Module III Meaning of Financial Management Financial Management means planning, organizing, directing and controlling the financial

activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise. Scope/Elements 1. Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets are also a part of investment decisions called as working capital decisions. 2. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby. 3. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two:

a. Dividend for shareholders- Dividend and the rate of it has to be decided. b. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise. Objectives of Financial Management The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be1. To ensure regular and adequate supply of funds to the concern. 2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders. 3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost. 4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved. 5. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital. Functions of Financial Management 1. Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise.

2. Determination of capital composition: Once the estimation have been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties. 3. Choice of sources of funds: For additional funds to be procured, a company has many choices likea. Issue of shares and debentures b. Loans to be taken from banks and financial institutions c. Public deposits to be drawn like in form of bonds. Choice of factor will depend on relative merits and demerits of each source and period of financing. 4. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible. 5. Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done in two ways: a. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus. b. Retained profits - The volume has to be decided which will depend upon expansional, innovational, diversification plans of the company. 6. Management of cash: Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintainance of enough stock, purchase of raw materials, etc. 7. Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc. Introduction to project Appraisal Development projects impose a series of costs and benefits on recipient communities or countries. Those costs and benefits can be social, environmental, or economic in nature, but may often involve all three. Public investment typically occurs through the selection, design and implementation of specific projects to achieve the goals of policy. Why are some project proposals accepted and rejected, and how? What are the considerations in appraisal other than the economic rate of return? How are questions of environmental impact, welfare distribution and risk taken into account? In addition to being financially viable, a development project cannot usually be considered acceptable unless it is economically, technically and institutionally sound. It should be the least-cost feasible solution to the problem being solved and should expect to produce net economic and/or social benefits. For example, irrigation projects may facilitate the growing of cash crops in one locality, but cause water shortages, and hence economic, social and environmental pressures in another. Appraisal is the analysis of a proposed project to determine its merit and acceptability in accordance with established criteria. This is the final step before a project is agreed for financing. It checks that the project is feasible against the situation on the ground, that the objectives set remain appropriate and that costs are reasonable.

Technical Appraisal Whether pre-requisites for the success of project considered? Good choices with regard to location, size, process, machines etc. Economic Appraisal Social cost -benefit analysis Direct economic benefits and costs in terms of shadow prices Impact of project on distribution of income in society Impact on level of savings and investments in society Impact on fulfillment of national goals :(1) Self sufficiency (2) Employment and (3) Social order Ecological Appraisal Impact of project on quality of :- Air, Water, Noise, Vegetation, Human life Major projects ,such as these, cause environmental damage Power plants Project Appraisal Criteria Technical: will the project work? Has due attention been paid to technical factors affecting the project design? Given the human and material resources identified, can the project activities be undertaken and outputs achieved within the time available and to the required standards? Financial: can the project be financed? Will there be sufficient funds to cover the expenditure requirements during the life of the project? Economic: will the nation and society at large be better off as a result of the project? Will the project benefits be greater than the project costs over the life of the investment when account is taken of time (namely, is the Net Present Value of the project positive at the test discount rate)? Social and gender: what will be the effect of the project on different groups, at individual, household and community levels? How will the project impact on women and men? How will they participate in various stages of the project cycle? Will the social benefits of the project be greater than the social costs over the life of the investment when account is taken of time? Institutional: are the supporting institutions in place? Can they operate effectively within the existing legislative and policy environment? Has the project identified opportunities for institutional strengthening and capacity building? Environmental: will the project have any adverse effects on the environment? Have remedial measures been included in the project design? Political: will the project be compatible with government policy, at both central and regional levels? Sustainability and risk: will the project be exposed to any undue risks? Will the project benefits be sustainable beyond the life of the project? Irrigation schemes Industries like bulk drugs, chemicals and leather processing. Likely damage & the cost of restoration

Financial Appraisal Whether the project is financially viable? o Servicing debt o Meeting return expectations Financial Accounting Tools for Business Decision-Making

A company's top leadership reviews operating data to detect business trends and economic indicators that may affect the firm's profit levels and economic robustness. Senior managers and department heads usually analyze an organization's financial statements and segment operating indicators to appraise business performance in the short and long term. Accounting tools aids a business in the decision-making process by providing critical benchmarking datum.

Financial Position Analysis

Corporate leaders analyze a company's balance sheet, or statement of financial position, to gauge the firm's economic solidness. This analysis is important because a balance sheet instructs senior managers on corporate short-term assets and liabilities as well fixed assets and long-term debt. A review of an organization's balance sheet helps a department head assess cash levels and make decisions accordingly. For example, a senior leader may seek external financing if he notes that working capital ratios are inadequate for the next six months. Working capital is a gauge of short-term cash availability and equals short-term assets minus short-term liabilities.

