Introduetion to finan cial management.

xfinance:
Sn a gener al sense tinance means cash or money
dno brOade sense tinanco means att and scienee ot
mana qing money
7Jn a POpular sense tinance refer5 to the prospect ot the intloo
0T Yeeipt on ong hand and outtlow ot Daynent on he onr
hand.
#Deiniion.
A Acording to FW perlsh nance is euerybodies Tesponsi bilihes
to ensuTe that money is aloays available to MQKe neessary
Payment as and whon the ncd toY Such pay men4 arises?
fypes of tinancial needs in busincss.
term: - requirement ot tunds tor a priod etceding 3yeors.
> Long
Mediun term: Time constraint fined at I yeaY.
Short term :- Deals with finan cing the current assct5.
* Busines s tinonte
eLcquasahons, qlo cohon
t is an achuty or process concorned with
and vtlisation of tunds by a business firm.
Prouremntl AcqQsathons.
DisperSImentl uhlisahon.
*Types ot tinance.
-9 Piuate finance ’ Public hnance
Lcentral Cuouernment
LIndiuidal
finance L state ouetnmcnt
L Patnersntp L Semi aouernment.
hnance
LBusiness
inance.
 *Deine tinencia managmcnt wshich is
’inanial manggement reters tothat pat ot business actiuity
COncer necl wih procutemuntl wilizahon ot hnandal resources
Jn othr words inan cial mangge ment reters to that part of managcmnt
achuhy which is (oneinco with plannin9. organisin g. diree hng ad
Contoing ot irmy finn cigl resoutces
* Deñneñen
’Acording to JL Massye:Financial manoqement is the operononal
tor obtaining and etfechuey
Qchvit ot a busincss hat is tesDonsible
oising the tunds nceessary tor eticlent opctanon s"
* Seopettementsot inancial management
’ Învestiment dcision
’ financial dccision.
’ diuidend decision.
objeiñves oi ninanciat management.
’Regular and adequate so Pply
’ Returns
> ophmim funds oHlisaion
’satety on invesiment.
ran a sound capital structLIre S.
Oprasonal Qth cr.
Basic
tstima ang tinancial +To Serve the loterest
Proft maxim1aion ot Invislbis,owncrs,
Wealtn maximi zahon requiremcnis
- Aquiring suticient Cn plo yces,cte.
..P:TR -TC 4 timdytunds
7Prope uhlisahion 6f weltare et
’ Maint aln nq qpod
tunds -io nS with nucstors,
üncrease proitability le aclers 4 (mployes.
’ ((roh ot th ti n
’ MOing timey Paymnta
of Salaries, interest ETax.
’Pro#t maximi2ahon is also cad Qs casn p(T share.he q0Ql 6t
Dencht snare holders
4nts is to achitue the nignest proitabilihy tomaximizqhon ls ne
and owncrs.CLcLOrd\na to CP J0ncs "proit
maximizchon ot irms Qct income
 aS LQue maximiañon or net
maximizahon ls also called apPProch whten inudlvcs
Dwealth maximizhon.1t is morden listenrs
orth in 1he hels of
PYeSent
innoughon and improycmts
the ctest
(0ncern.
m anagement
*funehonS ot inanciatrequ|NMCOts.
tstmahon of eapital cOmpositon
’Detcrmin ants of capital
’ choic ot sources ot funds.
Inucstments of funds.
disposal 6t surplus.
Management of cQsh.
* finonciql decision6 be inuestcd to enable a
cìnq magnitude ot funds to tobe acqirecl
regar
OLCiSiOnsCLLLomplish ts últimate ao qls,kindo1 assets
tims Income and
ním tb ot listribuNon otfnaníal ceciions/
Ratrn ot CapitatizaNon Patrn are incudea in
similar olhcr Patteng lmatters
Ais iour broad categories.:
Jnu stment decision.
y inancinq decision
y di uidnd clecision.
dcision.
’ Hlorking capltai
Peak
Erpa nsOR Recesslon
Depressi on reeosery
trougn
’4ectors intuencing.
bimernal b{atengl
Nature ot busincsS lcono mie itk fonomy
Si2eoft businc9S ·Term ot credit MQrkls.
Mana gcmcnt aiouinmcnt iegulaHons.
Business aycle
Ovo ncrsnip Taxes.
tarnings
legal fo trm
liqudity
aSsgt.
*iunehons or roles ot hingnial manggers,
und requiremcnt eshmahon
Qpila) struchure.
7 Cash managcment deisions
Cqpital budghng.
’ markt impact anauysis
iunchongt Qeas ot inanctal man0gement
’ Dctermining inanc Inl huds:promohonl (xpenscs, fixed aod worng9
ins are nedcd to meet
Capital nu ds
manuBacturinq concetn oill rquhe more inustmcnts in ined
H
sscts t han a trcL Clio q concern
orong asses sment ot Rnancia ncecls mass jeopardics ne
A
Suruiva ot a (ontern,
9 Sucion of SoLurce ot funds:
inancial inghtuhons may be rquested to provide long ttrm
unds the worcinq capital nuds maay De net by geting casn
(redit or ouerdiaft tcilihes rom conmercial brak.
'a smal (ontern may tind difficulNes In raising tunds tor want
0f adcquate scurihes or lue to is reputahon."
inanciat andysis and interpretaHon:
"te is expcctec to know obout the poitadiliy, liqidihy posi bon
concern.
Short tcIM ancl lOng-trm inancial POsi Hon of the
Tthe intu DretaBon ot vatiouS rahons s tso rquired lcsscnia)
to veach Certain conclusions.
COst volume -proit an dysis.
*t Is an imporlant tool e proht planning. 10 nderstand cost uoluiwn-profit
rclanon ship, 00¢ Snould know 1he bhaulour ot (osis.
(ost sLb ciuicded as'
ined (ost ( con siant during prDeluc thon)
’u ariable (ost
Scmi- variable (ost,
 Cqpitcl budgchng:
Se proess ot mking inneyt meot distons in cap ital1neexpenlihirrs.
iM tl
lt |s an (Apenaihire tncurd toy acuring or 0mpiauinq
assyts.
e o t \ng capit al man 0gemem!
It is eS S(ntial to maintain Ihe smooln funning ot busin (ss. reters Tb
that Part of the m's capital whicn Is requied tor inanlng short
ttrm or CUrnt assels sutn qs cash,reuiuables anclinuentofi,
Casn \s requied tb meet ay to day n ets qnd purcnase inventois,ete
pro fit plmning and control:
it is an mpor tant fesponsibilihy 6+ he hnqne manogr 1H is also us«d
as a tool tor euauahng the p(rtormanu ot manggenntproit s
determined by the volume ot reuenu and expendihure -ruenuc
may acure trom sales,invesiments in buiside Sc(urihes or income
trom oi her soures.

