FINANCIAL MANAGEMENT

1
.Mr.CharakRay.
ASST.PROFESSOR(FINANCE)
MBA(BHU),ASSOCIATE((III),PGDHI(III)
BCM(BHSE),SENIOR(ST.JA)

2
.Mr.CharakRay.
Money required for Business
activities is Called business
finance
Required for
Long Term
Fixed Assets
Short Term
Working Capital

3
.Mr.CharakRay.
Study of acquiring funds
And
Its effective and careful utilization,
In terms of the overall objectives of the
firm,
And expectations of the providers of funds.

4
.Mr.CharakRay.

5
.Mr.CharakRay.
Primary Aim Of Financial
Management Is To
Maximize Shareholder’s
Wealth

6
.Mr.CharakRay.
Market Price Of The
Company’s Share
Goes Up
Shareholder Gets
Regular Dividend(part
Of Profit)

7
.Mr.CharakRay.
BCM(BHSE),SENIOR(ST.JA) •Availability of sufficient funds at a reasonable
cost when-ever required
•Effective utilization of funds to reduce wastage
•Safety of funds by creating reserves, reinvesting
profits etc
•Sound capital structure that a balance is
maintained between debt and equity capital
Possible by

8
.Mr.CharakRay.
Size as well as the composition of Fixed Assets
Capital budgeting decision involves
large sum of money to be invested in fixed
assets
may reduces the return on investment if fixed
assets are not used properly

9
.Mr.CharakRay.
Financial
Decision
Investment
Decision
Financing
Decision
Dividend
Decision

10
.Mr.CharakRay.
•Involves decision regarding short
term money required for operational
and day-to-day activities called……
•Long term investment in assets
•Called ……………………………………………….
require for..

11
.Mr.CharakRay.
• Decision related to various Sources
Of Finance i.e.
• And relative Proportion Between
them on the basis of
• Return Expected ,
• Cost
• Risk Associated

12
.Mr.CharakRay.
• Profit may either reinvest
in the business for .
Or
• It may ..….
• Manager has to maintain
the…..

13
.Mr.CharakRay.
Decisions relate to the total amount
of funds invested in long term fixed
assets and short working capital.
Includes

14
.Mr.CharakRay.
Investment
Decision
Capital
Budgeting
Working
Capital

15
.Mr.CharakRay.
Funds required for day-to-
day operational activity.
Like…

16
.Mr.CharakRay.

17
.Mr.CharakRay.
Total fund invested in the
Current Assets
Excess of current assets over
current liabilities
Gross Working Capital Current Assets=
Net Working Capital Current Assets= Current Liability-

18
.Mr.CharakRay.
Converted into cash within A period
of one year without reduction in
value
Provide Little Or Low Return
Example Cash At Bank ,Debtors,
stock

19
.Mr.CharakRay.

20
.Mr.CharakRay.

21
.Mr.CharakRay.
Nature Of Business
Operating Efficiency
Credit Allowed
Level Of Competition
Availability Of Raw Material
Seasonal Factors
Scale Of Operations
Inflation
Company Business Cycle
Availability Of Credit
Length Of Production Cycle

22
.Mr.CharakRay.
NATURE OF BUSINESS
Manufacturing raw
material needs to
be converted into
finished goods
Needs More
working capital
No manufacturing,
no distinction
between raw
materials
And finished goods
Needs Less
working capital
Tata steel

23
.Mr.CharakRay.
•Firm capable of utilizing the resources,
efficiently, without wastage of materials
and idle labor can manage with lower
working capital.
Needs Less
working capital

24
.Mr.CharakRay.
Credit Allowed
•Liberal credit policy results in higher amount of debtors,
Increasing the requirement of working capital
•Conservative credit policy results in lower amount of
debtors, decreasing the requirement of working capital
Conservative credit policy
(Low Debts Collection
Period)
Liberal Credit Policy
(Low Debts Collection
Period)
Needs LESS working
capital
Needs MORE
working capital

25
.Mr.CharakRay.
Level Of Competition
• Higher Competition
• Higher Stocks Of Finished Goods ,
Higher Advertisement Cost
• Needs More Working Capital
• Lower Competition
• Lower Stocks Of Finished Goods , Lower
Advertisement Cost
• Needs LESS Working Capital

26
.Mr.CharakRay.
Availability Of Raw Material
RAW materials are available
freely and
Continuously
&
Low Lead Time
(time lag between the
placement of order and
actual receipt of the
materials)
Needs less working
capital

