FINANCIAL MANAGEMENT

Title: Principles of Financial Management Course code: PD401(2-0-2) Objective In todays dynamic world engineers along with taking technical decisions also have to take financial decisions. So they need to understand, analyze and interpret financial data and financial issues. This course will help them in understanding the concepts and principles of accounting and finance with the support of software packages so that they can make quick informed financial decisions. Learning Outcomes At the end of the course the students will be able to understand: basic accounting principles. how to measure the performance of a business. how to make and evaluate the impact of business decisions at all levels. Methodology The course will be taught with the aid of lectures, case studies, and use of computer spreadsheet programs. The students will self-learn the usage of accounting packages available in the industry.

Books for Reference

1. Principles of financial management by Douglas R. Emery, John D. Finnerty, John D. Stowe, PHI. 2. Financial Management by M.Y. Khan, and P.K. Jain, Tata McGraw Hill. 3. Financial Management by Prasanna Chandra.

Course Contents
Topic Introduction, scope and objectives
Basic Financial Concepts Financial statements & analysis

Capital Budgeting
Concept and measurement of cost of capital Long Term Sources of Finance Leverages Working capital management Inventory management

Evaluation (Lecture Course)

Exam % of Marks Duration Coverage

T-1

15

1 hr

Syllabus covered up till T-1 Mainly syllabus covered after T-1, plus some questions from portions covered upto test 1 Mainly syllabus covered after Test-2, and up to Test-3 Plus some questions from portions covered Test-1 and Test-2.

T-2

25

1hr 30 min

T-3 Assignments Tutorials, Quizzes & Regularity in attendance.

35

2 hr As decided and announced by the teacher concerned in the class at the beginning of the course

25

Entire Semester

AN OVERVIEW

GOALS OF THE FIRM

Maximizing owners/shareholders wealth
Maximizing the price per share
Market price of a share serves as a barometer for business performance It indicates how well management is doing on behalf of its shareholders

Nature 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.

Importance of Finance
What is finance? What are a firms financial activities? How are they related to the firms other activities? Firms create manufacturing capacities for production of goods; some provide services to customers. They sell their goods or services to earn profit. They raise funds to acquire manufacturing and other facilities. Thus, the three most important activities of a business firm are: Production Marketing Finance A firm secures whatever capital it needs and employs it in activities, which generate returns on invested capital (production and marketing activities).

DEFINITION Financial Management can be defined as the management of flow of funds and it deals with the financial decision making. It encompasses the procurement of the funds in the most economic and prudent manner and employment of these funds in the most optimum way to maximise the return for the owner. Raising of funds and their best utilisation is the key success of any business organisation.

 All business decisions have financial implications, and therefore, financial management is inevitably related to almost every aspect of business operations. Broadly speaking, the financial management includes any decision made by a business/ investor that affects its finances.

OBJECTIVES OF FINANCIAL MANAGEMENT

Maximize owners' wealth

Market value of equity

The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be To ensure regular and adequate supply of funds to the concern. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders.

 To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved. 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.

SCOPE OF FINANCIAL MANAGEMENT

How large should the firm be? How fast should the firm grow? What should be the composition of the firms assets? What should be the mix of the firms financing? How should the firm analyse, plan and control its financial affairs?

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:
Dividend for shareholders- Dividend and the rate of it has to be decided. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.

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 like Issue of shares and debentures Loans to be taken from banks and financial institutions 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: Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus. 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.

KEY ACTIVITIES OF FINANCIAL MANAGEMENT

Financial Analysis, Planning and Control Balance Sheet Management of the Firms Financial Structure Long Term Financing Short Term Financing Fixed Assets Management of the Firms Asset Structure

Current Assets

RISK RETURN TRADE OFF

Capital Budgeting Decisions Return Capital Structure Decisions Market Value of the Firm Dividend Decisions Risk Working Capital Decisions

FINANCE AND ECONOMICS

Macro Economics
Necessary for understanding the environment in which the firm operates
Growth rate of economy, tax environment, availability of funds, rate of inflation, terms on which the firm can raise finances

Micro Economics
Helpful in sharpening the tools of decision making
Principle of marginal analysis is applicable to decision making

FINANCE AND ACCOUNTING

Score Keeping vs. Value Maximising
Accrual Method vs. Cash Flow Method Certainty vs. Uncertainty

BUSINESS
Sole proprietorship
Decision-making is simple Can be set up easily & inexpensively The owner receives all income from business. Income is taxed at only one level (that of the owner). Subject to few regulations Unlimited liability. Limited life of the proprietorship The business has limited access to additional funds.