didnd policy
Tnu ine stors are interesied in carning thu mazimum rehn on
thuir inN(S0M nis:1he comany shouc distipute reasona blu
amount as diuidund s to its inembeYS and etain 1nc rest for
Is qrowth and suruina.
*funchons-o1 finaneiel managor
3 Cshmg hng thu amount oi apital required.
’(Purch ase , me Hng. Pan si on)
of Busincss.
aterming capital struchure.
hoiu of Soure ot tunds
’ Proturermeni ot unds.
7 Uhliscahon o tunts.
disp0sal of profits or srplus,
Management of Cash.
’ tinanigl conirol.
 ÉTHIC3

* meaning: human behaviour ohich is tight ov wrong

’ is the study o
things ts oth ers.
Jn general, etthics mean doing right
Ctics Mean good or bad absenceot traud which impose
manipulahon, tobrleakon: Or qtterahon of reo rds or documents or
misapprop richon of asscts.
7 Cach and euery Oraants aion has totolow tis tn he prepra hon
of tnancal statemcnts that leads to protitabiliy and Solveniy.
lhat is busincss ethies.
t means that the companis must operdle auording to Q
amount is
Qpplicable laws this rgaibtons no (on pany's respectiQby
and customs Qnd Drotects it from tegl
Prs
worony and
Jt is a prariee nat detrmnes what is rignt,
apPropriate In ine wors plate-14 Is otten gudcd by boss an
ncse principles kup the Ompanies incliwdugls from
Cngaqnq in illcgal Qchuites such is insidcr tecling.
discrimina hon and tualy .
*{hies ed/tthicat issiLes in tinanu.