27
.Mr.CharakRay.
Seasonal Factors
Certain seasons
good like
Has huge demand during peak season and
production is carried out through out the
year to accumulate inventories
Needs MORE Working
Capital

28
.Mr.CharakRay.
Scale Of Operations
Firm operating at higher scale
requires higher inventory, high
labor cost
Higher amount of working capital is
required
Firm operating at lower scale
requires lower inventory, low
labor cost
Lower amount of working capital is
required

29
.Mr.CharakRay.
Inflation
High inflation led to high cost
of raw material and labor and
the firm is not able to revise
the selling prices, immediately
Needs MORE
working
capital

30
.Mr.CharakRay.
BCM(BHSE),SENIOR(ST.JA) Company Business Cycle
•During Depression sales as
well as production will be low
•Lower amount of working
capital is required
•In case of a Boom, sales as
well as production are higher
• Higher amount of working
capital is required

31
.Mr.CharakRay.
BCM(BHSE),SENIOR(ST.JA) Availability Of Credit
High credit from suppliers, and
additional finance from bank
lower amount of working capital is
required
Low credit from suppliers, and
additional finance from bank
higher amount of working capital is
required

32
.Mr.CharakRay.
Length Of Production Cycle
Cash
Raw
Material
Work in
Process
Finished
Goods
Accounts
Receivable
•Is the Length Period required to convert
sales, after acquisition of the resources
such as materials, power etc, into cash

33
.Mr.CharakRay.
•Shorter processing cycle. Low time
span between the receipt of raw
material and their conversion into
finished goods
• Lower amount of working capital is
required
•Longer processing cycle high time
span between the receipt of raw material
and their conversion into finished goods
•Higher amount of working capital is
required

34
.Mr.CharakRay.
Refers to investment in long-
term assets.
(More than one year)
Affect the growth,
profitability and risk of the
business in the long run.
Must be financed through
long-term sources of capital

35
.Mr.CharakRay.

36
.Mr.CharakRay.
Effect On Long Term Growth
Returns comes in longer time
Irreversible
Funds Involved Are Large

37
.Mr.CharakRay.
Involves large amount
of funds to acquires…..
Funds Involved Are Large

38
.Mr.CharakRay.
BCM(BHSE),SENIOR(ST.JA) •Decisions once taken are not Reversible
without incurring heavy losses.
•Cancellation of a project is quite Costly
in terms of waste of funds

39
.Mr.CharakRay.
BCM(BHSE),SENIOR(ST.JA) •Returns comes after long time which is
uncertain.
•Difficult task to estimate the future
benefits and costs because of.

40
.Mr.CharakRay.
BCM(BHSE),SENIOR(ST.JA) •The direction of growth depends on quality
of fixed assets.
•If decision goes in the right direction
profitability increases.
•If goes wrong, it is harmful for growth
and profits
Effect On Long Term Growth

41
.Mr.CharakRay.
Expected Return On Investment
Cash Flow Of The Project
Investment Criterion involved
Risk Involved

42
.Mr.CharakRay.
Risk Involved
•Decisions Require A Judgment Of Future Events
Which Are Uncertain.
•Difficult Task To Estimate The Future Benefits
And Costs Because Of.

43
.Mr.CharakRay.
•Projects are to be considered on the basis of the
amount of investment, interest rate, cash flows
and rate of return
• Rank the projects, according to their
profitability by using various capital budgeting
techniques like

44
.Mr.CharakRay.
•Most profitable projects are selected by
evaluating the various projects on the basis
of rate of return.
•
•Project with the maximum return
•Is to be selected
Expected Return On Investment

45
.Mr.CharakRay.
•Cash is likely to generated
when invest in fixed assets
•Company must analysis the
duration in which the cash is
likely to generate

46
.Mr.CharakRay.
Diversification
Nature Of Business
Alternatives Finance
Technology Choice
Scale Of Business
Prospectus Of Growth
Upgrading Of Technique
Collaboration Level

47
.Mr.CharakRay.
•Some organizations SHARE each other’s
facilities
•
•Collaboration reduces the amount of
investment ( Banks share common ATM
machines)
•Needs less fixed assets

48
.Mr.CharakRay.
•In some industries, assets become
Outdated after some time
•Such organisation require higher fixed
capital. example

49
.Mr.CharakRay.
Organisation having Higher Growth plans
requires higher investment in fixed assets.

