Category: Financial Management

Financial management is the process of planning, organizing, controlling, and monitoring an organization’s financial resources to achieve its goals and objectives effectively. It involves making financial decisions, managing investments, and ensuring the financial health and sustainability of the business. Financial management is essential for both businesses and individuals. As it helps in optimizing financial resources and making informed decisions about money matters.

Key aspects of financial management include:

  1. Financial Planning: This involves setting financial goals and developing a comprehensive plan to achieve them. It includes budgeting, forecasting, and identifying potential sources of funding.
  2. Capital Budgeting: This process entails evaluating and selecting long-term investment projects that align with the organization’s objectives. It involves analyzing the potential returns and risks associated with different investment opportunities.
  3. Financing Decisions: Financial managers need to decide how to fund the organization’s operations and investments. This may involve choosing between debt financing (e.g., loans, bonds) and equity financing (e.g., issuing shares).
  4. Working Capital Management: It involves managing the organization’s short-term assets and liabilities to ensure smooth day-to-day operations. The goal is to maintain an optimal balance between cash flow, inventory, accounts receivable, and accounts payable.
  5. Risk Management: Financial managers must assess and mitigate financial risks that the organization may face. This includes market risks, credit risks, liquidity risks, and operational risks.
  6. Financial Reporting and Analysis: Preparation of accurate and timely financial statements (e.g., income statement, balance sheet, cash flow statement) is crucial for decision-making. Financial analysis helps interpret these statements to assess the company’s performance and identify areas for improvement.
  7. Financial Control: Monitoring financial performance and comparing actual results with budgeted figures is essential to identify deviations and take corrective actions as needed.
  8. Tax Planning: Financial managers need to consider tax implications while making financial decisions to optimize tax efficiency and compliance.

Financial management is vital for individuals as well. It involves budgeting, saving, investing, and managing personal finances to achieve financial goals. Such as buying a house, funding education, or planning for retirement.

Overall, financial management plays a crucial role in the success and sustainability of organizations and individuals by ensuring the effective allocation and utilization of financial resources. It helps create a sound financial foundation, minimize risks, and support long-term growth and prosperity.

  • What is the Financial Statement Analysis?

    Learn, Explain What is the Financial Statement Analysis?

    Financial performance, as a part of financial management, is the main indicator of the success or failure of the companies. Financial performance analysis can be considered as the heart of the financial decisions. Rational evaluation of the performance of the companies is essential to prepare sound financial policies and to attract potential investors. Shareholders are interested in EPS, dividend, net worth and market value per share. Also learned, Concept of Accountability in Financial Management, What is the Financial Statement Analysis?

    Management is interested in all aspects of financial performance to adopt a good financial management system and for the internal control of the company. The creditors are primarily interested in the liquidity of the company. Government is interested from the regulatory point of view. Besides, other stakeholders such as economists, trade associations, competitors, etc are also interested in the financial performance of the company. Therefore, all the stakeholders are interested in the performance of the companies but their perspective may be different.

    Financial statement analysis helps to highlight the financial performance of the company. It is the process of identifying the financial strength and weakness of a firm by properly establishing the relationship between the items on the Balance Sheet and those on the Profit and Loss Account. It is a general term referring to the process of extracting and studying information in financial statements for use in management decision making, for example, financial statement analysis typically involves the use of ratios, comparison with prior periods and budget, and other such procedures. The financial appraisal is a scientific evaluation of the profitability and strength of any business concerns. It seeks to spotlight the significant impacts and relationships concerning managerial performance, corporate efficiency, financial strength and weakness and creditworthiness of the company.

    The objective of financial statement analysis is a detailed cause and effect study of the profitability and financial position. Financial Analysis is the process of determining the significant operating and financial characteristics of a firm from accounting data and financial statement. The goal of such analysis is to determine the efficiency and performance of the firm’s management, as reflected in the financial records and reports. Financial statements are such records and reports, which contain the data required for performance management. It is therefore important to analyze the financial statements to identify the strengths and weaknesses of the company.

    The financial statements of a business enterprise are intended to provide much of the basic data used for decision making, and in general, evaluation of performance by various groups such as current owners, potential investors, creditors, government agencies, and in some instance, competitors. Financial statements are the reports in which the accountant summarizes and communicates the basic financial data. The financial statements provide the summary of accounts of the company the Balance Sheet reflecting the assets, liabilities, and capital as of a certain date and the Profit and Loss Account showing the results of operation during a period. The financial statements are a collection of data organized according to logical and consistent accounting procedures. The function of financial statement is to convey an understanding of some financial aspects of the company.

    Financial statement analysis involves appraising the financial statement and related footnotes of an entity. This may be done by accountants, investment analysts, credit analysts, management and other interested parties. Financial statements indicate an appraisal of a company’s previous financial performance and its future potential. The analysis of a financial statement is done to obtain a better insight into a firm’s position and performance. Analyzing a financial statement is a process of evaluating the relationship between component parts of the financial statement to obtain a better understanding of the firm’s position and performance. The financial analysis is thus the analysis of the financial statements, which is done to evaluate the performance of the company. Ratio Analysis, Trend Analysis, Comparative Financial Statement Analysis and Common Size Statement Analysis are the major tools of the financial analysis.

    Financial statement analysis involves the computation of ratios to evaluate a company’s financial position and results of operation. A ratio is an important tool for financial statement analysis. The relationship between two accounting figures expressed mathematically is known as the financial ratio. The ratio used as an index of yardstick for evaluating the financial position and performance of the firm. It helps analysts to make a quantitative judgment about the financial position and performance of the firm. It uses financial reports and data and summarizes the key relationship in order to appraise financial performance.

