Financial Management in PEs

Planner
Role of Finance, Finance Organisation. Sources of capital and Financial restructuring . Working capital and Export financing. Pricing. Budget and budgetary control.

Financial Management
The ways and means of managing money.
Planning, acquisition, allocation, and utilisation of financial resources with the aim to achieve objectives of the firm.

Is the application of planning and controlling functions to the finance function.

Scope of Finance Function

Estimating financial requirements. Capital structure decisions. Selecting source of finance. Selecting pattern of investment. Proper Cash management. Implementing financial controls. Proper use of surpluses.

Aims of Finance function

Acquiring sufficient funds.
Proper utilisation of funds. Increasing profitability.

Maximising firms value.

Objectives of Financial management

Profit: Profit earning. Profitability is a barometer for measuring efficiency and economic prosperity of a business. Economic and business conditions do not remain the same all the time. Profits are the main sources of finance for the growth of the business. Profitability is essential for fulfilling social goals. Wealth: Maximizes the stockholders wealth.

Profit

Vs

Wealth
Its an prescriptive idea. Not necessarily socially desirable. Controversy objectives Maximize stockholders wealth or wealth of firm. Ownership and management are separated.

The term profit is vague. Ignores the time value of money. Ignores Risk factor.

Dividend policy.

Functions of a Finance manager

Financial forecasting and planning. Acquisition of funds. Investment of funds. Helping in valuation decisions. Maintain proper liquidity.

Functional areas of FM
Determining financial needs. Selecting the source of funds. Financial analysis and Interpretation. C-V-P analysis. Capital budgeting. Working capital management. Profit planning and control. Dividend policy.

Organization of finance function

Board of directors
Managing Director/ Chairman Director (F)/ VP (F)/ CFO Treasurer and Controller ( Financial executives)

Responsibilities of FE
The basic responsibility of the treasurer is to provide, manage and protect the firms capital. The basic responsibility of the controller is to check that the funds are used efficiently.

Functions of FE
Treasurer : Obtaining finance Banking relationship Investor relationship Short- term financing Cash management Credit administration Investments Insurance

Functions of FE
Controller: Financial Accounting Internal audit Taxation Management accounting and control Budgeting, planning and control Economic appraisal Reporting to Government

Role of Financial advisor

Financial advisor for PSUs to advise their Chief executives on all financial matters. Major responsibilities / functions include determination of financial requirements of the enterprise and to identify sources through which such requirements can be met. appraisal of capital budgeting projects with a view to ascertain their commercial/economic viability and financial soundness. review of financial results of all operations of the enterprise.

conducting of special studies with a view to reducing the costs and enhancing the profitability of the enterprise. Accounts and Audit Financial delegation Financial reporting cost of production inventory holding period debtors collection period cost and revenue variances income statement plan expenditure approved and spent

FM Process
FM is a dynamic decision-making process include a series of interrelated activities involving: Financial planning Financial decision-making Financial analysis Financial control

Financial decisions in PSUs

Capital expenditure
Financing decisions Dividend decisions

Working capital management decisions

Working capital management

 Concerned with the problems that arise in attempting to manage current assets, current liabilities and the interrelationship that exist between them.
In general PSEs are having adequate levels of working capital.

Ill effects of mismanagement of WC

In the event of working capital being ill managed: the flow of money gets chocked raw materials and supplies are interrupted dues and payments get delayed and clamour for clearance of outstanding obligations jeopardising the viability of the firm. Inadequate working capital has the potential to disrupt production / sales operations of otherwise well-run and managed firms, excessive working capital is equally unwarranted.

Sources of WC
Primarily through cash credit and advances from banks / financial institutions. The CG provides funds under non- plan category to meet the Wc needs. Non plan support is normally in the form of loans granted by the Govt. to subsidize cash losses and / or to facilitate payment of wages and salaries of loss crunch. It should be noted that after July, 1991 the Govt. policy is to close down PSEs that cannot be revived.

Outlook
Inventory management in most PSEs is far from satisfactory.- causing dent to profitability. Receivables management lacked appropriate policies.majority sale made to Govt firms / Govt. enterprises / other PSEs. Cash management cash rich companies are not investing / parking their cash surpluses in an appropriate manner. It is important to mention that one of the major reasons for low profitability is attributed to excessive investments in working capital as per the various studies conducted by the Bureau of Public Enterprises.

Pricing policy in PEs

Pricing
PEs are bound by the promise of fulfilling certain socialistic objectives providing impetus to industrial development impact on inter enterprises and inter industries. impact on the enterprise itself and its final consumers.

Pricing group mass consumption goods

Promotion oriented pricing

Surplus generated oriented pricing

Stabilization oriented pricing

Pricing principles
Cost plus pricing to recover fully the cost and return on investment. ex: telephone industries, Hindustan aeronautics wherein the government is a major buyer.