50
.Mr.CharakRay.
Firm operating at higher scale
requires more machinery, building
to meet big orders
Higher amount of fixed capital is
required
Firm operating at lower scale
requires few equipment,
machinery, plant etc
Lower amount of fixed capital is
required

51
.Mr.CharakRay.
•Capital-intensive organisation requires
higher investment in plant and
machinery
• Relies less on manual labor.
•Higher amount of fixed capital is
required
•Labor-intensive organisation requires
less investment in fixed assets
• Relies more on labor workforce.
•LOWER amount of fixed capital is
required

52
.Mr.CharakRay.
•Companies getting alternatives of fixed
assets does not requires to invest in certain
assets like machinery, land, building.
•Example :- availability of leasing/rental
facilities
•Required Less Funds in fixed assets

53
.Mr.CharakRay.
NATURE OF BUSINESS
Manufacturing raw
material needs to
be converted into
finished goods
Needs More
fixed assets
No manufacturing,
no distinction
between raw
materials
And finished goods
Needs less
fixed assets

54
.Mr.CharakRay.
A firm if chooses to enter
into New Sector/Business
Higher amount of fixed
capital is required

55
.Mr.CharakRay.
• Decision related to various Sources
Of Finance i.e.
• And relative Proportion Between
them on the basis of
• Return Expected ,
• Cost
• Risk Associated

56
.Mr.CharakRay.
Sources
Of Finance
Owners Fund
(Equity)
Borrowed Fund
(Debts)

57
.Mr.CharakRay.
Part Of Owned Capital
Dividend Depends On
Profits
Enjoy Voting Rights
Not Redeemed During The
Life Of Company.
Dividend Is Not Tax
Deductible. Floatation
Costs High
Part Of Loan Capital
Interest is fixed
irrespective of profits
No Voting Rights
Redeemed at the end of
the specified period.
Interest paid is tax
deductible. Floatation
costs low
Type of
capital
Return
Voting
rights
Redemption
Cost

58
.Mr.CharakRay.
•Refers to the mix of different sources of long-term
funds such as
•Equity share , preference share (owners fund /equity) ,
•Long-term loans, debentures (borrowed fund/debts)
Capital Structure
Debt
=
Equity
Debt
=
Equity Debt+
Or

59
.Mr.CharakRay.
Financial risk.
•The risk of default on payment of debt.
•Higher use of debt increases the financial risk of
a business

60
.Mr.CharakRay.

61
.Mr.CharakRay.

62
.Mr.CharakRay.
Interest Paid Is Tax Deductable
Debenture Holder Do Not Have Voting Rights

63
.Mr.CharakRay.
•How are the shareholders of a company
likely to gain with a debt component in the
capital employed? Explain with the help of an
example
or
•What do you mean by trading on equity.

64
.Mr.CharakRay.
Refers to the Increase In Profit of the
equity shareholders due to the Presence Of
Debt by making equity as base.

65
.Mr.CharakRay.
The Return
On Capital
Employed
Stable
Regular
Than The
Rate Of
Interest
>

66
.Mr.CharakRay.
• Total Funds used
• Interest rate on debts
• Tax rate
• Earning before interest and tax
Debt
Situation I
Situation II
Situation III
• Rs. 30 Lakh
• 10% p.a.
• 30%
• Rs. 6 Lakh
Nil
Rs. 10 Lakh
Rs. 20 Lakh

67
.Mr.CharakRay.
Profit Before Interest And
Tax 6,00,000
-1,00,000
5,00,000
-1,50,000
3,50,000
2,00,000
1.75
6,00,000
-2,00,000
4,00,000
-1,20,000
2,80,000
1,00,000
2.8
6,00,000
NIL
6,00,000
-1,80,000
4,20,000
3,00,000
1.4
Less:-Interest(10%)
Profit After Interest
Less:- Tax(30%)
Profit After Tax
No Of Equity Shares
Earning Per Share
Net profit after tax
= No of equity shares

68
.Mr.CharakRay.
Profit Before Interest And
Tax 6,00,000
-1,00,000
5,00,000
-1,50,000
3,50,000
2,00,000
1.75
6,00,000
-2,00,000
4,00,000
-1,20,000
2,80,000
1,00,000
2.8
6,00,000
NIL
6,00,000
-1,80,000
4,20,000
3,00,000
1.4
Less:-Interest(10%)
Profit After Interest
Less:- Tax(30%)
Profit After Tax
No Of Equity Shares
Earning Per Share

69
.Mr.CharakRay.