    Ratio analysis is such a powerful tool of financial analysis that through it, the economic and financial position of a business unit can be fully x-rayed. Ratios are just a convenient way to summarize large quantities of financial data and to compare the performance of the firms. Ratios are exceptionally useful tools with which one can judge the financial performance of the firm over a period of time. Performance ratio can provide an insight into a bank’s profitability, return on investment, capital adequacy and liquidity.

    The above theories suggest that financial analysis helps to measure the performance of the companies. Different analysts desire different types of ratios, depending largely on whom the analysts are and why the firm is being evaluated. Short-term creditors are concerned with the firm’s ability to pay its bills promptly. In the short run, the amount of liquid assets determines the ability to pay off current liabilities. They are interested in liquidity. Long-term creditors hold bonds or debentures; mortgages against the firm are interested in current payment of interest and the eventual repayment of the principal.

    The company must be sufficiently liquid in the short-term and have adequate profits for the long-term. They examine liquidity and the profitability. Stockholders, in addition to liquidity and profitability, are concerned about the policies of the firm’s stock. Without liquidity, the firm could not pay the cash dividends. Without profits, the firm could not be able to declare dividends. With poor policies, the common stock would trade at a lower price in the market.

    Analysis of the financial statement of a company for one year or for a shorter period would not truly reflect the nature of its operations. For this, it is essential that the analysis reasonably cover a longer period. The analysis made over a longer period is termed as Trend Analysis. Trend Analysis of the ratio indicates the direction of change. This method involves the calculation of percentage relationship that each item bears to the same item in the base year. Trend percentage discloses the changes in the financial and operating data between specific periods and makes it possible to form an opinion as to whether favorable and unfavorable tendencies are reflected by the data.

    Comparative Statement Analysis is another method of measuring the performance of the company. It is used to compare the performance and position of the firm with the average performance of the industry or with other firms, such a comparison will identify areas of weakness which can then be addressed to rectify the situation.

  • What is the Concept of Accountability in Financial Management?

    Accountability has different forms. First, the individualizing form of accountability can be studied in which the accountability contributes to making the realization of the image an individual perceives it. This perspective helps a person to polish his senses and action thereby improving his image that is noticed by others. The second view of accountability is the socializing form in which a person can improve its performance and efficiency by interacting with some of the experienced people in the organization. Accountability institutionalizes the use of accounting through which it operates in the organizations and firms. Also learned, Types of Product, What is the Concept of Accountability in Financial Management?

    Learn, Explain What is the Concept of Accountability in Financial Management?

    “Accountability breeds responsibility” This is a famous quote by Dr. Stephen R. Covey gives the meaning of accountability in rather general terms. The concept of accountability can be defined as the process through which a person is held answerable for his actions and deeds. Under the umbrella of the organization, the notion of accountability can be stated as the phenomenon through which whether a person at the higher level of hierarchy or at the lower level is accountable for his works and services that he renders to the organization. Accountability from the organizational perspective bears great importance as it is the measure through which the performance of the organization and a person serving can be judged and analyzed.

    How Does Accountability work?

    Accountability within the organizations mainly works through three different levels of accounting. They are auditing, management accounting, and financial reporting. Financial reporting and management accounting aspect of accounting has been dealt with in detail in representation and control part respectively. The third and more applicative form in which accountability holds in the organizations is the auditing in which companies accounts are checked and verified by some agency or authority assigned for it is covered in detail here.

    When it comes to organizational perspective the application of accountability expands. From the past, there has been a practice in business and organizations to maintain the accounts of each and every transaction that takes place in the organization. In the modern era, this system has become more advanced and transparent. The organizations can be judged or held responsible economically on the grounds of the accounts or financial statements that they produce. This involves the concept of auditing of company accounts. Audit serves as a vital economic process and plays an important role in serving the public interest by strengthening the accountability and reinforcing the trust and confidence in financial reporting.

    Auditing of accounts are generally performed by the people employed by the owner of the company, these persons are called auditors, agents or stewards. They generally work in the interest of the company with the focus on the economic performance of the institution. This phenomenon is called an agency theory which suggests that because of the information asymmetries people employ agents or stewards who work for the benefit of the company. Auditing gives a clear idea of accounts and also imparts the correct information to the shareholders.

    The interplay between Accounting and Accountability:

    Accounting can be defined as the process of identifying, measuring and communicating the financial information about the entity to permit informed judgments and decisions by users of information. Initially, there were cruder forms of accounting first one was double entry system which was a binary system method used for recording the events in which all the debts and credits were represented in the tabular form and the second was bookkeeping which was the maintenance or the summary of all the financial transactions taken place. Accountability often comes to play where there is some accounting failures or discrepancies and the company or the person producing the account is held responsible.

  • Factors Affecting the Major Types of Financial Decisions!

    Factors Affecting the Major Types of Financial Decisions!

    Learn and Understand, Factors Affecting the Major Types of Financial Decisions!

    Definition: The Financing Decision is yet another crucial decision made by the financial manager relating to the financing-mix of an organization. It is concerning the borrowing and allocation of funds required for the investment decisions. Types of Decisions: i. Investment decision ii. Financing decision iii. Dividend decision iv. Liquidity Decision. Also learn, Simple Types of Financial Decisions, Factors Affecting the Major Types of Financial Decisions!

    Some of the important functions which every finance manager has to take are as follows:

    A. Investment decision.

    B. Financing decision.

    C. Dividend decision, and.

    D. Liquidity Decision.

    The following decision is explained below:

    A. Investment Decision (Also Know, Capital Budgeting Decision):

    This decision relates to the careful selection of assets in which funds will be invested by the firms. A firm has many options to invest their funds but the firm has to select the most appropriate investment which will bring maximum benefit to the firm and decide or selecting most appropriate proposal is investment decision.

