Funcations of financial management
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 ‡ ‡ 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. 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. 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.


Objectives of Financial Management 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.

Functions of Financial Management 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. 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. Choice of sources of funds: For additional funds to be procured, a company has many choices like-

capital) available and used for day to day operations (i. Cash is required for many purposes like payment of wages and salaries. 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. Objectives of working capital: Every business needs some amount of working capital. This can be done through many techniques like ratio analysis. Retained profits . This can be done in two ways: Dividend declaration . ‡ To provide credit facilities to customers etc. etc. components and spares. Choice of factor will depend on relative merits and demerits of each source and period of financing.e. It refers to funds which are used during an accounting period to generate a current income of a type which is consistent with major purpose of a firm existence. meeting current liabilities. ‡ To incur day to day expenses and overhead costs such as fuel. Disposal of surplus: The net profits decision have to be made by the finance manager. innovational.Issue of shares and debentures Loans to be taken from banks and financial institutions Public deposits to be drawn like in form of bonds. working) of an enterprise.The volume has to be decided which will depend upon expansional. It consists broadly of that portion of assets of a business which are used in or related to its current operations. Working capital advantage and disadvantage Meaning: Working capital means the funds (i. payment of electricity and water bills. purchase of raw materials. procure and utilize the funds but he also has to exercise control over finances.e. power. ‡ To pay wages and salaries. and office expenses etc. financial forecasting. payment to creditors. etc. ... cost and profit control. Financial controls: The finance manager has not only to plan. It is needed for following purposes‡ For the purchase of raw materials. Management of cash: Finance manager has to make decisions with regards to cash management.It includes identifying the rate of dividends and other benefits like bonus. diversification plans of the company. maintainance of enough stock.

· Companies that have high inventory turns and do business on a cash basis (such as a grocery store) need very little working capital. Even a business that has billions of dollars in fixed assets will quickly find itself in bankruptcy court if it can't pay its monthly bills.all of which result in a lower credit rating. These types of businesses raise money every time they open their doors. increased borrowing. which can cost a corporation a lot of money over time. . A lower credit rating means banks charge a higher interest rate. managements can simply stock pile the proceeds from their daily sales for a short period of time if a financial crisis arises. Since cash can be raised so quickly. poor working capital leads to financial pressure on a company. · A company that makes heavy machinery is a completely different story. ? Financing of working capital through long term sources provides the benefits of reduces risk and increases liquidity Types of working capital: Working capital an be divided into two categoriesPermanent working capital: Temporary working capital: Advantages of working capital: Is being able to foresee any financial difficulties that may arise. there is no need to have a large amount of working capital available. Sources of working capital: The working capital requirements should be met both from short term as well as long term sources of funds. it can rarely be sold fast enough to raise money for short-term financial crises (by the time it is sold. and late payments to creditor . Under the best circumstances. then turn around and plow that money back into inventory to increase sales. ? Financing of working capital through short term sources of funds has the benefits of lower cost and establishing close relationship with banks. Since the inventory on their balance sheet is normally ordered months in advance. It's easy to see why companies such as this must keep enough working capital on hand to get through any unforeseen difficulties. ? Other factors.Factors that determine working capital: The working capital requirement of a concern depend upon a large number of factors such as ? Size of business ? Nature of character of business. ? Seasonal variations working capital cycle ? Operating efficiency ? Profit level. Because these types of businesses are selling expensive items on a long-term payment basis. it may be too late). they can't raise cash as quickly. Since cash is generated so quickly.