Profitability Trends

Department chiefs and segment managers review corporate profitability trends by analyzing a firm's statement of profit and loss, otherwise known as an income statement. This analysis is a critical decision-making tool because senior leaders engage in shortterm transactions and long-term initiatives, depending on a company's profit potential. For instance, top managers may disengage from a short-term business acquisition or joint-venture transaction if they note that a company may be unable to generate sufficient profits in the near term because of unfavorable economic conditions. Profitability trends include profit margin, or net income over sales and return on equity, or net income over owner investments.

Cash Flow Analysis

Cash flow analysis is an important business decision-making tool because it helps a corporate treasurer or risk manager understand a company's cash inflows or receipts and cash outflows or payments, and how they affect liquidity levels.

This analysis involves a review of cash flows from operating activities, from investing activities and from financing activities. To illustrate, a corporate accounting manager can analyze operating cash flows and discover the company incurs significant losses in a business unit or area. Equity Cash Flows

An analysis of a firm's equity cash flows helps corporate finance analysts evaluate a firm's capital structure and how it affects business performance. Capital structure indicates sources of funds a firm uses to finance short-term operating activities and longterm investments and reorganization initiatives such as mergers or acquisitions. Sources of funds include retained earnings or internal funds, common stock and preferred shares. An equity cash flow analysis also helps senior leaders establish adequate levels of dividend payments that compensate shareholders appropriately, while keeping a company financially healthy.

Overview of Working Capital Management u u u u Working Capital Concepts Working Capital Issues Financing Current Assets: Short-Term and Long-Term Mix Combining Liability Structure and Current Asset Decisions

Working Capital Concepts Net Working Capital : Current Assets - Current Liabilities. Gross Working Capital : The firms investment in current assets. Working Capital Management : The administration of the firms current assets and the financing needed to support current assets. Significance of Working Capital Management u In a typical manufacturing firm, current assets exceed one-half of total assets. u Excessive levels can result in a substandard Return on Investment (ROI). u Current liabilities are the principal source of external financing for small firms. u Requires continuous, day-to-day managerial supervision. Working capital management affects the companys risk, return, and share price Classifications of Working Capital u Components : Cash, marketable securities, receivables, and inventory u Time :Permanent & Temporary

HUMAN RESOURCE MANAGEMENT Importance of HRM functions: Why are these concepts and techniques important to all managers? This point will very clear to you if you see this example. As managers none of us would like to make the following: mistake. To hire the wrong person for the job To experience high turnover To find our people not doing their best To waste time with countless and useless interviews To have our company sued for our discriminatory actions. To be quoted under bad example of unsafe practices To have some of your employees think their salaries are unfair and inequitable relative to others in the organization To allow a lack of training to undermine your department's effectiveness To commit any unfair labor practices With the help of our knowledge of HRM practices and philosophy we can avoid making these mistakes. More important, it can help ensure that you get results-through others. Remember!! you could do everything else right as a manager-lay brilliant plans, draw clear organization charts, set up modern assembly lines, and use sophisticated accounting controls-but still fail as a manager (by hiring the wrong people or by not motivating subordinates, for instance). On the other hand, many managers-whether presidents, generals, governors, or supervisors have been successful even with inadequate plans, organization, or controls. They were successful because they had the knack for hiring the right people for the right jobs and motivating, appraising, and developing them. Remember managers versus leaders! Thus, the functions of HRM hold an importance for all members of an organization. _ Personnel Function Definition of personnel Management: let me narrate below a few standard definitions given by experts of personnel management, which will give an idea of what it means. It is that phase of management which deals with the effective control and use of manpower as distinguished from other sources of power. The management of human resources is viewed as a system in which participants seek to attain both individual and group goals. Its objectives is to understand what has happened and is happening and to be prepared for what will happen in the area of working relationships between the managers and the managed. If an analysis is made of these definitions it will be seen that personnel (or manpower) management involves procedures and practices through which human resources are managed (i.e. organized and directed) towards the attainment of the individual, social and organizational goals. By controlling and effectively using manpower rescues, management tries to produce goods and services for the society. Prof.Jucius has defined personnel administration as The field of management which has to do with planning, organising, directing and controlling various operative functions of procuring, developing, maintaining and utilising a labour force, such that the: a) Objectives, for which the company is established are attained economically and effectively; b) objectives of all levels of personnel are