    The firm invests its funds in acquiring fixed assets as well as current assets. When decision regarding fixed assets is taken it is also called capital budgeting decision.

    Factors Affecting Investment/Capital Budgeting Decisions:

    1. Cash Flow of the Project:

    Whenever a company is investing huge funds in an investment proposal it expects some regular amount of cash flow to meet day to day requirement. The amount of cash flow an investment proposal will be able to generate must assess properly before investing in the proposal.

    2. Return on Investment:

    The most important criteria to decide the investment proposal is the rate of return it will be able to bring back for the company in the form of income for, e.g., if project A is bringing 10% return and project В is bringing 15% return then we should prefer project B.

    3. Risk Involved:

    With every investment proposal, there is some degree of risk is also involved. The company must try to calculate the risk involved in every proposal and should prefer the investment proposal with the moderate degree of risk only.

    4. Investment Criteria:

    Along with return, risk, cash flow there are various other criteria which help in selecting an investment proposal such as availability of labor, technologies, input, machinery, etc.

    The finance manager must compare all the available alternatives very carefully and then only decide where to invest the most scarce resources of the firm, i.e., finance.

    Investment decisions are considered very important decisions because of following reasons:

    (i) They are long-term decisions and therefore are irreversible; means once taken cannot change.

    (ii) Involve huge amount of funds.

    (iii) Affect the future earning capacity of the company.

    Importance or Scope of Capital Budgeting Decision:

    Capital budgeting decisions can turn the fortune of a company. The capital budgeting decisions are considered very important because of the following reasons:

    1. Long-Term Growth:

    The capital budgeting decisions affect the long-term growth of the company. As funds invested in long-term assets bring the return in future and future prospects and growth of the company depend upon these decisions only.

    2. Large Amount of Funds Involved:

    Investment in long-term projects or buying of fixed assets involves the huge amount of funds and if the wrong proposal is selected it may result in wastage of huge amount of funds that is why capital budgeting decisions are taken after considering various factors and planning.

    3. Risk Involved:

    The fixed capital decisions involve huge funds and also the big risk because the return comes in long run and company has to bear the risk for a long period of time till the returns start coming.

    4. Irreversible Decision:

    Capital budgeting decisions cannot reverse or change overnight. As these decisions involve huge funds and heavy cost and going back or reversing the decision may result in heavy loss and wastage of funds. So these decisions must take after careful planning and evaluation of all the effects of that decision because adverse consequences may be very heavy.

    B. Financing Decision:

    The second important decision which finance manager has to take is deciding source of finance. A company can raise finance from various sources such as by issue of shares, debentures or by taking loan and advances. Deciding how much to raise from which source is the concern of financing decision.

    Mainly sources of finance can divide into two categories:

    1. Owners fund.

    2. Borrowed fund.

    Share capital and retained earnings constitute owners’ fund and debentures, loans, bonds, etc. constitute borrowed fund.

    The main concern of finance manager is to decide how much to raise from owners’ fund and how much to raise from a borrowed fund.

    While taking this decision the finance manager compares the advantages and disadvantages of different sources of finance. The borrowed funds have to pay back and involve some degree of risk whereas in owners’ fund there is no fixing commitment of repayment and there is no risk involved. But finance manager prefers a mix of both types. Under financing, decision finance manager fixes a ratio of owner fund and borrowed fund in the capital structure of the company.

    Factors Affecting Financing Decisions:

    While taking financing decisions the finance manager keeps in mind the following factors:

    1. Cost:

    The cost of raising finance from various sources is different and finance managers always prefer the source with minimum cost.

    2. Risk:

    More risk is associated with the borrowed fund as compared to owner’s fund securities. Finance manager compares the risk with the cost involved and prefers securities with the moderate risk factor.

    3. Cash Flow Position:

    The cash flow position of the company also helps in selecting the securities. With smooth and steady cash flow companies can easily afford borrowed fund securities but when companies have a shortage of cash flow, then they must go for owner’s fund securities only.

    4. Control Considerations:

    If existing shareholders want to retain the complete control of business then they prefer borrowed fund securities to raise further fund. On the other hand, if they do not mind to lose the control then they may go for owner’s fund securities.

    5. Floatation Cost:

    It refers to the cost involved in the issue of securities such as broker’s commission, underwriters fees, expenses on the prospectus, etc. The firm prefers securities which involve least floatation cost.

    6. Fixed Operating Cost:

    If a company is having high fixed operating cost then they must prefer owner’s fund because due to high fixed operational cost, the company may not be able to pay interest on debt securities which can cause serious troubles for the company.

    7. State of Capital Market:

    The conditions in capital market also help in deciding the type of securities to raise. During boom period it is easy to sell equity shares as people are ready to take risk whereas during depression period there is more demand for debt securities in the capital market.

    C. Dividend Decision:

    This decision is concerned with the distribution of surplus funds. The profit of the firm is distributed among various parties such as creditors, employees, debenture holders, shareholders, etc.

    Payment of interest to creditors, debenture holders, etc. is a fixed liability of the company, so what company or finance manager has to decide is what to do with the residual or left over the profit of the company.

    The surplus profit is either distributed to equity shareholders in the form of the dividend or kept aside in the form of retained earnings. Under dividend decision, the finance manager decides how much to distribute in the form of dividend and how much to keep aside as retained earnings.

    To take this decision finance manager keeps in mind the growth plans and investment opportunities.

    If more investment opportunities are available and company has growth plans then more is kept aside as retained earnings and less is given in the form of dividend, but if company wants to satisfy its shareholders and has fewer growth plans, then more is given in the form of dividend and less is kept aside as retained earnings.

    This decision is also called residual decision because it is concerned with the distribution of residual or leftover income. Generally new and upcoming companies keep aside more of retain earning and distribute less dividend whereas established companies prefer to give more dividend and keep aside less profit.