you can clearly see if it has the resources necessary to expand internally or if it will have to turn to a bank and take on debt. the companies are divided into twoa. For instance . Capital Structure . ‡ It helps in maintaining solvency of the business. ‡ It enables a concern to face business crisis in emergencies such as depression. can't pay yourself. b. · You can pay your suppliers. no cash flow. Type of securities to be issued are equity shares. Relative ratio of securities can be determined by process of capital gearing. confidence. Low geared companies. pay your staff.Those companies whose proportion of equity capitalization is small. and over all efficiency in a business. ‡ Excess working capital means idle funds which earn no profits. and can expand your business. ‡ Inadequate working capital can not pay its short term liabilities in time. ‡ Rate of return on investments also fall with the shortage of working capital. the less financial strain a company experiences.There are two companies A and B. By studying a company's position. no viable business. Expand its volume of business. and can't pay your suppliers. It tells you what would be left if a company raised all of its short term resources.Those companies whose equity capital dominates total capitalization. ‡ It can arrange loans from banks and others on easy and favorable terms.· It reveals more about the financial condition of a business than almost any other calculation. and pay yourself a wage. On this basis. So in a nutshell. The ratio of equity capital to total capitalization in company A is Rs. while in . can't pay your staff. Total capitalization amounts to be Rs. ‡ It creates an environment of security.Meaning and Factors Determining Capital Structure Meaning of Capital Structure Capital Structure is referred to as the ratio of different kinds of securities raised by a firm as long-term finance. b. ‡ ‡ ‡ Gives a company the ability to meet its current liabilities. The capital structure involves two decisionsa. preference shares and long term borrowings( Debentures). ‡ Excess working capital may result into over all inefficiency in organization. or working capital. Highly geared companies. The more working capital. and used them to pay off its short term liabilities. 5 lakh. 20 lakh in each case. · Lack of sufficient working capital and inability to liquidate current assets are frequent causes of business failure. Disadvantage of working capital: · You can't expand. Take advantage of financial opportunities as they arise. ‡ It helps the business concern in maintaining the goodwill.

the company¶s capital should consist of share capital generally equity shares. i.An established business which has a growing market and high sales turnover. In such cases. the capital structure consists of debenture holders and loans rather than equity shares. Period of financing. Trading on equity means taking advantage of equity share capital to borrowed funds on reasonable basis. Bold and adventurous investors generally go for equity shares and loans and debentures are generally raised keeping into mind conscious investors.In a capital structure. the company is in position to meet fixed commitments. Debentures and loans can be refunded back as the time requires. equity shares as well as debentures. It is seen that debentures at the time of profit earning of company prove to be a cheaper source of finance as compared to equity shares where equity shareholders demand an extra share in profits. Trading on equity becomes more important when expectations of shareholders are high. Preference shareholders have reasonably less voting rights while debenture holders have no voting rights. company A is considered to be a highly geared company and company B is low geared company. Degree of control. the company¶s capital structure generally consists of debentures and loans. 2. ratio of equity capital is Rs. 15 lakh to total capitalization. So. the wider is total capitalization. 8. Capital market condition. While in period of boons and inflation. big companies having goodwill. thereby the profits are high and company is in better position to meet such fixed commitments like interest on debentures and dividends on preference shares. Therefore.company B. the company has to look to the factor of cost when securities are raised.In the lifetime of the company. 4. It refers to additional profits that equity shareholders earn because of issuance of debentures and preference shares. equity shareholders are at advantage which means a company should go for a judicious blend of preference shares. 6. Flexibility of financial plan. If the company¶s management policies are such that they want to retain their voting rights in their hands. the capital structure should be such that there is both contractions as well as relaxation in plans. in Company A. while for long period it goes for issue of shares and debentures. Therefore. then the company is not in position to meet fixed obligations. it goes for loans from banks and other institutions. Choice of investors. 3. Interest on debentures has to be paid regardless of profit.In a company. Trading on Equity. Cost of financing. The bigger the size. proportion is 75%.The company¶s policy generally is to have different categories of investors for securities. Therefore.The word ³equity´ denotes the ownership of the company. when sales are high. a capital structure should give enough choice to all kind of investors to invest. While equity capital cannot be refunded at any point which provides rigidity to plans. . Factors Determining Capital Structure 1.When company wants to raise finance for short period. Stability of sales. During the depression period. it is the directors who are so called elected representatives of equity shareholders. If company is having unstable sales.Small size business firms capital structure generally consists of loans from banks and retained profits. While on the other hand. 9. Sizes of a company. These members have got maximum voting rights in a concern as compared to the preference shareholders and debenture holders. the market price of the shares has got an important influence. proportion is 25% and in company B. equity capital proves to be safe in such cases. 7. It is based on the thought that if the rate of dividend on preference capital and the rate of interest on borrowed capital is lower than the general rate of company¶s earnings. stability and an established profit can easily go for issuance of shares and debentures as well as loans and borrowings from financial institutions.In an enterprise.e. 5. the company should go for issue of debentures and other loans. in order to make the capital structure possible.

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