analysis and Interpretation </li></ul><ul><li>Cost-volume-profit Analysis </li></ul><ul><li>Capital Budgeting </li></ul><ul><li>Working Capital Management </li></ul><ul><li>Profit Planning and Control </li></ul><ul><li>Dividend Policy </li></ul>[email_address]
  8. 8. Sources of Finance [email_address]
  9. 9. Share Capital : Long term funds can be raised from share capital. According to Section 86 of Companies Act, 1956, a company can issue only two types of shares i.e. (a) Preference shares and (b) Equity shares <ul><li>Equity Shares Preference Shares </li></ul><ul><ul><ul><ul><ul><li>Cumulative Preference Shares </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Non-cumulative Preference Shares </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Participating Preference Shares </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Non-participating Preference Shares </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Convertible Preference Shares </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Non-convertible Preference Shares </li></ul></ul></ul></ul></ul>[email_address] SHARES
  10. 10. Equity Shares <ul><li>Equity shareholders are known as the real owners of the business. They have a control over the working of the company. Equity shares are paid dividend after the preference shares. Equity capital is paid after meeting all other claims. They do not have a right to get a fixed percentage of dividends. The dividend is dependent upon the amount of profits available. When there is no profit, they do not get any dividend. </li></ul>[email_address]
  11. 11. Merits of Equity Shares <ul><li>Company need not have the forced obligation to pay dividend to equity shareholders. </li></ul><ul><li>Equity share is a permanent source of funds which facilitate flexibility in usage of funds. </li></ul><ul><li>The obligation to repay the equity capital arises only at the time of liquidation of the company. </li></ul><ul><li>The shareholders can participate in the management of the company through voting rights. </li></ul><ul><li>Equity shares can be issued without creating any charge over the assets. </li></ul>[email_address]
  12. 12. Demerits of Equity Shares: <ul><li>Equity shares always associated with the expectations of the investors. It is practically a difficult task to fulfill the expectations of the investors. </li></ul><ul><li>Equity shareholders have to bear all the losses at the time of liquidation. </li></ul><ul><li>Interruptions of many persons are involved in the company working. So, in some cases, it creates delay in decision-making. </li></ul><ul><li>When the finance has to be raised for less risky projects, then this is not a good source of raising finance. </li></ul><ul><li>If only equity shares are issued then the company can not avail the benefits of trading on equity. </li></ul><ul><li>Investors who have a desire to invest in safe or fixed returns have no attraction of such shares. </li></ul>[email_address]
  13. 13. Preference Shares : Preference shares are those shares which are entitled to a priority in the payment of dividends at a fixed rate and the return of the capital in the event of winding up of the company. Preference shares may be of the following kinds: <ul><li>Cumulative Preference Shares : Cumulative preference shares are those shares on which fixed dividend cumulate till it is fully paid up. It means that on these shares, if a dividend is not paid in one year then that dividend will be combined in the next year. For e.g. In the year 2005, if company is unable to pay dividend of Rs.5000 then in the year 2006, the company have to pay 5000 of year 2005 and then 5000 of year 2006. </li></ul><ul><li>Non-cumulative Preference Share : Such shares do not have the privilege of the accumulation of unpaid dividend. In other words, if profits during a particular year is not sufficient, the arrear lapses. </li></ul><ul><li>Participating Preference Shares : These shares get dual benefit on the capital, first a fixed rate of dividend is given and then a fraction of surplus profits left after paying dividend to equity shareholders. The surplus profits are distributed between the preference shares and equity shares. </li></ul>[email_address]
  14. 14. <ul><li>Non-participating Preference shares: These shares are entitled to a fixed rate of dividend and do not have a right on surplus profits. </li></ul><ul><li>Convertible Preference Shares : These are the shares which entitle to convert them in to equity shares within a certain time period. </li></ul><ul><li>Non- Convertible Preference Shares : These shares do not have the right to convert these shares into equity. </li></ul><ul><li>Redeemable Preference Shares: These shares are redeemable or repaid within a stipulated period. </li></ul>[email_address]
  15. 15. Merits of Preference Shares: <ul><li>It provides preferential right to pay dividend and the repayment of the capital. </li></ul><ul><li>Preference shares provide a long term capital. </li></ul><ul><li>There is no liability to redeem the preference shares except redeemable preference shares. </li></ul><ul><li>It earns a fixed rate of dividend. </li></ul><ul><li>Preference shares although carry no voting right but the holders of such shares can vote on matters directly affecting their rights. </li></ul><ul><li>Redeemable preference shares have the added advantage of repayment of capital when there are surplus funds with the company. </li></ul>[email_address]
  16. 16. Demerits of Preference Shares: <ul><li>It is an expensive source of finance as compared to debt because generally the investors expect a high return of dividend then the interest on debentures. </li></ul><ul><li>Cumulative preference shares become a permanent burden so far as the payment of dividend is concerned. </li></ul><ul><li>Preference shares have no charge on the assets so it looses the interest of the investors. </li></ul>[email_address]