    Factors Affecting Dividend Decision:

    The finance manager analyses following factors before dividing the net earnings between dividend and retained earnings:

    1. Earning:

    Dividends are paid out of current and previous year’s earnings. If there are more earnings then company declares the high rate of dividend whereas during the low earning period the rate of dividend is also low.

    2. Stability of Earnings:

    Companies having stable or smooth earnings prefer to give the high rate of dividend whereas companies with unstable earnings prefer to give the low rate of earnings.

    3. Cash Flow Position:

    Paying dividend means outflow of cash. Companies declare the high rate of dividend only when they have surplus cash. In the situation of shortage of cash, companies declare no or very low dividend.

    4. Growth Opportunities:

    If a company has a number of investment plans then it should reinvest the earnings of the company. As to invest in investment projects, the company has two options: one to raise additional capital or invest its retained earnings. The retained earnings are the cheaper source as they do not involve floatation cost and any legal formalities.

    If companies have no investment or growth plans then it would be better to distribute more in the form of the dividend. Generally, mature companies declare more dividends whereas growing companies keep aside more retained earnings.

    5. Stability of Dividend:

    Some companies follow a stable dividend policy as it has the better impact on shareholder and improves the reputation of the company in the share market. The stable dividend policy satisfies the investor. Even big companies and financial institutions prefer to invest in a company with regular and stable dividend policy.

    There are three types of stable dividend policies which a company may follow:

    (i) Constant dividend per share:

    In this case, the company decides a fixed rate of dividend and declares the same rate every year, e.g., 10% dividend on investment.

    (ii) Constant payout ratio:

    Under this system, the company fixes up a fixed percentage of dividends on profit and not on investment, e.g., 10% on profit so dividend keeps on changing with the change in profit rate.

    (iii) Constant dividend per share and extra dividend:

    Under this scheme, a fixed rate of dividend on investment is given and if profit or earnings increase then some extra dividend in the form of bonus or interim dividend is also given.

    6. Preference of Shareholders:

    Another important factor affecting dividend policy is expectation and preference of shareholders as their expectations cannot ignore the company. Generally, it is observed that retired shareholders expect the regular and stable amount of dividend whereas young shareholders prefer capital gain by reinvesting the income of the company.

    They are ready to sacrifice present-day income dividend for future gain which they will get with growth and expansion of the company.

    Secondly poor and middle-class investors also prefer the regular and stable amount of dividend whereas wealthy and rich class prefers capital gains.

    So if a company is having a large number of retired and middle-class shareholders then it will declare more dividend and keep aside less in the form of retained earnings whereas if company is having a large number of young and wealthy shareholders then it will prefer to keep aside more in the form of retained earnings and declare low rate of dividend.

    7. Taxation Policy:

    The rate of dividend also depends upon the taxation policy of the government. Under present taxation system dividend income is tax-free income for shareholders whereas. The company has to pay tax on dividend given to shareholders. If the tax rate is higher, the company prefers to pay less in the form of dividend whereas. If the tax rate is low then the company may declare the higher dividend.

    8. Access to Capital Market Consideration:

    Whenever company requires more capital it can either arrange it by the issue of shares or debentures in the stock market or by using its retained earnings. Rising of funds from the capital market depends upon the reputation of the company.

    If capital market can easily access or approach and there is enough demand for securities of the company then company can give more dividend and raise capital by approaching capital market, but if it is difficult for company to approach and access capital market then companies declare low rate of dividend and use reserves or retained earnings for reinvestment.

    9. Legal Restrictions:

    Companies’ Act has given certain provisions regarding the payment of dividends that can pay only out of current year profit or past year profit after providing depreciation fund. In case the company is not earning the profit then it cannot declare the dividend.

    Apart from the Companies’ Act, there are certain internal provisions of the company that is whether the company has enough flow of cash to pay the dividend. The payment of dividend should not affect the liquidity of the company.

    10. Contractual Constraints:

    When companies take a long-term loan then financier may put some restrictions or constraints on the distribution of dividend and companies have to abide by these constraints.

    11. Stock Market Reaction:

    The declaration of the dividend has an impact on the stock market as an increase in dividend is taken as a good news in the stock market and prices of security rise. Whereas a decrease in dividend may have the negative impact on the share price in the stock market. So possible impact of dividend policy on the equity share price also affects dividend decision.

    D. Liquidity Decision:

    It is very important to maintain a liquidity position of a firm to avoid insolvency. Firm’s profitability, liquidity, and risk all are associated with the investment in current assets. In order to maintain a tradeoff between profitability and liquidity. It is important to invest sufficient funds in current assets. But since current assets do not earn anything for business, therefore, a proper calculation must do before investing in current assets.

    Current assets should properly value and dispose of from time to time once they become non-profitable. Currents assets must use in times of liquidity problems and times of insolvency.

    Factors Affecting the Major Types of Financial Decisions - ilearnlot

  • What are the Major Types of Financial Decisions?

    What are the Major Types of Financial Decisions?

    Learn and Understand, What are the Major Types of Financial Decisions? 

    Financial decision is yet another important function which a financial manager must perform. It is important to make wise decisions about when, where and how should a business acquire funds. Funds can acquire through many ways and channels. The types are 1. Investment decisions, 2. Financing decisions, 3. Dividend decisions, and 4. Liquidity decisions. Broadly speaking a correct ratio of an equity and debt has to maintain. This mix of equity capital and debt is known as a firm’s capital structure. Also learn, Concept of Financial Decisions, What are the Major Types of Financial Decisions?

    A firm tends to benefit most when the market value of a company’s share maximizes this not only is a sign of growth for the firm but also maximizes shareholders wealth. On the other hand, the use of debt affects the risk and return of a shareholder. It is riskier though it may increase the return on equity funds.

