• Financial Management -

Meaning, Objectives and

Functions
 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/ Financial Decision
• 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, time 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
• 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.
• 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 a
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-
– Issue of shares and debentures
– Loans to be taken from banks and financial
institutions
– 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.
• 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.
• Disposal of surplus: The net profits decision have to be made
by the finance manager. This can be done in two ways:
– Dividend declaration - It includes identifying the rate of
dividends and other benefits like bonus.
– Retained profits - The volume has to be decided which will
depend upon expansional, innovational, diversification
plans of the company.
• 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, maintenance of enough stock, purchase of
raw materials, etc.
• Financial controls: The finance manager has not only to plan,
procure and utilize the funds but he also has to exercise control
over finances. This can be done through many techniques like
ratio analysis, financial forecasting, cost and profit control, etc.
 Profit and Loss Statement (P&L)
• The profit and loss (P&L) statement is a
financial statement that summarizes the
revenues, costs and expenses incurred during a
specified period, usually a fiscal quarter or
year. The P&L statement is synonymous with
the income statement. These records provide
information about a company's ability or
inability to generate profit by increasing
revenue, reducing costs or both. The P&L is
also known as a statement
of earnings, statement of operations,
or statement of income.
• The profit & loss (P&L) statement is one of
the three primary financial statements used to
assess a company’s performance and financial
position (the two others being the balance
sheet and the cash flow statement).
• The basic equation on which a P&L is based
is:
• Revenues – Expenses = Net Income
Let's assume grocery store XYZ sold $100,000 worth of food for the year. It would record these sales as revenue on the very top of its income statement (as shown below).
• BALANCE SHEET: One of the important elements
of financial statement analysis is the balance
sheet. The balance sheet shows your assets or
what you own, your liabilities or what you
owe, and your owner’s equity, which is yours
and your partners' investment in the small
business.
• First, you'll need to determine the financial
statements that you or your financial professional
will generate for your business. These financial
statements will help you determine your firm's
financial position at a point in time and over a
period of time, as well as your cash position.
• Below is a guide for preparing a balance sheet.
• Assets
• Line 1 is the firm’s cash account. Business firms need to
keep cash on hand for emergencies and to take advantage of
any bargains they might find in the marketplace.
• Line 2, accounts receivable, represents what your credit
customers owe you if your firm extends credit.
• The value of the firm’s inventory is stated on Line 3.
Inventory is simply the products the firm has for sale.
• The last asset on the sample balance sheet is fixed assets.
This asset is stated on Line 4. Fixed assets include any
equipment and vehicles you own and any land and buildings
you own.
• The value of the asset accounts is totaled and stated on Line
5. Total assets are the value of everything your firm owns.
• Liabilities and Equity
• Line 6 lists accounts payable, which are the short-term
credit accounts that you owe your suppliers.
• Line 7 shows any long-term bank loans or loans from
other sources that you’ve taken out with a maturity of
more than a year.
• Line 8 shows the amount of owner’s capital that has
been invested in the firm. This is the money that the
owner and any other investors have put in the firm.
• The last line, line 9, totals the number of liabilities and
equity. This is the total amount the firm owes plus
the owners’ investment in the firm. The total of the
liabilities and equity must equal total assets as the firm
can’t own more than it owes.
XYZ Company Balance Sheet
December 31,2009
Assets
1.Cash $ 40,000
2.Accts Receivable 200,000
3.Inventory 180,000
4.Fixed Assets 400,000
5.Total Assets 820,000
Liabilities and Equity
6.Accts Payable $ 180,000
7.LT Bank Loans 240,000
8.Owner's Capital 400,000
820,000
9.Total Liab & Equity
 Cash Flow Statement

