FINANCIAL MANAGEMENT :1.

) Introduction

of Working Capital Management

Working capital management is the device of finance. It is related to manage of current assets and current liabilities. After learning working capital management, commerce students can use this tool for fund flow analysis. Working capital is very significant for paying day to day expenses and long term liabilities. Meaning and Concept of Working Capital and its management Working capital is that part of companys capital which is used for purchasing raw material and involve in sundry debtors. We all know that current assets are very important for proper working of fixed assets. Suppose, if you have invested your money to purchase machines of company and if you have not any more money to buy raw material, then your machinery will no use for any production without raw material. From this example, you can understand that working capital is very useful for operating any business organization. We can also take one more liquid item of current assets that is cash. If you have not cash in hand, then you can not pay for different expenses of company, and at that time, your many business works may delay for not paying certain expenses. If we define working capital in very simple form, then we can say that working capital is the excess of current assets over current liabilities. Types of Working Capital 1. Gross working capital Total or gross working capital is that working capital which is used for all the current assets. Total value of current assets will equal to gross working capital.

2. Net Working Capital Net working capital is the excess of current assets over current liabilities. Net Working Capital = Total Current Assets Total Current Liabilities This amount shows that if we deduct total current liabilities from total current assets, then balance amount can be used for repayment of long term debts at any time.

3. Permanent Working Capital Permanent working capital is that amount of capital which must be in cash or current assets for continuing the activities of business.

4. Temporary Working Capital Sometime, it may possible that we have to pay fixed liabilities, at that time we need working capital which is more than permanent working capital, then this excess amount will be temporary working capital. In normal working of business, we dont need such capital. In working capital management, we analyze following three points Ist Point What is the need for working capital? After study the nature of production, we can estimate the need for working capital. If company produces products at large scale and continues producing goods, then company needs high amount of working capital. 2nd Point What is optimum level of Working capital in business? Have you achieved the optimum level of working capital which has invested in current assets? Because high amount of working capital will decrease the return on investment and low amount of working capital will increase the risk of business. So, it is very important decision to get optimum level of working capital where both profitability and risk will be balanced. For achieving optimum level of working capital, finance manager should also study the factors which affects the requirement of working capital and different elements of current assets. If he will manage cash, debtor and inventory, then working capital will automatically optimize. 3rd Point What are main Working capital policies of businesses? Policies are the guidelines which are helpful to direct business. Finance manager can also make working capital policies. 1st Working capital policy Liquidity policy Under this policy, finance manager will increase the amount of liquidity for reducing the risk of business. If business has high volume of cash and bank balance, then business can easily pays his dues at maturity. But finance manger should not forget that the excess cash will not produce and earning and return on investment will decrease. So liquidity policy should be optimized. 2nd Working Capital Policy

Profitability policy Under this policy, finance manger will keep low amount of cash in business and try to invest maximum amount of cash and bank balance. It will sure that profit of business will increase due to increasing of investment in proper way but risk of business will also increase because liquidity of business will decrease and it can create bankruptcy position of business. So, profitability policy should make after seeing liquidity policy and after this both policies will helpful for proper management of working capita

Q2) Definition of Financial Planning

Financial Planning is the process of estimating the capital required and determining its competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise.
Objectives of Financial Planning

Financial Planning has got many objectives to look forward to: a. Determining capital requirements- This will depend upon factors like cost of current and fixed assets, promotional expenses and long- range planning. Capital requirements have to be looked with both aspects: short- term and long- term requirements. b. Determining capital structure- The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required in the business. This includes decisions of debt- equity ratio- both short-term and long- term. c. Framing financial policies with regards to cash control, lending, borrowings, etc. d. A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner at least cost in order to get maximum returns on investment.
Importance of Financial Planning

Financial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of a concern. This ensures effective and adequate financial and investment policies. The importance can be outlined as1. Adequate funds have to be ensured. 2. Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained. 3. Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning. 4. Financial Planning helps in making growth and expansion programmes which helps in long-run survival of the company.

5. Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds. 6. Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the company. This helps in ensuring stability an d profitability in concern

Financial Planning Process

Financial planning is an important process for everyone for the present as well as the future. While most people spend o satisfy their immediate needs, they would also like to save and invest to secure their future needs and emergencies. Some of the needs of people at different stages of life are Protection against premature death Retirement Planning Protection from disability and ill health Education and marriage of children Wealth creation Wealth preservation While doing financial planning for a client, it is important for a professional to first create a financial and risk profile of the customer. Based on that, the professional can develop different options of investments for the client as per his financial capacity and risk appetite along with expected return on investment.

Steps in financial planning process

The financial planning process involves the following steps 1. 2. 3. 4. 5. 6. Conducting need analysis Evaluating existing resources Conducting risk assessment Developing a financial plan Implementing the financial plan Monitoring the financial plan

Let's look at these steps one by one. 1. Conducting need analysis: This step involves o o o Identifying needs of protection, retirement, health, wealth creation, and preservation Quantifying these needs Arriving at the time frame

In this step, analyzing the macro and socio economic trends is called for. Growth of the economy & progress of society are essential for all round development of the individual. Other concerns include inflation, longevity and after retirement spans to name a few.

Some of the common goals of investors include: o o o Education and marriage of children Down payment for a house Retirement

Before investing, investors need to answer the following questions: What are their investment goals? Do they expect short term or long term benefits? What is the time horizon of their investment - 3 years, 5 years, 10 years or more? How much money do they have to invest and what are their return expectations? Do they have any short term financial needs, for example a housing loan, whereby they may not be able to invest as much as they would like to? o Should they invest in stocks, bonds, mutual funds or pension funds? 2. Evaluating existing resources: o o o o Existing resources of the client are evaluated as follows o o Cash flows such as Income & Expenses Net worth such as Assets & Liabilities

The financial planner also needs to understand and quantify the present and future financial flows of the customer. This helps in quantifying the surpluses available from time to time. A financial balance sheet of the customer also needs to be drawn to arrive at their net worth. The planner should be able to understand various classes of assets and their correlation with each other. 3. Conducting risk assessment: Assessment of risk is conducted by o o Risk profile Asset Allocation

Risk profile: It is important to determine the style of the investor before investing. Investors may be Aggressive Investor - who likes to take risks to earn an extra bit of return Moderate investor - who is content and believes in earning slow and steady gains Conservative investor - is risk averse investor whose primary objective is capital preservation and wants a steady growth in income. They are also known as passive investors. Asset Allocation: Asset allocation is the key to performance of portfolio. Assets can be sacred, serious or aggressive assets. Sacred assets are sacrosanct such as house, gold or fixed deposits which have low risk and low returns. Serious assets could be debt funds or bonds with higher returns and higher risks. Direct equity or equity mutual funds are of this type. Investors, who are willing to accept considerable volatility in their portfolios, invest in aggressive assets. 4. Developing the financial plan: Developing a financial plan for customer involves

Developing the plan for fulfilling protection, retirement, health, and wealth creation / preservation needs of the customer o Explaining the plan and rationale to the customer o Giving both upside potential and downside risk, keeping in mind customer's profile & risk appetite o Understanding tax laws and operating regulatory framework 5. Implementing the financial plan: o This step involves executing the plan through optimal investment. After getting the customer's approval, the financial plan needs to be implemented with the help of various service providers. It is important to create a proper record of the financial plan and its implementation. Recording of essential details, due dates, and dates of receipt of flows is important. 6. Monitoring the financial plan: Some guidelines for monitoring the investments are:2. Establish a systematic way of monitoring each investment 3. Ensure that monitoring should be practical and routine function 4. Call the client if market conditions change 5. Always contact the client in good as well as bad situations 6. Monitor periodically and make notes for the next meeting 7. Anticipate cash flows and be ready with an action plan 8. Balance maintenance versus new ideas 9. Be selective and document your recommendations 10. Make investment advisory accessible to client through conference calls

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