    A sound financial structure is said to be one which aims at maximizing shareholders return with minimum risk. In such a scenario the market value of the firm will maximize and hence an optimum capital structure would achieve. Other than equity and debt there are several other tools which are used in deciding a firm capital structure.

    Some of the important functions which every finance manager has to take are as follows:

    i. Investment decision.

    ii. Financing decision.

    iii. Dividend decision, and.

    iv. Liquidity Decision.

    The Following types are explained below:

    1. Investment Decisions:

    Investment Decision relates to the determination of total amount of assets to hold in the firm, the composition of these assets and the business risk complexions of the firm as perceived by its investors. It is the most important financial decision. Since funds involve cost and are available in a limited quantity, its proper utilization is very necessary to achieve the goal of wealth maximization.

    The investment decisions can classify into two broad groups:

    (i) Long-term investment decision and

    (ii) Short-term investment decision.

    The long-term investment decision is referring to as the capital budgeting and the short-term investment decision as working capital management.

    Capital budgeting is the process of making investment decisions in capital expenditure. These are expenditures, the benefits of which are expecting to receive over a long period of time exceeding one year. The finance manager has to assess the profitability of various projects before committing the funds.

    The investment proposals should evaluate in terms of expecting profitability, costs involving and the risks associated with the projects.

    The investment decision is important not only for the setting up of new units but also for the expansion of present units, replacement of permanent assets, research and development project costs, and reallocation of funds, in case, investments made earlier do not fetch result as anticipated earlier.

    Short-term investment decision, on the other hand, relates to the allocation of funds as among cash and equivalents, receivables and inventories. Such a decision is influencing the tradeoff between liquidity and profitability.

    The reason is that the more liquid the asset, the less it is likely to yield and the more profitable an asset, the more illiquid it is. A sound short-term investment decision or working capital management policy is one which ensures higher profitability, proper liquidity and sound structural health of the organization.

    2. Financing Decisions:

    Once the firm has taken the investment decision and committed itself to new investment, it must decide the best means of financing these commitments. Since firms regularly make new investments; the needs for financing and financial decisions are ongoing.

    Hence, a firm will be continuously planning for new financial needs. The financing decision is not only concerned with how best to finance new assets but also concerned with the best overall mix of financing for the firm.

    A finance manager has to select such sources of funds which will make the optimum capital structure. The important thing to decide here is the proportion of various sources in the overall capital mix of the firm. The debt-equity ratio should fix in such a way that it helps in maximizing the profitability of the concern.

    The raising of more debts will involve fixed interest liability and dependence upon outsiders. It may help in increasing the return on equity but will also enhance the risk.

    The raising of funds through equity will bring permanent funds to the business but the shareholders will expect higher rates of earnings. The financial manager has to strike a balance between various sources so that the overall profitability of the concern improves.

    If the capital structure is able to minimize the risk and raise the profitability then the market prices of the shares will go up maximizing the wealth of shareholders. Also learn, What is the Definition of Price Perception?

    3. Dividend Decisions:

    The third major financial decision relates to the disbursement of profits back to investors who supplied capital to the firm. The term dividend refers to that part of profits of a company which is distributing it among its shareholders.

    It is the reward of shareholders for investments made by them in the share capital of the company. The dividend decision is concerning with the quantum of profits to distribute among shareholders.

    A decision has to take whether all the profits are to distribute, to retain all the profits in business or to keep a part of profits in the business and distribute others among shareholders. The higher rate of the dividend may raise the market price of shares and thus, maximize the wealth of shareholders. The firm should also consider the question of dividend stability, stock dividend (bonus shares) and cash dividend.

    4. Liquidity Decisions:

    It is very important to maintain a liquidity position of a firm to avoid insolvency. Firm’s profitability, liquidity, and risk all are associating with the investment in current assets. In order to maintain a tradeoff between profitability and liquidity, it is important to invest sufficient funds in current assets. But since current assets do not earn anything for business, therefore, a proper calculation must do before investing in current assets.

    Current assets should properly value dispose of from time to time once they become not profitable. Currents assets must use in times of liquidity problems and times of insolvency.

    What are the Major Types of Financial Decisions - ilearnlot

  • What is the Concept of Financial Decisions?

    What is the Concept of Financial Decisions?

    Learn, What is the Concept of Financial Decisions?

    Decisions concerning the liabilities and stockholders’ equity side of the firm’s balance sheet, such as a decision to issue bonds. Decisions that involve: (1) determining the proper amount of funds to employ in a firm. (2) selecting projects and capital expenditure analysis. (3) raising funds on the most favorable terms possible, and. (4) managing working capital such as inventory and accounts receivable. Also learn, Financial Management, What is the Concept of Financial Decisions?

    Definition of Financing Decision:

    The Financing Decision is yet another crucial decision made by the financial manager relating to the financing-mix of an organization. It is concerned with the borrowing and allocation of funds required for the investment decisions.

    The financing decision involves two sources from where the funds can raise: using a company’s own money. Such as share capital, retained earnings or borrowing funds from the outside in the form debenture, loan, bond, etc. The objective of financial decision is to maintain an optimum capital structure, i.e. a proper mix of debt and equity, to ensure the trade-off between the risk and return to the shareholders.

    The Debt-Equity Ratio helps in determining the effectiveness of the financing decision made by the company. While taking the financial decisions, the finance manager has to take the following points into consideration:

    • The Risk involved in raising the funds. The risk is higher in the case of debt as compared to the equity.
    • The Cost involved in raising the funds. The manager chose the source with minimum cost.
    • The Level of Control, the shareholders, want in the organization also determines the composition of capital structure. They usually prefer the borrowed funds since it does not dilute the ownership.
    • The Cash Flow from the operations of the business also determines the source from where the funds shall raise. High cash flow enables to borrow debt as interest can easily pay.
    • The Floatation Cost such as broker’s commission, underwriters fee, involved in raising the securities also determines the source of fund. Thus, securities with minimum cost must choose.

