CONCEPT AND
DEFINATION
During the life
of a business enterprise there are financial events that receive considerable
attention. By concentrating on discernible financial events discussion on
finance of an enterprise have tended to look at the raising development of
finance. Funds required for running the business are raised through a
combination of direct revenue from sales, loans from banks etc. funds raised as
above are deployed among competing uses within the enterprises activities.
Financial management can
be looked upon as the study of relation ship between the raising of finance
& development of finance.
Financial management is
the operational activity of a business that is responsible for obtaining &
effectively utilizing the funds necessary for efficient operations.
IMPORTANCE OF FINANCE MANAGEMENT
Successful Promotion Depends an Financial Administration :
Important
reasons of failure of business promotion are a defective finance plan. If the
plan adopted fails to provide fixed and working capital, the business can’t be
carried out successfully selection thinking over factors like profitability,
risk and control.
Smooth Running of Enterprise :
Finance is required for promotion day to day expenses, expansion,
administration, working capital etc. Procurement and effective utilization of
funds ensures smooth running of enterprise.
Measure of Performance :
The performance of the firm can be measured by financial results i.e.
by its size of earning risk and profitability determines the value of firm.
Determinants of Business Success :
Finance manager play a very important role in the success of business
by advising the top management the solutions of various financial problems as
expert. Finance department provides facts and figures to top management, which
make it easy for top executive to take decisions.
SOURCES OF FINANCE
In order to start an industrial concern i.e. to produce and to sell,
there must be adequate finance for purchasing fixed assets. (Building,
machinery etc.), raw materials and other
supplies. There should also be sufficient. Finance to meet day to day expenditures of
the enterprise.
The
sources of finance may be categorized as follows -
Loans : Money
can be borrowed from friends, money lending institutions, banks.
Shares : Funds are collected by issuing shares to public.
Debentures : A
debenture holder is a creditor only and has no any control over the affairs of
the company. A fixed rate interest is paid on debenture. Interest is paid
whether the company runs in profit or loss. A debenture holder gets his money
back after the stated number of years.
Taking in Partners :
Capital
may be raised by adding partners in the business who are ready to invest in the
firm.
Sale & Lease Back :
For getting funds, a company may be sell some of its property to an
investment company with a right to lease back at an agreed rent.
Profit Plowback :
Company uses their profit for finance.
Special Institutions :
Finance may be obtained by borrowing from an-
Insurance Company
LIC & Insurance companies
Investment Company SFC
(State Financial Corporation)
Industrial Development Corp. IFCI
(Industrial Finance Corporation,
India)
IDBI (Industrial Development bank of India)
ICICI (Industrial credit &
Investment
Corporation of India)
CHARACTERISTICS DIFFERENCE
OF
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Debentures
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Shares
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1) A debentureholder is a creditor only and has
no control over the affairs of the company.
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1) A share holder is an owner of the company.
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2) A fixed rate interest is paid on debentures.
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2) Dividend is paid on shares.
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3) Interest is paid whether the company runs in
profit or loss.
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3) It has upon the type of shares whether the
annual dividend is paid or not.
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4) A debentureholder gets his money.
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4) Money of the share holder is not refunded to
him.
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FINANCIAL PLANNING
A financial plan of a
corporation has two fold aspects: It refers not to the capital structure of the
corporation, but also to the financial policies which the corporation has
adopted or intends to adopt.
Financial planning means
deciding in advance, the financial activities to be carried but to achieve the
organizational objective. The basic objective of the firms is maximization of
profit with minimizing efforts.
Objective Of Financial Planning :
1) Effective Utilization Of
Capital :
Proper financial planning ensures effective utilization of capital.
2) Economy & Co –
Ordination In Operative Function :
The main purpose of financial planning is to minimize the waste in the
process of complex operative process. Technical development, higher rates, increased
rate of interest & competition
forces the management to co-ordinate various operative function.
3) Success Of Entire Firm :
Success or failure of entire firm depends upon sound of financial plan.
4) Rapid Expansion Of
Public Sector :
It has
resulted in intensified financial planning for private sector.
5) Optimum Capital
Structure Of Minimize Cost :
Financial planning decides about optimum capital structure of minimum
cost & reduced risk. For this, financial planner analyses the different
sources of financing in the light of out & risk.
6) Unity in Action :
Financial planning guides action. Financial planning determines
policies, objectives & procedures which bring unity of action.
Financial Planning &
Budgets :
Capital expenditure budget-
This budget reveals future investment to be
made in building, equipments & physical assets of the rogations. It
involves acquiring assets of long term. Such decisions can’t be changed easily.
Cash budget- It involves expenses, revenues & new capital expenditures. It
involves reveals cash inflow & cash outflow. The objective of cash flow is
to plan cash in such a way that the company always maintains sufficient cash
balance to meet its needs & uses the idle cash in the most profitable
manner.
Other budget
1) Balance sheet
FINANCIAL STATEMENT
A firm communicates financial information to the users through
financial statement & report. A financial statement contain summarized
information of the firms financial affairs, organized systematically.
Functions
of Balance Sheet :
1)
It give summary of the
firm’s resources & obligations.
2)
It is measure of the firm’s
liquidity.
3)
It is measure of firm’s
solvency.
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Balance sheet of X Y Z
company as on 31st Dec. 1998
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Equity &
liabilities: Rs
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Assets: Rs
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Share capital
(10,000 shares, 100Rs.
For each share.) 1,000
Reserves & surplus 2,000
Long term loans:
Debentures
200
Financial inst. 200
Creditors:
For goods 30
For expenses 25
Customer advances 40
Provision
Dividend 45
Provision for taxation 140
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Fixed assets:
Land, building, plant, 2,200
Machinery.
Less deprecation -200
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Net block:- 2,000
Investments:
Current Assets:
Interest receivable 10
Stock
1,350
Debtors 100
Cash & Bank balance 100
Loans & Advances 50
Others Assets 80
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Total Liabilities &
Equity 3,690
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Total Assets 3,690
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