• Cash flow statement is

a financial statement that provides aggregate data
regarding all cash inflows a company receives from
its ongoing operations and external investment
sources, as well as all cash outflows that pay for
business activities and investments during a given
period.
• Cash flow statement is a critical tool for companies.
Even profitable companies can fail to adequately
manage cash flow. The cash flow statement is
broken down into three different business activities:
operations, investing and financing.
• BREAK-EVEN ANALYSIS
Break-even analysis is a business tool widely used
across all industries to evaluate business
performance in terms of costs and the number of
units that need to be sold in order to cover the cost
or make a profit.
• Simply put, break-even point can be determined
by calculating the point at which revenue
received equals the total costs associated with
the production of the goods or services.
• Break-even Point = Fixed Costs/ (Unit Selling Price
– Variable Costs)
• Time Value of Money
• TVM refers to that amount of money you have in hand
at the moment is worth more than the same amount you
‘may’ get in future. One reason for this is inflation and
another is possible earning capcity.
• Present Value and Future Value
• Present Value is the same as Time Value as elaborated
above. It is the money you have currently that is equal to
a future one-time disbursal or several part-payments –
discounted by a suitable rate of interest.
Future Value is the sum of money that any saving
scheme with a compounded interest will build to by a
pre-decided future rate. It applies to both lumpsum as
well as recurring investments like SIP.
• F.V.= P.V.(1+r/100)n
Where,
FV is Future value of money,
PV is Present value of money,
r is the interest rate,
n is the number of years in the tenure.
• For instance, if you invest Rs. 1 lakh for 5 years
at 10% interest, the future value of this one lakh
will be Rs. 161,051 as per the formula. This
formula can help you to analyze different
investments over different time periods,
enabling you to make optimal and informed
financial decisions.
• Capital Budgeting
• Capital budgeting (or investment appraisal) is the process of
determining the viability to long-term investments on purchase or
replacement of property plant and equipment, new product or other
projects.
• Capital budgeting consists of various techniques used by managers
such as:
• Payback Period
• Discounted Payback Period
• Net Present Value
• Accounting Rate of Return
• Internal Rate of Return
• Profitability Index
• All of the above techniques are based on the comparison of cash
inflows and outflow of a project however they are substantially
different in their approach.
• A brief introduction to the above methods is given below:
• Payback Period measures the time in which the initial cash
flow is returned by the project. Cash flows are not
discounted. Lower payback period is preferred.
• Net Present Value (NPV) is equal to initial cash outflow less
sum of discounted cash inflows. Higher NPV is preferred and
an investment is only viable if its NPV is positive.
• Accounting Rate of Return (ARR) is the profitability of the
project calculated as projected total net income divided by
initial or average investment. Net income is not discounted.
• Internal Rate of Return (IRR) is the discount rate at which
net present value of the project becomes zero. Higher IRR
should be preferred.
• Profitability Index (PI) is the ratio of present value of future
cash flows of a project to initial investment required for the
project.
 MATERIAL MANAGEMENT

Definition
It is concerned with planning, organizing and
controlling the flow of materials from their initial
purchase through internal operations to the service
point through distribution.
OR

Material management is a scientific technique,

concerned with Planning, Organizing &Control of
flow of materials, from their initial purchase to
destination.
AIM OF MATERIAL MANAGEMENT

To get
1. The Right quality
2. Right quantity of supplies
3. At the Right time
4. At the Right place
5. For the Right cost
PURPOSE OF MATERIAL
MANAGEMENT
•To gain economy in purchasing
•To satisfy the demand during period of
replenishment
•To carry reserve stock to avoid stock out
•To stabilize fluctuations in consumption
•To provide reasonable level of client services
 Objective of material management
Primary
•Right price Secondary
•High turnover •Forecasting
•Low procurement •Inter-departmental
•& storage cost harmony
•Continuity of supply •Product improvement
•Consistency in quality •Standardization
•Good supplier relations •Make or buy decision
•Development of •New materials &
personnel products
•Good information •Favorable reciprocal
system relationships
 Four basic needs of Material management
1. To have adequate materials on hand when needed.
2. To pay the lowest possible prices, consistent with
quality and value requirement for purchased
materials.
3. To minimize the inventory investment.
4. To operate efficiently and effectively.
Basic principles of material management
5. Effective management & supervision
2. Sound purchasing methods
3.Skillful negotiations
4.Effective purchase system
5.Should be simple .6.Must not increase other costs
7.Simple inventory control programme
 Inventory Management
Inventory management refers to the process of ordering,
storing and using a company's inventory: raw materials,
components and finished products, efficiently.
Appropriate inventory management strategies vary
depending on the industry. An oil depot is able to store
large amounts of inventory for extended periods of time,
allowing it to wait for demand to pick up. While a food
industry or the medicines have to consume during a proper
given time period.
Inventory control
It means stocking adequate number and kind of stores, so
that the materials are available whenever required and
wherever required. Scientific inventory control results in
optimal balance
• The Economic Order Quantity (EOQ)
model is used in inventory management by
calculating the number of units a company
should add to its inventory with each batch in
order to reduce the total costs of its inventory.
The costs of its inventory include holding and
setup costs.
• The EOQ model seeks to ensure that the right
amount of inventory is ordered per batch so a
company does not have to make orders too
frequently and there is not an excess of
inventory sitting on hand.
 Just-in-Time
Just-in-time (JIT) manufacturing originated in Japan in the
1960s and 1970s; Toyota Motor Corp. (TM). The method
allows companies to save significant amounts of money
and reduce waste by keeping only the inventory they need
to produce and sell products. This approach reduces storage
and insurance costs, as well as the cost of liquidating or
discarding excess inventory.
JIT inventory management can be risky. If demand
unexpectedly spikes, the manufacturer may not be able to
source the inventory it needs to meet that demand,
damaging its reputation with customers and driving
business towards competitors. Even the smallest delays can
be problematic; if a key input does not arrive "just in time.
• Materials Requirements Planning (MRP)
• Materials requirements planning (MRP) is one
of the first software-based integrated
information systems designed to
improve productivity for businesses. A
materials requirements planning information
system is a sales forecast-based system used
to schedule raw material deliveries and
quantities, given assumptions of machine and
labor units required to fulfill a sales forecast.
• Types of Data Considered by Materials Requirements
Planning
• The final product being created. This is sometimes called
independent demand, or Level "0" on BOM.
• How much is required at a time.
• When the quantities are required to meet demand.
• Shelf life of stored materials.
• Inventory status records of net materials available for use
already in stock (on hand) and materials on order from
suppliers.
• Bills of materials: Details of the materials, components and sub-
assemblies required to make each product.
• Planning data: This includes all the restraints and directions to
produce such items as: routing, labor and machine standards,
quality and testing standards.
• ERP (Enterprise Resource Planning) is an
integrated, real-time, cross-functional enterprise
application, an enterprise-wide transaction
framework that supports all the internal business
processes of a company.
• It supports all core business processes such as
sales/ purchase order processing, inventory
management and control, production and
distribution planning, and finance.
• Why ERP?
• Business integration and automated data
update
• Linkage between all core business processes
and easy flow of integration
• Flexibility in business operations.
• Better analysis and planning capabilities
• Critical decision-making
• Competitive advantage
• Use of latest technologies
• Scope of ERP
Finance: Financial accounting, Managerial accounting,
treasury management, asset management, budget control,
costing, and enterprise control.
Logistics: Production planning, material management,
plant maintenance, project management, events
management, etc.
Human resource: Personnel management, training and
development, etc.
Supply Chain: Inventory control, purchase and order
control, supplier scheduling, planning, etc.
Work flow: Integrate the entire organization with the
flexible assignment of tasks and responsibility to
locations, position, jobs, etc.
 CONCEPTUAL MODEL OF SUPPLY
CHAIN MANAGEMENT
Supply chain acts as a connecting chain Of
materials from the suppliers S to the
manufacturer to the distributor to the retailer R to
the ultimate customers. In a supply chain the flow
of demand information is in a direction opposite
to the flow of materials .Thus, the information
flow on demand is from the customer to the
retailer to the distributor to the manufacturer to
the supplier .It may be noted that the supply chain
is not a linear chain but takes the form of a
network.
 Supply Chain Management