’ insiclet irading

*in Sdcr are people ono haue auss t non public intomai
about a COmpary such ( exeuhues,dirçctors,emplDyu,
nsider can bg ud sel stocr in thre on compa ny,
1ncy ha ve olow cevtain ules and rg ulañons.
nsar reers n exhange ot seurihey b induilua'sand
tracing
who hae acss t non- Pusbe into about th compa.
8euses. anothor
¥ hosh (e takeour tn me aeqsihon of one company y
(OM pany aganist te oishy t thu ormet.
traud n fnanial slatements
hchtous relnues invaves ckiming 1h scile of g5vcds 4Stnices Ihat dicnt 0C
Suh s (loub countng sals

Conealcl liobili hes and (xpens es:

"|t me am fail ed 10 reuotd thcm, certan Gabili hes anl expnse Gre
t0 reLOra thm

fraudulent assest ialuaien.

* impropcr o taudulnt aiso le ury 4 omissions
Puits ot an aucditor about he
Oural 8tatermant to th Mumbrs
an
Siote o t Qttairs ota comPang
10 mt tn obrhuO ot tne omPanies at to s6 taJ0 The

be reusona buy &HU and Cartd ín fde nbhins the

true at ot aounts .

Enical issues fn nancial martct

churning
Un suitability
rtaxcss în murcets
 Unit-&
Souree ot finance.
Source ot tunds: Businoss simply cannot tunchon
Cnd M money required to mak« a without money
business tun cHon is kngon
C busness tunds. The SOusce of fncs re classii d basecl on
tiMe pernod,ouoncYship and contol, and thei
source ot genighon,
* On the bas ot eriod

LOng termM Cquig Mclium tum snort 1errm

Léquiy Snares LTrad (rclit

Retine dearnngs Lpubicciposir Ltectoring
L Banrs
Preterenu shareS Ll0an from Hnanial
fnsituhons
Loan tom inancia)
inshhuhons.

* On tho basts ot ouonship

Bomouo e tunss
Ouoncr tund
Lequiy s haves LlD ans on baos.
LlDanstrom Hngncq)
LRitaincdznin gs
inshhons.
LDuble cep osl15
LLecSe hnan dng
 On thebosis of Souree
6t CioneraHon
1

frtemal soutu
Lequihy shQre cap1ta -Ioon trom bany
LRitained comings. LPvekrnesna,
Pubie uposits
Latbenture.
Llcase hn ancing.
Lommcal pap
4Tra de (rclit
tattoring

