CHAPTER-I

INTRODUCTION
Finance is a field that deals with the dynamics of assets and liabilities
over time under conditions of different degree of uncertainty and risk. Finance
can also be defined as the science of money management. Finance aims to
price assets based on the risk level and their expected rate of return.

FINANCIAL MANAGEMENT

Financial Management is an integral part of overall management. It is

concerned with the duties of the financial managers in the business firm. It is
management principles and practices applied to finance decision making.
Financial management application of general management functions to area of
financial decision making. All business decisions have financial implications.
A single decision may financially effect different department of an
organization. Financial management may be described as making decision on
financial matters, implementing the decisions and review of the
implementations.

According to Archer and Ambrosia, “Financial Management is the

applications of the planning and control functions to the finance to the finance
function”. In the words of Guttmann and Doug all, “Business finance may be
defined as the activity concerned with planning raising controlling and
administering of the funds used in the business”.

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DEFINITION OF FINANCE MANAGEMENT

“Financial management is that area of business management devoted to a

judicious use of capital and careful selection of source of capital in order to
enable a spending unit to move in the direction of reaching the goals.”-J.F.
Brandley

“Financial management is the operational activity of a business that is

responsible for obtaining and effectively utilizing the funds necessary for
efficient operations.”-Massie

Nature of financial management

Financial management is an organic function of any business. Any

activities and other business operations, pay compensation to the suppliers, etc.
there are many theories around financial management:

• Some experts believe that financial management is all about providing

funds needed by a business on terms that are most favorable, keeping
its objectives in mind. Therefore, this approach concerns primarily
with the procurement of funds which may include instruments,
institutions, and practices to raise funds. It also takes care of the legal
and accounting relationship between an enterprise and its source of
funds.

• Another set of experts believe that finance is all about cash. Since all
business transactions involve cash, directly or indirectly, finance is
concerned with everything done by the business.

• The third and more widely accepted point of view is that financial
management includes the procurement of funds and their effective

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 utilization. For example, in the case of a manufacturing company,
financial management must ensure that funds are available for
installing the production plant and machinery. Further, it must ensure
that the profits adequately compensate the costs and risks borne by the
business.

• In a developed market, most businesses can raise capital easily.

However, the real problems is the efficient utilization of the capital
through effective financial planning and control.

• Further, the business must ensure that it deals with tasks like ensuring
the availability of funds, allocating them, managing them, investing
them, controlling costs, forecasting financial requirements, planning
profits and estimating returns on investment, assessing working
capital, etc.

Scope of financial management

The introduction to financial management also requires to understand

the scope of financial management. It is important that financial decisions take
care of the shareholders interests.

Further they are upheld by the maximization of the wealth of the

shareholders, which depends on the increase in net worth capital invested in the
business and ploughed - back profits for the growth and prosperity of the
organization.

The scope of financial management is explained below:

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 • Financial Management

• Financing Decision

• Investment Decision

• Dividend Decision

Core Financial Management Decision

In organizations, managers in an effort to minimize the costs of

procuring finance and using it in the most profitable manner, take the following
decisions:

Investment decisions:

Managers need to decide on the amount of investment available

out of the existing finance, on a long-term and short- term basis. They are of
two types:

Long-term investment decisions or capital budgeting mean

committing funds for a long period of time like fixed assets. These decisions
are irreversible and usually include the ones pertaining in a building and/or
land, acquiring new plants/machinery or replacing the old ones, etc. These
decisions determine the financial pursuits and performance of a business.

Short-term investment decisions or working capital management

means committing funds for a short period of time like current assets. These
involve decisions pertaining to the investment of funds in the inventory, cash,
bank deposits, and other short- term investment. They directly affect the
liquidity and performance of the business.

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Financing decisions:

Managers also make decision pertaining to raising finance from long –

term sources (called capital structure) and short-term sources (called working
capital).They are of two types:

Financial planning decisions which relate to estimating the sources and

application of funds. It means pre-estimating financial needs of an organization
to ensure availability of adequate finance. The primary objective of financial
planning is to plan and ensure that the funds are available as and when
required.

Capital Structure decisions which involve identifying sources of funds.

They also involve decisions with respect to choosing external sources like
issuing shares, bonds, borrowing from banks or internal sourceslike retained
earnings for raising funds.

Dividend decisions:

These involve decisions related to the portion of profits that will be

distributed as dividend. Shareholders always demand a higher dividend, while
the management would want to retain profits for business needs. Hence, this is
a complex managerial decisions.

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.

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  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 FINANCE

The following are the functions of finance:

1. Procurement of Funds

The main aim of the finance functions is the provision of adequate finance
to meet requirements of the business. Finance must be provided in time at a
reasonable cost. For this purpose, finance must be procured on favorable terms.