Supply Chain
• A supply chain is a network of facilities and
distribution options that performs the functions
of procurement of materials, transformation of
these materials into intermediate and finished
products, and the distribution of these finished
products to customers – Ganeshan and
Harrison.
 …Supply Chain Management
• The systematic, strategic coordination of the
traditional business functions and the tactics
across theses business functions within a
particular company and across businesses
within the supply chain, for the purposes of
improving the long-term performance of
individual companies and the supply chain as a
whole – Mentzer, Dewitt, et al.
 It consists of a network of facilities and
distribution options that perform the functions of
procurement of materials, transformation of these
materials into intermediate and finished products,
and the distribution of these finished products to
customers in the right time and of the right quantity
and quality .
 Strategic Advantages of Supply Chain
• Supply chain management facilitates supply, storage,
and movement of materials, information, personnel,
equipment, and finished goods within the organization
and between its environment.
• Goal of supply chain management is to integrate the
entire process of satisfying the customer’s needs all
along the supply chain.
• Supply chain costs often represent 50% or more of total
operating costs, thus the firms that have implemented
supply chain management
– Have 45% supply chain cost advantage
– 50% lower inventory
– 17% faster delivery of final product and
– Larger market shares and higher customer loyalty 44
 Logistics
• Planning and controlling efficient, effective
flows of goods, services, and information from
one point to another.
Logistics vs SCM
• Logistics refers to activities that occur within the
boundaries of a single organization and supply
chains refer to networks of companies that work
together and coordinate their actions to deliver a
product to market.
• SCM acknowledges all of traditional logistics
and also includes activities such as marketing,
new product development, finance, and customer
service. 45
 Business Process Reengineering
What is reengineering?
“Reengineering is the fundamental rethinking and
radical redesign of business processes to achieve
dramatic improvements in measures of performance
such as cost, quality, service and speed”.
THUS Business Process Reengineering (BPR)
advocates that enterprises go back to the basics and
reexamine their vary roots. It doesn’t believe in small
improvements. Rather it aims at total reinvention.
BPR focuses on processes and not on tasks, jobs or
people.
companies are on the lookout for new solutions for
their business problems through Business Process
Reengineering (BPR). The recent examples,
“Wal-Mart reduces restocking time from six weeks
to thirty-six hours.”
Process for BPR
Activity #1: Prepare for Reengineering:
“If you fail to plan, you plan to fail”. Planning and
Preparation are vital factors for any activity or
event to be successful, and reengineering is no
exception. Before attempting reengineering, the
question ‘Is BPR necessary?’ should be asked?
47
Activity #2: Map and Analyze As-Is Process :
Before the reengineering team can proceed to
redesign the process, they should understand the
existing process.
Activity #3: Design To-Be process . The objective
of this phase is to produce one or more
alternatives to the current situation, which satisfy
the strategic goals of the enterprise.
Activity #4:Implement Reengineered Process: The
implementation stage is where reengineering
efforts meet the most resistance and hence it is by
far the most difficult one.
Activity #5: Improve Process Continuously: A
process cannot be reengineered overnight.
very vital part in the success of every
reengineering effort lies in improving the
reengineered process continuously. Two things
have to be monitored – the progress of action
and the results.
ALL THE BEST FOR MID
TERM II