*tquity shâros:-issue ot shares is th moin sOur eot

\ong-1erM tnan shares are IsSled by Joint soue
the public. a company diu'des its capiia)
Companies to callcod a
(mO unts ofa cu foik tacu vale. tcach ynit is
Sne A peson holding shares is callocla shateholde.
hy are also Knoon as ordingry chares.
Lholders ot thes( shars Ore mun bers ot the company <
nae vothng righs
repres cnt onership of the (omPany and capital wil
be raind by issur of such sharcs knon as 0wnorsnp
Capnal of owns tund
Glny dot gct tad elivicdend , dlyidnd based on pro tis.
The çhureholdrs are mterd tp as fesi du a) owns.
hrough thej righd to vott, Thye eharoholdes heve
a rigt tD a mei pak in the mnegencnf otne
ompany
Pveterence sh¡res: in the instrumo0t,certain
or deing the risrs
îvolwed instrunent minimum
0f the
req Lirm on i! ke Minimum tenure public iscuonces.
ra Sng ete. have been specithtdin case of
redeomabl preteronee sha res with
7OmPanies are qilowed t0 issue
a mim tenure o4 a0 ueaw as per lhe carmpenies ACT
1YPES 0f PRE FRENCE StARES.
Cummulafve non-commulohve
pantigting 4 non- parhei pa ing
(nNer Gble 4 non-tonuothbl.
reedt moble t irredemable.
LIMITATLON.
rQtOt inteest ie highur.
dividtnt is only paid when (ompany earns pYD ht
Detered shares::
* also Known s founder shares.
91hue shares were normally issued to founders these share
holders hae a prxfrenclal igt betore «quihy 4pretren u
Chore holdors.
lo puie l1d cn issue D.s.
The se sha res are issued to tho t0under to (ontrol oLeY he
mano grent by re enture od thelr vohng ugts .
1detteret shares are issuet by such companies mptal
* hot is apita) restructving pncess
*•3a through anays ot hort trm t tong term in ancla
neods to ensure that it uoill duotbp s tore strength.
9 capital vetnutin g oturg to hange tne Cap posihNon or debt
 dte rence blw Pan uque
Pan vaue stock 4 no Par vaue
stocR.
nopan vale.
>t has affued nominal daignated
Per shas. value peM shan.
At aegs complen ’t simpltys the aovnbing
acon tin9 proces.
^ Jt may 'imit the
ot capital isin euiblihy o4 eapitol aiing.
to tu shas
of stock.

ot No par vate stock is detemind by mewy

fhe gtoue fuetuotes a ceatin condiNones

to martet

The an0unt
unspei
etermiud lag

Sweat cqiby shares.

* Debentues.
’H is a document issud by Te ompany
’ t is aso cthcate o he oebt tatn by company.

aduontages.
’ Investos who want f'xed ino me at esu tpt
hom
’ The tompany coes nt ivolv r ts pao hts h a de benture
2As e deb enture doept cay vohing rignts .finan ein g th rou h
them does pot dilute cotrol ot eqity ghav oh old1S
mamagermt
 dlisadvont
tach
aqes.
company has eertain borOLoing apacihy .voitn
compary to turthr
the issue
botow tun's
a dobentures,the apae ihy of a
redul ces.
debenures, the compan yhas to nare proultions
"lalith yedeemablu evonduring periocls ot
payment on the pecitel date,
t01
finanxia) strain on the company
pOImanent burden Dn th aYnings t
dibenhs ul a

1yPes ot cebentures.
Secured and vnsecured
Registered and Bearer
rhble.
* convertbk and non-conle
tfist and aoncl.
(O0porate bonds
by ompaniu.
4They au bonts isuc raise ot pupose
They issul thes to money toA a \iahely
a noy plant, pusch asing cqcipmht, or
Such qs buildi ng
gmwing the busimoss.
matuniy amount on a a
to py
7 ind conmpang pronutute is cotect as pnYeipe.
specked matuny ola
yp ot bonls.
t 2ero Co
upon Ond.
 lapitaizatiorn 4 theories ot capitalizgfon
*(ost theory.
MEq ining rpacity theory
x (oncept ot apito lzdhon.
capitalizahon : share capital + Debenturrs t lonq term borow inys
Yeerve t Surplus carning
Bonnevile and cdeway deine outstonding
The Balana shet vatues of stole s and bords

Theori es ot capitoliza'dn .
Cost the0y.
focused 6n the cost ot acquiring assets
b of aquifing both
is the ym total ot cost
9 (ost theoryCurrent astts.
d cod
isu of ghare and oth SCCU TiBs are
cost in turred to r
also inclu dect in cap italnaton
Building, plant 4 Machincry, and other cuYent
Sum ot land 4
(Ssts and preiminay expenses to tin dthe total
Hrm yit helps
GBost uKd by a new business
mount of copital Audt tor establisthing the
mitato ns aspet but not cap atihy ot the
cost
5 S4 highliqni s only the beioms obs slete
whn the assets
silent qbout ime
-’it omains
eouoings the theory lose it
fim naving Alutuetig
for a
3 importane.
enning 1heory: biusines is consisluudl as thc br's ot
’ farnlnq caprity o t 1ne
CapilalineNon.
Iimitabons: businss o be
earoing of a ntw
ytshimah'on ot th huture
Ctficult. pres mtehon
may not be propt r
Rate tallen fol cn pitalizason
of the fim.
comitted t fhe kme ot (shmin g tht
y mistoke intene the nount of
enming s will tivctln
Capitaliahon