2. Efficient Utilization of Funds

Efficient utilization of funds is the fundamental requirement for the success

of the finance function. The firm must generate a return higher than the cost of
funds, so as to magnify the earnings of the shareholders. Only projects which
are profitable should be selected. Funds must not be allowed to remain idle at
any point of time.

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3. Increasing profitability

Finance functions should aim at increasing the profitability of the business.

All financial decisions influence the profits. Hence, decision making should
always be guided by profitability criterion.

4. Maximizing Firm’s Value

Finance function plays a key role in maximizing the firm’s value. To a

considerable extent, the value of the firm depends on its profitability. Besides
sound decision making with regard to capital structure, dividends, bonus shares
etc.

IMPORTANCE OF FINANCE

Finance is regarded as the lifeblood of a business enterprise. This is

because in the modern money oriented economy, finance is one of the basic
foundations of all kinds of economic activities. It is the master key which
provides access to all the source for being employed in manufacturing and
merchandising activities. It has rightly been said that business needs money to
make more money. However, it is also true that money more money, only
when it is properly managed. Hence, efficiency management of every business
enterprise is closely linked with efficient management of its finance.

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LIMITATION OF FINANCE

The following are the limitation of finance:

1. Monetary nature

Finance position of business concern is affected by several factors

economic, social, financial etc., but only financial factors are recording in
financial accounting

2. Recording Actual cost

Cost concept is found in finance. Price changes are not considered.

Money value is bound to change often from time to time. Finance records only
actual costs.

3. Technological Revolution

With the advancement in science and technology for the minute and
detailed break up of all types of data concerning various types of business unit
have become a must for the management in its day today functioning.

4. Incomplete information

Finance is only the net result of collective activities of a business

information is recorded for the whole concern. One can find important about
the total receipts and total expense.

5. Difficult in price Fixation

The cost of a product can be obtained only when all expense have been
incurred. It is not possible to determine the price fixation requires detailed
information. To fix correct cost of a product, one needs details of fixed and
variable costs and direct and indirect costs.
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 6. Evaluation of policies not possible

Finance do not provide data for evaluation of business policies and plans.
They do not make any study of variance in the performance and possible
reasons for it. Finance accounts do not provides any measure to judge the
efficiency of a concern.

7. No help in decision making

Finance is provide adequate information to enable the management to

compare the probale effect of alternative course of action such as introduction
of new product, replacement of labour by machine etc.,

8. Only quantitative information

Finance considers only those factors which are of being quantitatively

expressed. The policies and plans of the government have a direct hearing on
the working of the business.

9. Personal Bias

Accounting policies are financed by accountants. They differ on the use

of accounting principals. Although a number of conventions and post have
been propounded in accountancy, their use is greatly affected by the personal
judgement of accountants. It is found that finance statement prepare by two
different persons of the same concern a objective is ignored.

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TYPES OF FINANCE

1. Business finance

The ‘business finance’ is very comprehensive. It implies finances of

business activities. The term, ‘business’ can be categorized into three groups:
Commerce, Industry and Services. It is a process of raising, used in connection
with business activities. It encompasses finance of sole proprietary
organization, partnership firms and corporate organizations. No doubt, the
aforesaid organization have different characteristics, features, distinct
regulations and rules. And financial problems faced by them vary depending
upon the nature of business and scale of operations. However, it should be
remembered that the same principles of finance are applicable to large and
small organizations, proprietary and non-proprietary organizations.

According to Guthmann & Dougall, business finance can be broadly

defined as the activity concerned with planning, raising, controlling and
administering of funds used in the business. Business finance deals with a
broad spectrum of the financial activities of a business firm. It includes rising
and procurement of funds and their appropriate utilisation. It includes within its
scope commercial finance, industrial finance, proprietary finance, corporate
finance and even agricultural finance. Business finance, apart from the
financial environment and strategies of financial planning, covers detailed
problem of company promotion, growth and pattern. Thee problems of the
corporate sector go a long way in widening the horizon of business finance.
The finance manager has to assume the new responsibility business finance.
The finance manager has to assume the new responsibility of managing the

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total funds committed to total assets and allocating funds to individual assets in
consonance with the overall objectives of the business enterprise.

1. Direct Finance

The term ‘direct’, as applied to the financial organization, signifies that

savings are affected directly from the savings units without the interventions of
financial institutions such as investment in insurance companies, unit trusts,
and so on.

2. Indirect Finance

The term ‘indirect finance’ refers to the flow of savings from the
savers to the entrepreneurs through intermediary financial institutions such as
investment companies, unit trusts and insurance companies, and so on. Finance
administers economic activities. The scope of finance is vast and determined
by the financial needs of the business enterprise, which have to be identified
before any corporate plan is formulated. This eventually means that financial
data must b obtained and scrutinized. The main purpose behind such scrutiny is
to determine how to maintain financial stability.

3. Public finance

It is the study of principles and practices pertaining to acquisition of

funds for meeting the requirements of government bodies and administration of
these funds by the government.