Marginal costing industries where cost decreases with increase in the scale of production, MCP entails a price subsidy to the extent of the difference between average cost and marginal cost. ex: BHEL, Electricity boards.

 Discriminatory pricing used in multi- product and multi- service enterprises. Ex: railways , airways. Import based pricing where no domestic competition arises and whose production costs are higher than the price of similar imported products. Externally determined pricing prices of steel and fertilizers.

Guidelines to pricing
Guidelines are based on the socialistic objectives. The pricing of products should be within the landed costs of comparable imported goods which would be the normal ceiling and not on the basis of C.I.F prices. Within the ceiling of landed cost, it would be open to the enterprises to have price negotiation and fixed prices at suitable levels for their products which would give them a reasonable return on the capital invested. It is also desired that the price so fixed should be operative for a period of two to three years.

Ordinarily, the landed cost should be regarded as the absolute ceiling. Note: If however , in accessing the landed costs, there are reasons to believe that imported F.O.B./ C.I.F prices are artificially low, or in other exceptional circumstances, where our own cost of production is very high, it may be necessary to have the prices higher than the landed costs. In such cases the matter is required to be referred to the administrative ministry concerned for examination in depth in consultation with the M.O.F and the Bureau of Public enterprises.

Budget and budgetary control in PEs

Introduction
Budget is an important tool of planning and control. Planning involves looking systematically at the future so that decisions can be made today which will bring the company its desired results. Control is the process of measuring and correcting actual performance to ensure that plans for implementing the chosen course of action are carried.

Definition
CIMA, London, has defined a Budget as a financial and / or quantitative statement, prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective. Characteristics---- Primarily a planning device but it also serves as a basis for performance evaluation and control. Prepared either in quantitative terms or in money terms or in both. Purpose is to implement the policies formulated by management for attaining the given objectives. Budgeting is the act of preparing budgets.

Problems
Lack of support of top management. Non-participation by responsible executives. Un reasonable goals. Ill defined organisation. Continuous budget education. Adequate accounting . Cost of the system. Maximum profits. Integration with standard costing system.

Budgetary Control
A system of controlling costs through preparation of budgets. Is the establishment of budgets relating to the responsibilities of executives of a policy and the continuos comparison of the actual with the budgeted results, either to secure by individual action the objective of the policy or to provide a basis for its revision. Objectives: Planning, Co-ordination, Communication, Motivation, Control and Performance evaluation.

Advantages
Compels managers to think ahead-to anticipate and prepare for changing conditions. Co-ordinates the activities of various departments and functions of the business. Increases production efficiency, eliminates waste and controls the costs. Pinpoints efficiency or lack of it. Aims at maximisation of profits. Provides a yardstick against which actual results can be prepared.

Advantages continues
Motivates executives to attain the given goals. Aids in obtaining bank credit. Creates cost consciousness and introduces an attitude of mind in which waste and efficiency cannot thrive. Assists in delegation of authority and assignment of responsibility. Directs capital expenditure in the most profitable direction. Shows management where action is needed to remedy can be compared.

Limitations
The budget plan is based on estimates. Rigidity.

Budgeting is only a tool of management.

Expensive technique.

Zero base budgeting

It was introduced at Texas instruments in USA in 1969 by Peter Phyrr. A planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch. Each manager states why he should spend any money at all. A system whereby each budget item , regardless of whether it is new or existing, must be justified in its entirety each time a new budget is prepared.

Advantages
All activities included in the budget are justified in cost benefit considerations which promote more effective allocation of resources. Discards the attitude of accepting the current position in favour of an attitude of questioning and challenging each item of budget. Promote a management team of talented and skilful people. Facilitates identification of inefficient and unnecessary activities and avoid wasteful expenditure. Cost behaviour patterns are more closely examined.

Dis advantages
Involves high cost of preparing budgets every year. High volume of paper work. Danger of emphasizing short-term gains at the expense of long- term ones.

 PSEs prepare an annual budget pertaining to the expected revenue / income and expenditure. Budget is expected to be prepared as per the zero based budgeting concept. Budget should be based on currently attainable standards / targets. It is not desirable to set highly ambiguous targets / standards.

 Once the budget is prepared, it needs to be approved by the BOD.

The budget so approved forms the basis of all expenditures to be incurred by the PSEs. It acts as a benchmark to evaluate the performance of the PSU on its revenue earnings as well as expenditures incurred.

Reporting system
Comparing actual performance with budget targets referred to as variance report serve as a useful tool to ascertain whether the actual performance is in tune with the targets set in the budget.
Variance report is submitted regularly to the top management for necessary corrective actions.

Revised budget
In case the actual expenditure turn out to be more than the sum provided in the original budget, revised budget needs to be prepared. The revised budget like the original budget needs the approval of the BOD. Revised budget should contain reasons necessitating such a revision.