INTRODUCTION TO BUSINESS

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.
The planning, directing, monitoring, organizing and controlling of the monetary resources of an
organization.

Financial management is mainly concerned with proper management of funds. The financial manager
must see that funds are procured in such a manner that risk, cost and control considerations are properly
balanced and there is optimum utilization of funds

Scope/Elements

1. Investment decisions includes investment in fixed assets (called capital budgeting). Investments
in current assets are also a part of investment decisions called as working capital decisions.
2. Financial decisions - They relate to the raising of finance from various resources which will
depend upon decision on type of source, period of financing, cost of financing and the returns
thereby.
3. Dividend decision - The finance manager has to take decision with regards to the net profit
distribution. Net profits are generally divided into two:
a. Dividend for shareholders- Dividend and the rate of it has to be decided.
b. 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

The financial management is generally concerned with procurement, allocation and control of financial
resources of a business. The objectives can be-

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

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.

Page 1 of 5
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-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. 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 decisions have to be made by the finance manager. This can
be done in two ways:
a. Dividend declaration - It includes identifying the rate of dividends and other benefits like
bonus.
b. 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, maintenance 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. This can be done through many techniques like ratio
analysis, financial forecasting, cost and profit control, etc.

Financial Controls

In order to ensure that business meets its objectives, decisions have to be made on;

i. Are assets being used efficiently

ii. Are the business assets secure
iii. Does management act in the best interest of shareholders and according to business rules and
mission

Page 2 of 5
Sources of Finance

Capital required for a business can be classified under two main categories;

Fixed capital
Working capital

Every business needs funds for two purposes

For its establishment

To carry out its day-to-day operations

Depending on the date of maturity, sources of finance can be clubbed into the following:

Long-term sources of finance: Long-term financing can be raised from the following sources:

Share capital or equity share

Preference shares
Retained earnings
Debentures/Bonds of different types
Loans from financial institutions
Loan from state financial corporation
Loans from commercial banks
Venture capital funding
International (e.g. International Monetary Funds (IMF), World Bank Organization)

Medium-term sources of finance: Medium-term financing can be raised from the following sources:

Preference shares
Debentures/bonds
Public deposits/fixed deposits for duration of three years
Commercial banks
Financial institutions
State financial corporations
Lease financing / hire purchase financing

Short term sources of finance: Short-term financing can be raised from the following sources:

Trade credit
Commercial banks
Fixed deposits for a period of 1 year or less
Advances received from customers
Various short-term provisions

Page 3 of 5
Accounting Terms

Some accounting terms are as follow;

Revenue - total income before expenses.

Net Income (profit) - money remaining after all expenses and taxes have been paid
Balance Sheet - summary of a company's financial status, including assets, liabilities, and equity
Accounting Equation - assets = liabilities + equity
Asset - property with a cash value that is owned by a business or individual
Liability - money owed to creditors, vendors, etc
Equity - money owed to the owner or owners of a company, also known as "owner's equity"
Cash Flow - a summary of cash received and disbursed showing the beginning and ending
amounts
Depreciation - recognizing the decrease in the value of an asset due to age and use
Dividends - amounts paid to shareholders out of current or retained earnings
Goodwill - an intangible asset reflecting the value of an entity in excess of its tangible assets
Loan - money borrowed from a lender and usually repaid with interest
Budgeting - the process of assigning forecasted income and expenses to accounts, which amounts
will be compared to actual income and expense for analysis of variances
Auditors - third party accountants who review an entitys financial statements for accuracy and
provide a statement to that effect

Importance of Financial Statements

A company's financial statement is used to show a company's performance over a certain period of time,
generally every fiscal quarter. The financial statement really consists of three different statements:
balance sheets, cash flow statements and income statements.

By being able to read a financial statement, you can determine where a company has made or lost money,
where the money went and how the company stands financially. The financial statement gives
shareholders an accounting of how their investment is performing.

Components of a Financial Statement

Balance Sheets

The balance sheets represent the assets, liabilities and the net worth or shareholder equity of the company.
Assets make up all the property the company owns, including bank accounts, real estate, machinery etc.
An asset can also be intangible such as a trademark or patent.

Liabilities consist of the money the company owes others. This can include leases on real estate, loans,
accounts payable to suppliers of material, tax liabilities or obligations to deliver product. Liabilities also
include employee payrolls and money borrowed from banks.

Shareholder equity represents the company's net worth if it were liquidated and what each shareholder
would receive after paying the creditors of the company.

Page 4 of 5
Cash Flow Statements

Cash flow statements are the reports on the inflow and outflow of the company's money. The cash flow
statement is divided into financing activities, operating activities and investment activities. In
combination, these three parts show the change in capital position the company had over a period of time.

Income Statements

Income statements show how much revenue the company took in over a specified time period and how
much money was spent to get that revenue. The income statement shows the company's net earnings or
losses on the bottom line and begins with all the cash the company took in at the top, and goes through all
the expenses it took to make that money with the net figure on the bottom.

Knowing how to read a financial statement gives an investor or analyst a clear picture of the financial
position of a business. Nevertheless, past performance does not generally guarantee future results; keep
this in mind before investing in any company.

Page 5 of 5