4. Private finance

It is concerned with procuring money for private organization and

management of the money by individuals, voluntary associations and

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corporations. It seeks to analyses the principles and practices of managing
one’s own daily affairs. The finance of non-profit organization deals with the
practices, procedures and problems involved in the financial management of
educational charitable and religious and the like organizations.

5. Corporation finance

Corporation finance deals with the financial problems of a corporate

enterprise. These problems include the financial aspects of the promotion of
new enterprise and their administration during their early period ; the
accounting problems connected with the distinction between capital and
income, the administrative problem arising out of growth and expansion and,
finally, the financial adjustments which are necessary to bolster up to
rehabilitate a corporation which has run into financial difficulties. The term
‘corporation finance’ includes, apart from the financial environment. The
different strategies of financial planning. It includes problems of public
deposits, inter-company loans and investments, organized markets such as the
stock exchange, the capital market, the money market and the bill market.
Corporation finance also covers capital formation and foreign capital and
collaborations.

6. Direct Finance

The term ‘direct’, as applied to the financial organization, signifies that

savings are affected directly from the savings units without the interventions of
financial institutions such as investment in insurance companies, unit trusts,
and so on.

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 7. Indirect Finance

The term ‘indirect finance’ refers to the flow of savings from the
savers to the entrepreneurs through intermediary financial institutions such as
investment companies, unit trusts and insurance companies, and so on. Finance
administers economic activities. The scope of finance is vast and determined
by the financial needs of the business enterprise, which have to be identified
before any corporate plan is formulated. This eventually means that financial
data must b obtained and scrutinized. The main purpose behind such scrutiny is
to determine how to maintain financial stability.

8. Public finance

It is the study of principles and practices pertaining to acquisition of

funds for meeting the requirements of government bodies and administration of
these funds by the government.

9. Private Finance

It is concerned with procuring money for private organization and

management of the money by individuals, voluntary associations and
corporations. It seeks to analyses the principles and practices of managing
one’s own daily affairs. The finance of non-profit organization deals with the
practices, procedures and problems involved in the financial management of
educational charitable and religious and the like organizations.

10.Corporation finance

Corporation finance deals with the financial problems of a corporate

enterprise. These problems include the financial aspects of the promotion of
new enterprise and their administration during their early period ; the

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accounting problems connected with the distinction between capital and
income, the administrative problem arising out of growth and expansion and,
finally, the financial adjustments which are necessary to bolster up to
rehabilitate a corporation which has run into financial difficulties. The term
‘corporation finance’ includes, apart from the financial environment. The
different strategies of financial planning. It includes problems of public
deposits, inter-company loans and investments, organized markets such as the
stock exchange, the capital market, the money market and the bill market.
Corporation finance also covers capital formation and foreign capital and
collaborations.

STATEMENT OF THE PROBLEM

The Kamatchi traders was established in 2005. The firm is doing
buying and selling of waste papers and card boards. The firm is developing its
business gradually. The Kamatchi traders have been facing competition from
other traders. The firm is in position to overcome the competition and to
strengthen the financial position to run the business efficiently. So, it is
essential to make a study on the financial statement analysis to evaluate the
financial performance .

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SCOPE OF THE STUDY

The study has focused on financial analysis of Sri Kamatchi Traders. The
study corers the financial analysis of Sri Kamatchi Traders of Kumbakonam
only. The study was conducted with the parameters of long term and short
term solvency to evaluate the financial position of the firm.

OBJECTIVES OF THE STUDY

The following are the objective of the study:

 To know about the origin and growth of Sri Kamatchi Traders.
 To study the Profitability positions of the company.
 To know the liquidity and solvency position.
 To analysis the financial strength and weakness of the concern.
 To provide the suggestion for the betterment of Sri Kamatchi Traders.

RESEARCH METHODOLOGY

The study is based on secondary data that has been collected from annual
reports of the Sri Kamatchi Traders, and from various articles from magazines
and journal, Ratio analysis have been used to analyze the financial statement
of Sri Kamtchi Traders. The study is descriptive in nature.

PERIOD OF THE STUDY

The study covers the period of five years from 2017-18to 2021-22.

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LIMITATIONS OF THE STUDY

The following are the limitations of the study:

 The study has been taken only five years from 2021-22 to 2021-2022.
 The study was limited to only Sri Kamatchi Traders at Kumbakonam .
So the result may not be applicable to other firms.
 The study is limited to the field of activities of the Sri Kamatchi Traders.
 The study does not take into account the areas of finanancial
management such as capital budgeting, dividend policy.

CHAPTER SCHEME

 The first chapter deals with Introduction of the study,

 The second chapter depicts with Review of Literature of the study.
 The third chapter portraits with the profile of Kamathi Traders and
profile of Kumbakonam.
 The fourth chapter examines the financial statement analysis and
interpretation of Sri Kamatchi Traders.
 The fifth chapter consists of the findings, suggestions and conclusion of
the study.

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