Partnership
The general partners are decision-makers. The owners (the partners) divide income according to partnership agreement. Income is taxed once. Set up with ease Few government regulations

Corporation
Distinct legal entity Limited liability The business enterprise has a life in perpetuity Access to additional funds through the sale of new share of stock. Income is distributed according to proportionate ownership. The separation of ownership and decision-making.
Double taxation on income Regulated by Companies Act

Unlimited liability for each partner. A limited life of partnership. Limited access to additional funds.

Corporation
Private Company Public Company Minimum 7 persons Unlimited Shareholders Public subscription allowed Free transfer of shares

Minimum 2 persons Maximum Shareholders 50 Public subscription not allowed Restricted rights to transfer shares
Promoters enjoy unchallenged control over the firm

Firm can raise substantial funds

Firms ability to raise capital is limited

Cumbersome procedure for Formation

 Public Company is the most appropriate form of organisation as

Limited liability Enormous growth potential Free and easy transferability of shares

REGULATORY FRAMEWORK
Industrial Policy of 1991
Companies Act 1956 Securities and Exchange Board of India Guidelines 1992

THE FINANCIAL SYSTEM

Suppliers of Funds Individuals Businesses Governments

Demanders of Funds Individuals Businesses Governments

Transferring Capital
Direct Transfer of Funds

saver

Transferring Capital
Direct Transfer of Funds

saver

firm

Transferring Capital
Direct Transfer of Funds

Cash firm

saver

Transferring Capital
Direct Transfer of Funds

Cash firm

saver

Securities

THE FINANCIAL SYSTEM

Suppliers of Funds Individuals Businesses Governments

Funds

Demanders of Funds Private Placement

Securities

Individuals Businesses Governments

Transferring Capital
Indirect Transfer using a Financial Intermediary

saver

Transferring Capital
Indirect Transfer using a Financial Intermediary

saver

financial intermediary

Transferring Capital
Indirect Transfer using a Financial Intermediary Funds

saver

financial intermediary

Transferring Capital
Indirect Transfer using a Financial Intermediary Funds

saver

financial intermediary

firm

Transferring Capital
Indirect Transfer using a Financial Intermediary Funds Funds

saver

financial intermediary

firm

Transferring Capital
Indirect Transfer using a Financial Intermediary Funds Funds

saver

financial intermediary Firm Securities

firm

Transferring Capital
Indirect Transfer using a Financial Intermediary Funds Funds

saver

financial intermediary Firm Securities

firm

Intermediary Securities

THE FINANCIAL SYSTEM

Funds

Financial Institutions Commercial Banks Insurance Companies Mutual Funds Provident Funds Non Banking Financial Institutions

Funds

Deposits/shares

Securities

Suppliers of Funds Individuals Businesses Governments

Funds

Demanders of Funds Private Placement

Securities

Individuals Businesses Governments

Transferring Capital
Direct Transfer using Financial Market

saver

Transferring Capital
Direct Transfer through Financial Markets

saver

Financial Markets

firm

Transferring Capital
Direct Transfer through Financial Markets Funds saver

Financial Markets

firm

Transferring Capital
Direct Transfer through Financial Markets Funds saver Funds

Financial Markets

firm

Transferring Capital
Direct Transfer through Financial Markets Funds saver Funds

Financial Markets

firm

Securities

Transferring Capital
Direct Transfer through Financial Markets Funds saver Funds

Financial Markets

firm

Securities

Securities

THE FINANCIAL SYSTEM

Funds

Financial Institutions Commercial Banks Insurance Companies Mutual Funds Provident Funds Non Banking Financial Institutions

Funds

Deposits/shares

Loans

Suppliers of Funds Individuals Businesses Governments

Funds

Demanders of Funds Private Placement

Securities

Individuals Businesses Governments

Funds

Financial Markets Money Market Capital Market

Funds

Securities

Securities

THE FINANCIAL SYSTEM

Funds

Financial Institutions Commercial Banks Insurance Companies Mutual Funds Provident Funds Non Banking Financial Institutions

Funds

Deposits/shares

Loans

Funds

Securities

Suppliers of Funds Individuals Businesses Governments

Funds

Demanders of Funds Private Placement

Securities

Individuals Businesses Governments

Funds

Financial Markets Money Market Capital Market

Funds

Securities

Securities

INTEREST RATES
Regulated A rate of return promised by the borrower to the lender. Interest rate depends on inflation, maturity and risk Rates on deposits with commercial banks are subject to ceiling 3% - 10% Rates chargeable by commercial banks and financial institutions are subject to floors.

Growth Trends in the Indian Financial System

Impressive growth post 1950 era
Emergence of wide array of Financial Institutions Introduction of a variety of financial schemes and instruments to mobilize savings Remarkable growth in money markets

Deregulation in recent years