70
.Mr.CharakRay.
Extent of Control
Return on Investment
Other Companies Capital Structure
Cost of debt:
Situation of Cash Flow
Tax Rate
Stock Market Conditions
Risk Consideration
Interest Coverage Ratio
Floatation Costs

71
.Mr.CharakRay.
•The costs incurs when company makes
a New Issue of either stocks or debentures
• Costs of printing the certificates, paying
the underwriters, government fees etc.
•Issue of equity involves
•flotation cost
•Issue of debenture involves
•flotation cost

72
.Mr.CharakRay.
•Refers to the number of times
earnings of a company covers the
interest responsibility.
• The higher the ratio, higher the
debts can be raised
Profit before interest
=
Interest

73
.Mr.CharakRay.
•Debt Increases the financial risk to
meet Fixed interest payment, and
Repayment obligations.
•If a business risk is Lower, its capacity
to use Debt is higher and vice-versa.

74
.Mr.CharakRay.
•During depression(earning
are low) investors are
cautious and do not want to
take risk.
•They prefer investment in
Debts as the risk is Less
During boom
period(high learning),
equity shares are
more easily sold even
at a higher price.

75
.Mr.CharakRay.
•High corporate tax rate force the
companies to raise funds through debt as
interest on debt is expenditure.
•Taxable profits would be low.

76
.Mr.CharakRay.
•Company has Stable Sales and
regulars Inflow of cash.
•It can Raise Debts so that fixed
interest and repayment can be
made.

77
.Mr.CharakRay.
•Cost of the debt is the fixed interest
charges
•If the rate of interest on debts is higher
debts can be avoided
•And equity can be raised or vice-versa

78
.Mr.CharakRay.
•Debt equity ratios(Capital Structure)
of Other Companies in the
• Same Industry may be used if that
company is
•doing good in that sector

79
.Mr.CharakRay.
•If the
•Can to use trading on equity to increase
its EPS. Must
Issue Debts.

80
.Mr.CharakRay.
•Company wants
•Equity may Reduce The Managements
holding in the company and may cause.
Issue Debts.

81
.Mr.CharakRay.
Cash Flow Position of the Business
Higher Fixed Operating Costs
Other Floatation Costs
Issue of Cost
Control Considerations
Extent of Risk
State of Capital Markets
Factors Affecting Financing
Decision

82
.Mr.CharakRay.
•Company has Stable Sales and
regulars Inflow of cash.
•It can Raise Debts so that fixed
interest and repayment can be
made.

83
.Mr.CharakRay.
•Cost of the debt is the fixed interest
charges
•If the rate of interest on debts is higher
debts can be avoided
•And equity can be raised or vice-versa

84
.Mr.CharakRay.
•The costs incurs when company makes
a New Issue of either stocks or debentures
• Costs of printing the certificates, paying
the underwriters, government fees etc.
•Issue of equity involves
•flotation cost
•Issue of debenture involves
•flotation cost

85
.Mr.CharakRay.
•Company wants
•Equity may Reduce The Managements
holding in the company and may cause.
•
Issue Debts.

86
.Mr.CharakRay.
•Debt Increases the financial risk to
meet Fixed interest payment, and
Repayment obligations.
•If a business risk is Lower, its capacity
to use Debt is higher and vice-versa.

87
.Mr.CharakRay.
•During depression(earning
are low) investors are
cautious and do not want to
take risk.
•They prefer investment in
Debts as the risk is Less
During boom
period(high learning),
equity shares are
more easily sold even
at a higher price.

88
.Mr.CharakRay.
• Portion of profit which is Distributed to
shareholders.

89
.Mr.CharakRay.
How much of the profit earned by company (after
paying tax) is to be Distributed to the
shareholders
How much should be Retained in the business for
meeting the Future Investment requirements.
Profits
Dividends Reserves

90
.Mr.CharakRay.