    Thus, a company should make a judicious decision regarding from where, when, how the funds shall raise. Since, more use of equity will result in the dilution of ownership and whereas, higher debt results in higher risk. As the fixed cost in the form of interest is to pay on the borrowed funds.

    The Concept of Financial Decisions:

    Financial decisions refer to decisions concerning financial matters to a business concern. Decisions regarding the magnitude of funds to invest to enable a firm to accomplish its ultimate goal, kind of assets to acquire. The pattern of capitalization, the pattern of distribution of firm’s income and similar other matters are including in financial decisions.

    These decisions are crucial for the well-being of a firm because they determine the firm’s ability to obtain plant and equipment. When needed to carry the required amount of inventories and receivables, to avoid burdensome fixed charges when profits and sales decline and to avoid losing control of the company.

    Financial decisions are taking by a finance manager alone or in conjunction with his other executive colleagues of the enterprise. In principle, finance manager is held responsible to handle all such problems as involve money matters.

    But in actual practice, he has to call on the expertise of those in other functional areas: marketing, production, accounting, and personnel to carry out his responsibilities wisely. For instance, the decision to acquire a capital asset is based on the expected net return from its use and on the associated risk.

    These cannot give values to finance manager alone. Instead, he must call on the expertise of those in charge of production and marketing. Similarly, the decision regarding allocation of funds as between different types of current assets cannot take by a finance manager in the vacuum.

    The policy decision in respect of receivables—whether to sell for credit, to what extent and on what terms is essentially financial matter and has to hand by a finance manager. But at the operating level of carrying out the policies. Sales may also involve in decisions to tighten up or relax collection procedures may have repercussion on sales.

    Similarly, in respect of inventory, while determining, types of goods to carry in stock and their size are a basic part of the sales function. The decision regarding the quantum of funds to invest in inventory is the primary responsibility of the finance manager since funds must supply to finance inventory.

    As against the above, the decision relating to the acquisition of funds for financing business activities is primarily a finance function. Likewise, finance manager has to take the decision regarding the disposition of business income without consulting. Other executives since various factors involving in the decision affect ability of a firm to raise funds.

    What is the Concept of Financial Decisions - ilearnlot

  • What is Definition of Financial Management?

    What is Definition of Financial Management?

    Learn, Explain, Meaning, Definition of Financial Management!

    Financial management refers to the efficient and effective management of wealth (money) in order to fulfill the objectives of the organization. This is the special task associating directly with top management. The significance of this function is not seen in the ‘line’, but in the overall capacity of the company ‘staff’ is also in capacity. It is defined differently by various experts in the field. Also learn, Meaning, FM in Hindi (वित्तीय प्रबंधन की परिभाषा), What is Definition of Financial Management?

    Financial management is an integral part of overall management. It is concerned with the duties of the financial managers in the business firm. The term financial management has been defined by Solomon, “It is concerning with the efficient use of an important economic resource namely, capital funds”. The most popular and acceptable definition of financial management as given by S.C. Kuchal is that “Financial Management deals with the procurement of funds and their effective utilization in the business”.

    Howard and Upton: Financial management “as an application of general managerial principles to the area of financial decision-making.

    Weston and Brigham: Financial management “is an area of financial decision-making, harmonizing individual motives and enterprise goals”.

    Joshep and Massie: Financial management “is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations.

    Thus, Financial Management is mainly concerned with the effective fund’s management in the business. In simple words, Financial Management as practiced by business firms can call as Corporation Finance or Business Finance. Also read, How to Explain Nature and Scope of Financial Management?

    Definition of Financial Management:

    Financial management could define as follows:

    Financial management is that branch of general management, which has grown to provide specializing and efficient financial services to the whole enterprise; involving, in particular, the timely supplies of requisite finances and ensuring their most effective utilization-contributing to the most effective and efficient attainment of the common objectives of the enterprise.

    Some prominent definitions of financial management are citing below:

    “Financial management is concerned with managerial decisions that result in acquisition and financing of long-term and short-term credits for the firm. As such, it deals with situations that require selection of specific assets and liabilities as well as problems of size and growth of an enterprise. Analysis of these decisions is based on expected inflows and outflow of funds and their effects on managerial objectives.” —Philppatus

    Analysis of the above Definitions:

    The above definitions of financial management could analyze, in terms of the following points:

    (i) Financial management is a specialized branch of general management.

    (ii) The basic operational aim of financial management is to provide financial services to the whole enterprise.

    (iii) One most important financial service by financial management to the enterprise is to make available requisite (i.e. required) finances at the needed time. If requisite funds are not made available at the needed time; significance of finance is lost.

    (iv) Another equally important financial service by financial management to the enterprise is to ensure the most effective utilization of finances; but for which finance would become a liability rather than being an asset.

    (v) Through providing financial services to the enterprise, financial management helps in the most effective and efficient attainment of the common objectives of the enterprise.

    Points of Comment:

    (i) In big business enterprises, a separate cell, calls the Finance Department is creating to take care of financial management, for the enterprise. This department is heading by a specialist in Financial Management-calls the Finance Manager.

    However, the scope of authority of the finance manager very much depends on the policies of the top management; finance being a crucial management function.

    (ii) In the present-day times, at least, financial management represents a research area; in that, the finance manager is always expecting to research into new and better sources of finances and into best schemes for the most efficient and profitable utilization of the limited finances at the disposal of the enterprise.

