C - Lesson 11 Financial Management Flashcards
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.
Financial Management
Scope/Elements
- Investment decisions
- Financial decisions
- Dividend decision
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
- Investment 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.
- Financial decisions
The finance manager has to take decision with regards to the net profit distribution
- Dividend decision
Net profits are generally divided into two:
a. Dividend for shareholders
b. Retained profits
Dividend and the rate of it has to be decided.
a. Dividend for shareholders
Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.
b. Retained profits
The financial management is generally concerned with procurement, allocation and control of financial resources of a concern
Objectives of Financial Management
of funds to the concern.
- To ensure regular and adequate supply
which will depend upon the earning capacity, market price of the share, expectations of the shareholders.
- To ensure adequate returns to the shareholders
. Once the funds are procured, they should be utilized in maximum possible way at least cost.
- To ensure optimum funds utilization
, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved.
- To ensure safety on investment
-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.
- To plan a sound capital structure
Functions of Financial Management
- Estimation of capital requirements
- Determination of capital composition
- Choice of sources of funds
- Investment of funds
- Disposal of surplus
- Management of cash
- Financial controls
A finance manager has to make estimation with regards to capital requirements of the company.
Estimation of capital requirements
This will depend upon expected costs and profits and future programmes and policies of a concern.
Estimation of capital requirements
Estimations have to be made in an adequate manner which increases earning capacity of enterprise.
Estimation of capital requirements
Once the estimation have been made, the capital structure have to be decided.
Determination of capital composition
This involves short- term and long- term debt equity analysis.
Determination of capital composition
This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.
Determination of capital composition
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 sources 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.
Investment of funds
: The net profits decision have to be made by the finance manager.
Disposal of surplus
Disposal of surplus can be done in two ways:
a. Dividend declaration
b. Retained profits
It includes identifying the rate of dividends and other benefits like bonus.
a. Dividend declaration
The volume has to be decided which will depend upon expansional, innovational, diversification plans of the company.
b. Retained profits
Finance manager has to make decisions with regards to cash management.
Management of cash
Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintainance of enough stock, purchase of raw materials, etc.
Management of cash
The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances.
Financial controls
This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.
Financial controls