served to the highest possible degree; and c) objectives of the community are duly considered and served. Functions of Personnel Management Broadly speaking, experts have generally classified the functions into two major categories, i.e. managerial and operative functions. Others has classified functions as general and specific functions, and yet others as personnel Administration functions and Industrial Relations Functions. Functions have also been classified on the basis of the capacities; or on the basis of authority. Personnel functions It is necessary to identify the major personnel systems and their concepts in brief, for better understanding of the functions required for managing men effectively. The operating functions of personnel management are concerned with the activities specifically dealing with procuring, developing, compensating and maintaining an efficient workforce. For example, _ 1. The procurement function- obtaining of a proper kind and number of personnel necessary to accomplish an organizations goals 2. The development function- personnel development of employees, training 3. The compensating function- securing adequate and equitable remuneration to personnel 4. The integration function- an integration of human resources with organisation through job enlargement, jobevaluation, variable compensation plans, disciplinary action programmes. 5. The maintenance function- maintaining the physical conditions of employees (health and safety measures) and employee service programmes
Recruitment and Selection Recruitment is the process of generating of applications or attracting applicants for specific positions through four common sources, viz. Advertisement, state employment exchange agencies , present employees and campus recruitment. Having identified the potential applicants the next step is to evaluate their experience and qualification for ascertaining their suitability for a job and make selection. Selection refers to the process of offering job to one or more applicants from the applications. Selection is thus a means of selecting the best-fit for a job by using multiple hurdles such as screening, short listing based on marks, tests, interviewing, and an equal opportunity dispenser.

Performance & Potential Appraisal Performance appraisal also called merit rating or employee rating is a means of helping supervisors to evaluate the work of employees. It is the name given to the regular formalised and recorded review of the way in which an individual performs in his or her job. This is normally carried out by the job holders immediate boss.

Performance appraisal focuses of helping the individual to develop his or her present role capabilities and to assume more responsibility for that role. Potential appraisal focuses primarily identifying the employees future likely roles within the organisation. Potential appraisal is done for placement as well as for development purposes keeping in mind futuristic requirement of the organisation. Performance appraisals are becoming highly crucial tools of Modern organizations . Performance
Appraisal is very much in demand because; 1. It helps employee in self-appraisal 2. It Reviews his performance in relation to the objectives and other behaviors. 3. It Checks reviews done by the superiors. 4. It sends summary information for central storage and use. 5. It analyses the difficulties of the employees and works to remove them. It helps employees to face challenges and accept responsibilities. It plans Potential Development Exercises 1. It make thorough potential appraisal of the employee .. 2. Appraisal the potential of the employee annually.

Counselling Counselling is helping the employee to recognise his own strengths, weaknesses and potential and potential and helping him to prepare action plans for own development. Giving feedback in a 14 threatening way or correcting the undesirable or unsatisfactory behaviour of employees by pointing it out the deficiencies or other malfunctioning and warning them not to repeat these behaviour are all integral parts of a managers role and are not the same as counselling. 1. They give critical and supporting feedback. 2. They discuss with the employee the difference between his self rating and the rating by the immediate superior. 3. They discuss the steps the employee can take for improvement. 4. They provide support
5. It organizes specific programmes as well as general development programmes with own and outside resources. 6. It evaluates training efforts.

Job Evaluation Job evaluation is concerned with establishing the relative worth of a job compared to other jobs within an organisation. In job evaluation one attempts to consider and measure the inputs required of employees (know-how, accountability and problem solving etc.) for minimum job performance and to translate such measures into specific monetary returns.

Transfer, Promotion & demotion!!! Transfer is a lateral movement within the same grade, from one job to another. A transfer may result in changes in duties and responsibilities, supervisory and working conditions, but not necessarily salary. Promotion is the advancement of an employee from one job level to a higher one, with increase in salary. Demotion is the opposite of promotion. It is a downward movement from one job level to another, leading to a reduction in rank, status, pay and responsibility. Job Analysis Job analysis is the process of studying and collecting department information relating to operations and responsibilities of a specific job. The immediate products of this analysis are job description and job specification. Job description is an organised factual statement of duties and responsibilities of a specific job, whereas, job specification is a statement of the minimum acceptable qualities necessary to perform a job properly. Role Analysis Role analysis is the process of defining a role in the context of its work system., in terms of expectation of important persons, detailing specific tasks under each function, and elaborating the process, standards and critical attributes namely knowledge, attitude, skill, habits (KASH) required for effective role. Role is a position or an office a person occupies as defined by expectations from significant persons in the organisation, including the person himself. Position is the collection of tasks and responsibilities performed by one person.