Introduction To Financial Management

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INTRODUCTION TO FINANCIAL

MANAGEMENT
Important Business Activities
• Production
• Marketing
• Finance
Real And Financial Assets
• Real Assets: Can be Tangible or Intangible
• Tangible real assets are physical assets that
include plant, machinery, office, factory,
furniture and building.
• In tangible real assets include technical know-
how, technological collaborations, patents and
copyrights.
• Financial Assets also called securities, are
financial papers or instruments such as shares
and bonds or debentures.
Equity and Preference Shares
• Equity Shares are also known as ordinary shares.
• Do not have fixed rate of dividend.
• There is no legal obligation to pay dividends to
equity shareholders.
• Preference Shares have preference for dividend
payment over ordinary shareholders.
• They get fixed rate of dividends.
• They also have preference of repayment at the
time of liquidation.
Approaches to Finance Function
• Traditional approach
• Modern approach
Traditional approach
• Initial stages 1920s and 1930s
• Corporate finance
• Limited to only procurement of funds
• Utilization was done in other departments
– Drawbacks
• Ignores internal decision making
• Procurement of only long term funds
• Allocation of funds
• Ignores day to day financial problems
Modern approach
• Covered all drawbacks of traditional approach
Financial decisions
• Investment decisions
• Financing decisions
• Dividend decisions
Definition of Financial Planning
• Financial Planning is the process of estimating
the capital required and determining it’s
competition. It is the process of framing
financial policies in relation to procurement,
investment and administration of funds of an
enterprise.
Objectives of Financial Planning
• Determining capital requirements- This will
depend upon factors like cost of current and
fixed assets, promotional expenses and long-
range planning. Capital requirements have to
be looked with both aspects: short- term and
long- term requirements.
• Determining capital structure- The capital
structure is the composition of capital, i.e., the
relative kind and proportion of capital
required in the business. This includes
decisions of debt- equity ratio- both short-
term and long- term.
• Framing financial policies with regards to cash
control, lending, borrowings, etc.
• A finance manager ensures that the scarce
financial resources are maximally utilized in
the best possible manner at least cost in
order to get maximum returns on investment.
Importance of Financial Planning
• Adequate funds have to be ensured.
• Financial Planning helps in ensuring a reasonable balance between
outflow and inflow of funds so that stability is maintained.
• Financial Planning ensures that the suppliers of funds are easily
investing in companies which exercise financial planning.
• Financial Planning helps in making growth and expansion
programmes which helps in long-run survival of the company.
• Financial Planning reduces uncertainties with regards to changing
market trends which can be faced easily through enough funds.
• Financial Planning helps in reducing the uncertainties which can be
a hindrance to growth of the company. This helps in ensuring
stability an d profitability in concern.
Principles of financial planning
• Investing for sound returns
• Risk and return
• Diversification
• Consider inflation
• Unforeseen events
• Disciplined approach
Factors affecting financial plan
• Nature of the industry
• The very first factor affecting the financial plan
is the nature of the industry. Here, we must
check whether the industry is a capital
intensive or labour intensive industry. This will
have a major impact on the total assets that a
firm owns.
• Size of the company
• The size of the company greatly influences the
availability of funds from different sources. A
small company normally finds it difficult to
raise funds from long term sources at
competitive terms. On the other hand, large
companies like Reliance enjoy the privilege of
obtaining funds both short term and long
term at attractive rates.
• Status of the company in the industry
• A well established company enjoys a good
market share, for its products normally
command investors’ confidence. Such a
company can tap the capital market for raising
funds in competitive terms for implementing
new projects to exploit the new opportunities
emerging from changing business
environment.
• Sources of finance available
• Sources of finance could be grouped into debt
and equity. Debt is cheap but risky whereas
equity is costly. A firm should aim at optimum
capital structure that would achieve the least cost
capital structure. A large firm with a diversified
product mix may manage higher quantum of debt
because the firm may manage higher financial
risk with a lower business risk. Selection of
sources of finance is closely linked to the firm’s
capability to manage the risk exposure.
• The capital structure of a company
• The capital structure of a company is influenced
by the desire of the existing management
(promoters) of the company to retain control
over the affairs of the company. The promoters
who do not like to lose their grip over the affairs
of the company normally obtain extra funds for
growth by issuing preference shares and
debentures to outsiders.
• Matching the sources with utilization
• The prudent policy of any good financial plan
is to match the term of the source with the
term of the investment. To finance fluctuating
working capital needs, the firm resorts to
short term finance. All fixed asset –
investments are to be financed by long term
sources, which is a cardinal principle of
financial planning.
• Flexibility
• The financial plan of a company should
possess flexibility so as to effect changes in
the composition of capital structure whenever
need arises. If the capital structure of a
company is flexible, there will not be any
difficulty in changing the sources of funds.
This factor has become a significant one today
because of the globalization of capital market.
• Government policy
• SEBI guidelines, finance ministry circulars, various
clauses of Standard Listing Agreement and
regulatory mechanism imposed by FEMA and
Department of corporate affairs (Govt. of India)
influence the financial plans of corporates today.
Management of public issues of shares demands
the compliances with many statues in India. They
are to be complied with a time constraint.

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