s gtered stoe
ilegl scheme to dtud investors by otterng
9It is an
ehares at deoeptiue high prìc ca.
a higner Lael thn if i's chually worth,t
9]t is 'ssued at tns book ualut.
by overstahng hu
iS aLomplishd
Ouercapitalinahon::
caLses and oneties.
y Conept io andial attaris of a
capitalizahon Is that siak ot conpan's (Sscts s much
9 er- of
COmparny .inwhich ne reql oluu t0 a pam ancnt delin
los than theii bo or ale,,leading
coínpany.
earning tapcihy ot 1he
in the
where a Co mpe ns MOYe capita)
Greters to a sihuahon pcratons.ihis m <ons tho t
-Inon t nuds to run its
s«Non o us when
ass, undnpitoli run is
than its totrl enogh copital o
ploen't hatie compan4's catal is
fh n cans tha he
OPor ahong ests
thon its htal
 CAPITAL STRVCTVRe

*Mening of (osh
hon
crang (nent bro doy lenoe
eneual seOse copita stuctre means
requitementa.in a
nent sources to meet the business
Cpital stu chhe mong 0mbin aNon ol

Preieiene Shave copta.

(Ona tum loens

retaine d ea rn ings
nd othe long term sour Dt tund which a trm ise to
fun its business operahtons .
x detinafen:
"Capital) strurture i the rombingfon ot dobtot ent my
comprises a Hg's inancng its ss ts
Seturrhts tiat
TOhn JHamphon.
-up oti
. "topit al ciucture of a rompny otrs to the mqkeesouites.
trm
(apitalis nhon and it inct ud4 all t0 na
*capitalstautu, fnana?al stauatutasets stnurture thut.
sthuture is citferenl om the tinan cial st
CQp1tnl

tolal aslnl b a worfh or Owns

auty in h retrs to nut 4 ehÍtt -trm
hro Gal ctrutture abilihs (long- ferm
and al!
égbilifes) short- term liabilihes
incwe
apital stru ctu docsntincduds sh ot trm liabiltks oY
Dlt nnancial ctuctuur
tnt lablity, cte
 asset struttue mtes to the pro p0rhons of totl a36eis
a irm that meons mar up 0f the assd zy
uea bu company it indie ates the Oppicahon ot
balane ghut o a
in theditent typo ot fixrtl 4 eurent o3sets.
fUn
as ct stuctere tht Qssets t auvrnt asset.

Manter dabL to calcaulate the loueragos

Particulars.
XxxX
Sales XXX*
C) Variable cost xXX
(ontibuhon XXXX

EB17 loperathrg protit XXXX

interegt XXXA

XXXX
C> Tax

c) Preterenu oiuidend
XXX
Amo unt auailable to fquity share ho lders.
(onept ot laucr age tinancial d«cisibn ot tre
for
tru trame wOr empioyement of asset or solTCOS OT
7eueraa provicdesehned as @n
firm. may be a fixed cost or tixd
tne company has to pay
tunds to r vo hfeh
(ehuns
’uroges may be
tinonia
(orn bined uero4
 ’t is detincd as the tendency ot the oper afing profit to
cis propon onately oith sales.Jt is Said 4o ersist when
g
Mhm has to pay ied cost reqardtess o volume or
Output of sales.
The frm is sald to haue high deqree ot opera hng teerye
empy greattr omount ot ted (ost 4 smaler amount
(ost.
9 on the otner nand a tim heue a (ouwriabu
operabng levere
costq a smaller
Wnm T emplDy4 aareatí o moAt ot ll
Optra hng etge
amotinf ot fxtd (o. Ths the doge ot
pends on he Onnount ot tixccl el ments in h Ost
de
trucure

Operahng ucrage = (ontribuion

C81T
Dret of operabng uerag: chaq in protit
7. (hangin sales.