    (iii) There are three major areas of decision making, in financial management, viz:

    (1) Investment decisions i.e. the channels into which finances will invest-base on ‘risk and return’ analysis, of investment alternatives.

    (2) Financing decisions i.e. the sources from which finances will raise-base on ‘cost-benefit analyses’ of different sources of finance.

    (3) Dividend decisions i.e. how much of corporate profits will distribute, by way of dividends; and how much of these will retain in the company-requiring an intelligent solution to the controversy ‘Retention vs. Distribution’.

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  • What are Objectives of Financial Management?

    What are Objectives of Financial Management?

    What are Objectives of Financial Management? with Describe Definition, Meaning, Nature and Scope!

    Financial management is one of the functional areas of business. Therefore, its objectives must be consistent with the overall objectives of the business. The overall objective of financial management is to provide maximum return to the owners on their investment in the long- term. This is known as wealth maximization. Maximization of owners’ wealth is possible when the capital invested initially increases over a period of time. Wealth maximization means maximizing the market value of investment in shares of the company. Also learn, Definition with What are Objectives of Financial Management?

    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. In simple terms objective of Financial Management is to maximize the value of the firm, however, it is much more complex than that. The management of the firm involves many stakeholders, including owners, creditors, and various participants in the financial market.

    Effective procurement and efficient use of finance lead to proper utilization of the finance by the business concern. It is the essential part of the financial manager. Hence, the financial manager must determine the basic objectives of the financial management. How to Explain Nature and Scope of Financial Management?

    Objectives of Financial Management explain to the Simple point

    • Profit maximization happens when marginal cost is equal to marginal revenue. This is the main objective of Financial Management.
    • Wealth maximization means maximization of shareholders’ wealth. It is an advance goal compare to profit maximization.
    • Survival of company is an important consideration when the financial manager makes any financial decisions. One incorrect decision may lead the company to be bankrupt.
    • Maintaining proper cash flow is a short run objective of financial management. It is necessary for operations to pay the day-to-day expenses e.g. raw material, electricity bills, wages, rent etc. A good cash flow ensures the survival of the company.
    • Minimization on capital cost in financial management can help operations gain more profit.
    • It is vague:- There are several types of profits before interest, depreciation and taxes, profit before taxes, profit after taxes, cash profit etc.

    What are Objectives of Financial Management - ilearnlot

  • How to Explain Nature and Scope of Financial Management?

    How to Explain Nature and Scope of Financial Management?

    Learn, Explanation of Nature and Scope of Financial Management

    Financial management is one of the important aspects of finance. Nobody can ever think to start a business or a company without financial knowledge and management strategies. Finance links itself directly to several functional departments like marketing, production, and personnel. Here we will list out some of the major scopes of financial management notes which will help you in your decision-making process. Also learn, Types of Financial Decisions, How to Explain Nature and Scope of Financial Management?

    Financial management has a wide scope. According to Dr. S. C. Saxena, the scope of financial management includes the following five A’s.

    • Anticipation: Financial management estimates the financial needs of the company. That is, it finds out how much finance is requiring the company.
    • Acquisition: It collects finance for the company from different sources.
    • Allocation: It uses this collected finance to purchase fix and current assets for the company.
    • Appropriation: It divides the company’s profits among the shareholders, debenture holders, etc. It keeps a part of the profits as reserves.
    • Assessment: It also controls all the financial activities of the company. Financial management is the most important functional area of management. All other functional areas such as production management, marketing management, personnel management, etc. depend on Financial management. Efficient financial management is required for survival, growth, and success of the company or firm.

    Key Scope of Financial Management!

    The major scope of financial management is dividing into four categories. Let’s learn and understand the nature and scope of financial management through the below details notes.

    Investment Decision:

    Evaluating the risk involve, measuring the cost of fund and estimating expected benefits from a project comes under investment decision. It is one of the important scopes of financial management. The two major components of investment decision are Capital budgeting and liquidity. Capital budgeting is commonly known as the investment appraisal. It deals with the allocation of capital and funds in such a manner that they will yield earnings in future. Capital budgeting determines the long-term investment which includes replacement and renovation of old assets. It is all about maintaining an appropriate balance between fix and current assets in order to maximize profitability and to maintain desired liquidity in the firm for its smooth functioning.

    Working Capital Decision:

    Decisions related to working capital is another crucial scope of financial management. Decisions involving around working capital and short-term financing are known as a working capital decision. It also manages the relationship between short-term assets and its liabilities. Short-term assets include cash in hand, receivables, inventory, short-term securities, etc. Creditors, bills payable, outstanding expenses, bank overdraft, etc are a firm’s short-term liabilities. Short-term assets can exchange for cash within one calendar year. Similarly, the liabilities are to settle within an accounting year.

    Dividend Decision:

    The Dividend Decision plays a crucial role in today’s corporate era. It determines the amount of taxation that stockholders pay. A good dividend policy helps to achieve the objective of wealth maximization. Distributing the entire profit in the form of dividends or distributing only a certain percentage of it is decided by dividend policy. It is known as deciding the optimum dividend payout ratio i.e. proportion of net profits to be paid out to shareholders. Stability of cash dividends and stock sets the parameter which determines the number of investment opportunities. Expansion of an economic activity depends on the effectiveness of dividend decisions and scope of financial management.

    Financing Decision:

    Financing Decisions focuses on the accountabilities and stockholders’ equity side of the firm’s balance sheet, for example, the decision to issue bonds is a kind of financing decision. The main aim of financing decision is to cover expenses and investments. The decision involves generating capitals by various methods, from different sources, in relative proportion and considering opportunity costs, with respect to time of flotation of securities, etc.