91
.Mr.CharakRay.
Earning and stability of earning
Position of cash flow
Opportunity of growth
Contractual constraints
Shareholder preference
Taxation policy
Stock market reaction
Access to capital market
Legal constraints

92
.Mr.CharakRay.
Legal Constraints
•Certain provisions of the
•Company’s act 1956,
• SEBI guidelines,
•Stock exchange
•On Giving dividend.
•These must be consider while
declaring the dividends

93
.Mr.CharakRay.
Access to capital market/Ability to borrow
•Well established and large firms have
better access to the capital market
•Can pay higher dividend
•New and small companies find difficult to
borrow funds from the external sources
•May pay less dividend

94
.Mr.CharakRay.
Stock Market Reaction
Declaration of dividend
As a good news and Stock Prices React
Positively
Or may Negatively Respond to it
May be consider while paying the
dividend.

95
.Mr.CharakRay.
If tax on dividend is higher it would be
better to
Pay Less Dividends.
Taxation Policy

96
.Mr.CharakRay.
BCM(BHSE),SENIOR(ST.JA) Shareholder Preference
•Large Investors (shareholder)
wants growth in the companies may
not prefer dividend for some time.
•Small investor ( shareholders)
may prefer regular dividend as
regular Income from their
investments.

97
.Mr.CharakRay.
Contractual Constraints
•While giving loans to a company
,the lender may impose
•Restrictions on the payment of
dividends for certain years.
•And as per terms company does
Not Pay the dividends for that
period.

98
.Mr.CharakRay.
Opportunity Of Growth
•Companies having good
•Keep more money out of their.
• So as to make the required
investment may pay

99
.Mr.CharakRay.
•Dividends involve an.
• A company may be Profitable but leads
to Outflow of cash(capital expenditure)
•Company may Not Able to pay dividend
in spite of profits.
Position Of Cash Flow

10
0
.Mr.CharakRay.
•Companies having sufficient
• Out of current and previous years can
only pay higher dividends
Earning

10
1
.Mr.CharakRay.
•Companies having
•May pay More Dividend than those having an .
Stability Of Earning

10
2
.Mr.CharakRay.
Process of estimating the
fund requirement
And specifying the sources of
funds
For a given period

10
3
.Mr.CharakRay.
Estimation of the funds required for
different purposes such as for the
purchase of long-term assets or to meet
day to-day expenses
Put the best possible use of financial
resources so that funds are not left
idle

10
4
.Mr.CharakRay.
Estimating Of Optimum Funds
Setting Up The Most Appropriate
Capital Structure
Link Present With The Future.
Avoiding Business Shocks And
Surprises.
Finance In Right Projects

10
5
.Mr.CharakRay.
Proposes how the funds are to be allocated
for various projects
by comparing their
advantages and
risks associated
Finance In Right Projects

10
6
.Mr.CharakRay.
Anticipating the financial requirement to avoid
Business shocks(reduction in sales and profits)
and helps the company in preparing for the
future
Avoiding Business Shocks And Surprises

10
7
.Mr.CharakRay.
Link Present With The Future
Anticipates the future sales and
growth plans of the company

10
8
.Mr.CharakRay.
Setting Up The Most Appropriate Capital Structure
Preparing most appropriate capital structure
by mixing the right combination of
Debts
equity

10
9
.Mr.CharakRay.
Estimating Of Optimum Funds
Estimates the
exact requirement of funds
to avoid wastage of funds

11
0
.Mr.CharakRay.
Amount of long term and short term financing.
Composition of Current Assets
Items in the Profit and Loss Account
Division of long term financing into debt, equity
Size as well as the composition of Fixed Assets

11
1
.Mr.CharakRay.
Amount of long term and short term financing.
Short term and long term sources
affects the liquidity and profitability of the
business which may affect profit and loss
account.

11
2
.Mr.CharakRay.
Composition of Current Assets
Working capital decisions about
credit policy,
inventory management
affects the profitability and liquidity of the
business

11
3
.Mr.CharakRay.
Items in the Profit and Loss Account
Higher interest expense and higher payment
of dividends
affect the profit and loss account of company
which is taken under financial decision

11
4
.Mr.CharakRay.
Division of long term financing into debt, equity
Debt and equity increased or decrease
the risk reward return which
may affect its balance sheet is taken under
financial decision

FINANCIAL MANAGEMENT

Recomendados

Recomendados

Más contenido relacionado

Similar a FINANCIAL MANAGEMENT

Similar a FINANCIAL MANAGEMENT (12)

Más de CHARAK RAY

Más de CHARAK RAY (20)

Último

Último (20)

FINANCIAL MANAGEMENT