4 inancial Leuerage. acivities ot the tirm anclit ine veases

is related 4o thË tincxing
the hm by using hud ost finoncing- (arstf
the protitab1lihy ot
Pretferec capital?.
th hm er icles to
honcin) leverage ememes in 1he ifm whn estiblishey the cagre ot
90 tor dubt copital ine fnanciol (euerag ovailabil to cguiy
changes bctwcon operahng proht and proRi
shareh olders
C81T
EBT
(eur0ge : '7. Ch arg n (Ps
Degvee t hn antial t8tT.
7. hang n
feoturcs
sk.
is asSociatd wilh
the inanial levevay, higher will be tu w'st
higho
10we th Tinancia bu (rag, lowir wil be 1ho risk

favpunabu when EPs is posskue.

(ombincd leverage and opra ng tuerog ot a

~t is a combinahon ot fianciql
busincss Rn vseot h d
be eincl the putnhal
’ (Ombind (werase my whieh emphtu size 7hu ottat
(Ost, borvn oprqhnq and 0ncial
0f sales volu m chanqe on ¬PS of h him.
’Iherease in con stribuh on
foyoorabu
inereose n EPS which is uwhigh is
(0nstrbuh'on, desee n fps
ceer Use in
Ontaoureble.

C_ EgT

tBT.
chag« in
’cyre o4 Combined (utra:
e200,000
combined t * intrest
cost() Paritculars 5,000
interet
Sales Stattment cost \arigbe
Spe1
YOpiaßng >Vavíablecost c0stunit Salesletrag fiom h
financia)
COTRIBUION
BIT (
¬aning shovoing l0,000 tolouoing
IOPE
levtrage leverage unils
be RATAI calculahon
tore clata
1,0,02,00(E9BI0,T00 R5
:811 tax PROT
1,55, 00 I,55,v00 per caltulate
of unit.
0[c leverages
s
1016+hmy : financialoptiahng
1he
Setinprgia

0,b00 2,50,000 f
,55,000(5,000 ,7o0o0, 30,o0 2,0o 5000 0 rombincd
 26,332
30,000 BiT
BIT
times. 4133 |30,0
itdtrs, shatho fquity avaliabut 2
6.332
ciuiclend Preterenu (()
26,332
26,332
înterest )
3668 tBIT
00 cOst Cfned
00
(ONTRIBUTION
0
cost 3leriable
00 Sales
2,00,0
0D
Parheulars
?3,668 interest
?1,00,000
unit: per 00
unit. aper I,00,000 Sqles
owing tol tne irom leverage in
ancial Operaknq4 (alculate
 I0,000 equity
Rì capitalised woith 3 10 la khs onsisting ot
Sna res of Rs-t00 eoch Them anagement undor its expansion plan
decides to rise addiñondl apial ot SD lakh throgh one OI
the tinancial plans
"all tquity capital.
25,00,000 cquity shares and a500000, 07. dobentures.
" allin (2% debentures
?,00,00D equihy capital and s,00,000,10 7 preicrenu ehare
(apital
the ¬BT ot im is ,00, D00. ihe (ompany is unleY S07.
Taw brotut recormmend uwhith lan woud be suita ble rorn
he point ot ievo ot the ehare holcle fs.
 Plan L Plani PlonV
Plan
Cal^ of EPS Par heulas
3,00,000 3,00,(D 3,00,000 3,00, 00 0
E8T
50,000 120,000
() nt On Debentues
2,50,000 1.60,000 3,00,000
EBT 3,00,000 90,000 1,50,00 0
1,25,00O
I,50,000
l,2 5, D0 90,000 ,50,005
CAT I,So,000 So, 000

C) Pretrene diutelend I,0q 000

I,2 S,000 40,000
Amt auailabu to |,50,000
fquihy shaeh olde s. (0,000 1s000
20,000 S,000
Ant aucilable 6.6
EPS 83 9.0
fquy sharts.