Industrial Engineering and

Management
 Module – 2
Financial Management
 Financial Management
• Definition: 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.
• Objectives: The financial management is generally concerned with procurement,
allocation and control of financial resources of a concern. The objectives can be‐

1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders which will depend upon the
earning capacity, market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should
be utilized in maximum possible way at least cost.
4. To ensure safety on investment, i.e, funds should be invested in safe ventures
so that adequate rate of return can be achieved.
5. 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
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‐
1. Issue of shares and debentures
2. Loans to be taken from banks and financial institutions
3. 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:
1. Dividend declaration ‐ It includes identifying the rate of dividends and other benefits like bonus.
2. 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.
Relevance of fixed and working capital
• Fixed capital refers to the cash used to acquire long‐term assets or
fixed assets. These fixed assets are the first and most important
purchases a firm makes, and they are used to manufacture the final
product on a continuing basis.
• Fixed capital includes items such as machinery, vehicles, and
equipment, as well as plants, buildings, and other structures.
• Working capital is the difference between current assets and current
liabilities, and it represents the approximate money accessible to the
firm.
Fixed Capital vs. Working Capital
1. The part of an organization’s total capital that is invested in long‐term
assets is known as fixed capital. Working capital is the money needed to
run a business on a daily basis.
2. Fixed capital investments are durable products that will stay in the firm
for longer than one accounting period. The company’s working capital,
on the other hand, is made up of short‐term assets and liabilities.
3. Fixed capital is generally illiquid since it cannot be quickly converted to
cash. Working capital investments, on the other hand, may be converted
into cash quickly.
4. Fixed capital is used to acquire non‐current assets for the firm, whereas
working capital is used for short‐term finance.
5. The entity’s strategic objectives, which include long‐term business
planning, are supported by fixed capital. Working capital, on the other
hand, is used for a variety of purposes.
Elements of cost
• The elements of cost are those elements which constitute the cost of
manufacture of a product. These are the different types of costs that
contribute to the total expenditure of a project. They consist of material
costs, labour costs, and other expenses.
1. Material Costs: These are the costs associated with all the materials
required to build a product or carry out a project.
2. Labour Costs: These involve the expenses related to the workforce, such
as wages and salaries.
3. Overhead Expenses: These are the overhead associated with a project,
such as equipment depreciation, rents, and utilities.
• Take the example of a bridge construction project. The steel, cement, and
other construction materials contribute to the material costs. The payrolls
to workers and site engineers make up the labour costs. As part of the
overhead, the project will also incur expenses for equipment hire, site
office rental, and electricity usage etc.
 Depreciation

• Depreciation is an
accounting practice used to
spread the cost of a tangible
or physical asset over its
useful life.
• Depreciation accounts for
decreases in the value of a
company’s assets over time.
 Break-even analysis
• A break‐even analysis is a financial calculation that weighs the costs of a new
business, service or product against the unit sell price to determine the point at
which you will break even.
• In other words, it reveals the point at which you will have sold enough units to
cover all of your costs. At that point, you will have neither lost money nor made a
profit.

How Break‐Even Analysis Works:

• Calculating the break‐even analysis is useful in determining the level of
production or a targeted desired sales mix.
• The study is for a company's management use only, as the metric and
calculations are not used by external parties, such as investors, regulators, or
financial institutions.
• This type of analysis involves a calculation of the break‐even point (BEP).
• The break‐even point is calculated by dividing the total fixed costs of production
by the price per individual unit, less the variable costs of production. Fixed costs
are costs that remain the same regardless of how many units are sold.
The Limitations of a Break-Even Analysis
• The most important thing to remember is that break‐even analysis
does not consider market demand. Knowing that you need to sell 500
units to break even does not tell you if or when you can sell those 500
units. Don’t let your passion for the business idea or new product
cause you to lose sight of that basic truth.
• On the flip side, you’ll need to decide how much effort and time
you’re willing to expend to reach the break‐even point. For example,
are you willing to invest a substantial percentage of your sales team’s
time and effort over several months to reach the break‐even point?
Or, is producing and selling something else a better and more
profitable use of time and effort?
Budget and Budgetary Control: Definitions
• A budget is a financial plan for a corporation that covers a specific
future period. It is an expression of income and expenditures over a
certain period. Budgets are plans that cover all functional areas of a
business for a specific future period.
• A budget is a system that is related to plan and control. Therefore,
budgets also include budgetary control.
• In a nutshell, a budget is concerned with policy framing whereas
control is the budgetary implementation of the policy.
• In a narrow sense, budgetary control is a cost control technique
wherein actual cost is compared to budgeted cost, and thus is aimed
at profit.
• The periodic checking up of income, costs, and expenses related to
the administration of the budget is known as budgetary control.
Objectives of Budgetary Control
1. Planning: Planning has been defined as the design of a desired future
position for an entity and it rests on the belief that the future position
can be attained by uninterrupted management action. Detailed plans
relating to production, sales, raw‐material requirements, labour needs,
capital additions, etc. are drawn out. By planning many problems
estimated long before they arise and solution can be thought of through
careful study.
2. Co‐ordination: Budgeting plays a significant role in establishing and
maintaining coordination. Budgeting assists managers in coordinating
their efforts so that problems of the business are solved in harmony with
the objectives of its divisions. Efficient planning and business contribute
a lot in achieving the targets
3. Measurement of Success:Budgets present a useful means of informing
managers how well they are performing in meeting targets they have
previously helped to set. In many companies, there is a practice of
rewarding employees on the basis of their accomplished low budget
targets or promotion of a manager is linked to his budget success record.
Success is determined by comparing the past performance witha
previous period's performance.
4. Motivation:Budget is always considereda useful tool for
encouraging managers to complete things in line with the business
objectives. If individuals have intensely participated in the
preparation of budgets, it acts as a strong motivating force to
achieve the goals.
5. Communication: A budget serves as a means of communicating
information within a firm. The standard budget copies are
distributed to all management peoplethat provides not only
sufficient understanding and knowledge of the programmes and
guidelines to be followed but also gives knowledge about the
restrictions to be adhered to.
6. Control: Control is essential to make sure that plans and objectives
laid down in the budget are being achieved. Control, when applied
to budgeting, as asystematized effort is to keep the management
informed of whether planned performance is being achieved or not.