    The scope of financial management is to meet the expenses of the firm, a suitable capital structure for the enterprise should develop by the finance manager. Only an optimum finance mix can maximize the market price of the company’s shares in the long run. To decrease the risk, a stable equilibrium is requiring between debt and equity. Return and risk to the equity shareholders depend on how optimally the debts and financial leverages are using. Only when the risk and return are in synchronization, the market value per share is maximizing. The apt timing for raising funds is to decide by the financial manager time to raise the funds.

    Nature of Financial Management!

    Finance management is a long-term decision-making process which involves a lot of planning, allocation of funds, discipline and much more. Let us understand the nature of financial management with reference to this discipline.

    • Finance management is one of the important education which has to realize worldwide. Now a day’s people are undergoing through various specialization courses of financial management. Many people have chosen financial management as their profession.
    • The nature of financial management is never a separate entity. Even as an operational manager or functional manager one has to take responsibility for financial management.
    • Finance is a foundation of economic activities. The person who Manages finance is called the financial manager. An important role of a financial manager is to control finance and implement the plans. For any company financial manager plays a crucial role in it. Many times it happens that lack of skills or wrong decisions can lead to heavy losses to an organization.
    • Nature of financial management is multi-disciplinary. Financial management depends upon various other factors like accounting, banking, inflation, economy, etc. for the better utilization of finances.
    • An approach to financial management is no limit to business functions but it is a backbone of commerce, economic and industry.

    Scope & Elements of Financial Management!

    • Investment decisions: Include investment in fixed assets (call as capital budgeting). Investment in current assets is also a part of investment decisions call for working capital decisions.
    • Financial decisions: They relate to the raising of finance from various resources which will depend upon the decision on the type of source, the period of financing, cost of financing and the returns thereby.
    • Dividend decision: The finance manager has to take a decision with regards to the net profit distribution. Net profits are generally divided into two: 1) The dividend for shareholders- Dividend and the rate of it has to decide. 2) Retained profits- Amount of retained profits has to finalize which will depend upon expansion and diversification plans of the enterprise.

    How to Explain Nature and Scope of Financial Management - ilearnlot

    Reference

    1. Key Scope of Financial Management – http://wikifinancepedia.com/finance/financial-management/nature-and-scope-of-financial-management
    2. The scope of Financial Management – http://kalyan-city.blogspot.in/2011/09/what-is-financial-management-meaning.html
    3. Scope & Elements – http://www.managementstudyguide.com/financial-management.htm

  • What is Financial Management?

    What is Financial Management?

    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 the financial resources of the enterprise. Financial management refers to the efficient and effective management of money (funds) in such a manner as to accomplish the objectives of the organization. It is the specializing function directly associates with the top management. The significance of this function is not seen in the ‘line’. But in the overall capacity of the company ‘staff’ is also in capacity. So, what is the question; What is Financial Management?

    Here are explain; What is Financial Management? with Meaning and Definition.

    The term typically applies to an organization or company’s financial strategy. While personal finance or financial life management refers to an individual’s management strategy. It includes how to raise the capital and how to allocate capital, i.e. capital budgeting. Not only for long-term budgeting but also how to allocate the short term resources like current liabilities. It also deals with the dividend policies of the shareholders. Customer Relationship Management.

    Definition of Financial Management:

    One needs money to make money. Finance is the life-blood of business and there must a continuous flow of funds in and out of a business enterprise. Money makes the wheels of business run smoothly. Sound plans, efficient production system and excellent. Marketing network is all hampered in the absence of an adequate and timely supply of funds.

    According to Dr. S. N. Maheshwari,

    “Financial management is concerned with raising financial resources and their effective utilization towards achieving the organizational goals.”

    According to Richard A. Brealey,

    “Financial management is the process of putting the available funds to the best advantage from the long-term point of view of business objectives.”

    Sound financial management is as important in Business like production and marketing. A business firm requires finance to commence its operations, to continue operations and for expansion or growth. Finance is, therefore, an important operative function of the business. A large business firm has to raise funds from several sources and has to utilize those funds in alternative investment opportunities. In order to ensure the most prudent use of funds and to give proper returns on investment, sound financial policies and programs are requiring. Unwise financing can drive a business into bankruptcy just as easily as a poor product, inept marketing or high production costs.

    On the other hand, adequate and economical financing can provide the firm with a differential advantage in the marketplace. The success of a business enterprise is largely determined by the way its capital funds is raising, utilized and disbursed. In the modern money-using economy, the importance of finance has increased further due to the increasing scale of operations and capital-intensive techniques of production and distribution.

    In fact, finance is the bright thread running through all business activity. It influences and limits the activities of marketing, production, purchasing and personnel management. The success of a business is broadly measured financially. The efficient organization and administration of the finance function are thus vital to the successful functioning of every business enterprise. Sales Management, What You Do Know?

    Meaning of Financial Management:

    Financial management maybe defines as planning, organizing, directing and controlling the financial activities of an organization. According to Guthman and Dougal, the financial management means, “the activity concerned with the planning, raising, controlling and administering of funds used in the business.” It is concerned with the procurement and utilization of funds in the proper manner.

    Financial activities happen not only with the purchase and use of money. However, along with assessing the needs of funding, capital budgeting, distribution of surplus, financial control etc. for funds, Ezra Solan has described the nature of financial management as follows: “Financial management is properly defined as an integral part As is seen, overall management, especially as an employee, concerns with the establishment of operations. ”

    “In this broad perspective, the central issue of financial-policy is the wise use of money. The central process, there is a logical match for the benefit of the potential use of the cost of alternative potential sources, so that for any broad financial goals. Order to establish an enterprise, in addition to raising funds, financial management directly produces marketing and marketing within an enterprise. Concerns regarding actions, when done in the decision to acquire or distribution decisions. ”

    What is Financial Management - ilearnlot
    What is Financial Management?

    Reference:

    1. Financial-Management.