Tag: Financial

  • 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’.

    What is Definition of Financial Management - ilearnlot
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  • What is a Dollar?

    What is a Dollar?

    What is a Dollar? Meaning, Definition!

    Dollar (often represented by the dollar sign $) is the name of more than twenty currencies, including (ordered by population) those of the United States, Canada, Australia, Taiwan, Hong Kong, Singapore, New Zealand, Liberia, Jamaica, and Namibia. The U.S. dollar is the official currency of East Timor, Ecuador, El Salvador, Federated States of Micronesia, Marshall Islands, Palau, the Caribbean Netherlands, and for banknotes, Panama. Generally, one dollar is divided into one hundred cents. The Currency, a system of money in general use in a particular country. What is a Rupee? Now, you learn What is a Dollar?

    “The history of the dollar. For symbol “$”, see Dollar sign. The Slovenian philosopher, see Mladen Dolar. The municipality in Spain, see Dólar.”

    Exchange Currency in US Dollar 

    One US Dollar ($1) Rated to Others Country:

    1. 1.38 Australian Dollar
    2. 1.00 Bahamian Dollar
    3. 2.00 Barbadian Dollar
    4. 2.01 Belize Dollar
    5. 1.00 Bermudan Dollar
    6. 1.44 Brunei Dollar
    7. 1.34 Canadian Dollar
    8. 0.82 Cayman Islands Dollar
    9. 2.70 East Caribbean Dollar
    10. 2.13 Fijian Dollar
    11. 207.21 Guyanaese Dollar
    12. 7.76 Hong Kong Dollar
    13. 128.80 Jamaican Dollar
    14. 91.00 Liberian Dollar
    15. 13.96 Namibian Dollar
    16. 32.01 New Taiwan Dollar
    17. 1.44 New Zealand Dollar
    18. 1.44 Singapore Dollar
    19. 7.39 Surinamese Dollar
    20. 6.75 Trinidad & Tobago Dollar

    History of Dollar

    On 15 January 1520, the Czech Kingdom of Bohemia began minting coins from silver mined locally in Joachimsthal (Czech Jáchymov) and marked on the reverse with the Czech lion. The coins were called Joachim’s thaler, which became shortened in common usage to thaler or taler. The German name “Joachimsthal” literally means “Joachim’s valley” or “Joachim’s dale”. This name found its way into other languages: Czech tolar, Hungarian tallér, Danish and Norwegian (rigs) daler, Swedish (riks)daler, Icelandic dalur, Dutch (rijks)daalder or daler, Ethiopian ታላሪ (“talari”), Italian tallero, Polish talar, Persian dare, as well as – via Dutch – into English as dollar.

    A later Dutch coin depicting also a lion was called the leeuwen daler or leeuwen daalder, literally ‘lion daler’. The Dutch Republic produced these coins to accommodate its booming international trade. The leeuwen daler circulated throughout the Middle East and was imitated in several German and Italian cities. This coin was also popular in the Dutch East Indies and in the Dutch New Netherland Colony (New York). It was in circulation throughout the Thirteen Colonies during the 17th and early 18th centuries and was popularly known as “lion (or lyon) dollar”. The currencies of Romania and Bulgaria are, to this day, ‘lion’ (leu/leva). The modern American-English pronunciation of dollar is still remarkably close to the 17th-century Dutch pronunciation of daler. Some well-worn examples circulating in the Colonies were known as “dog dollars”.

    Spanish pesos – having the same weight and shape – came to be known as Spanish dollars. By the mid-18th century, the lion dollar had been replaced by Spanish dollar, the famous “pieces of eight”, which were distributed widely in the Spanish colonies in the New World and in the Philippines.

    Types of Dollar with Countries Bases

      Antigua and Barbuda East Caribbean dollar XCD    
     Australia and its territories Australian dollar AUD 1966-02-14 Australian pound 1910-1966
    Pound sterling 1825-1910
     Bahamas Bahamian dollar BSD   Bahamian pound
     Barbados Barbadian dollar BBD    
     Belize Belize dollar BZD/USD 1973 British Honduran Dollar
     Bermuda Bermuda dollar BMD    
     Brunei Brunei dollar
    (Alongside the Singapore dollar)    		 BND
    (SGD)    		    
     Canada Canadian dollar CAD 1858 Canadian pound 1841-1858
    Spanish dollar pre-1841
    Newfoundland dollar, pre-1949 in the Dominion of Newfoundland
     Cayman Islands Cayman Islands dollar KYD    
     Dominica East Caribbean dollar XCD    
     East Timor United States dollar USD    
     Ecuador United States dollar USD 2001 Ecuadorian sucre
     El Salvador United States dollar USD 2001-01-01 Salvadoran colón
     Fiji Fijian dollar FJD    
     Grenada East Caribbean dollar XCD    
     Guyana Guyanese dollar GYD    
     Hong Kong Hong Kong dollar HKD 1863 Rupee, Real (Spanish/Colonial Spain: Mexican), Chinese cash
     Jamaica Jamaican dollar JMD 1969 Jamaican pound
     Kiribati Kiribati dollar along with the Australian dollar N/A / AUD    
     Liberia Liberian dollar LRD    
     Marshall Islands United States dollar USD    
     Federated States of Micronesia United States dollar USD    
     Namibia Namibian dollar along with the South African rand NAD 1993 South African rand
     Nauru Australian dollar AUD    
     New Zealand and its territories New Zealand dollar NZD 1967 New Zealand pound
     Palau United States dollar USD    
     Saint Kitts and Nevis East Caribbean dollar XCD    
     Saint Lucia East Caribbean dollar XCD    
     Saint Vincent and the Grenadines East Caribbean dollar XCD    
     Singapore Singapore dollar SGD    
     Solomon Islands Solomon Islands dollar SBD    
     Suriname Surinamese dollar SRD 2004 Surinamese guilder
     Taiwan New Taiwan dollar TWD 1949  
     Trinidad and Tobago Trinidad and Tobago dollar TTD    
     Tuvalu Tuvaluan dollar along with the Australian dollar TVD / AUD    
     United States and its territories United States dollar USD 1792 Spanish dollar
    colonial script
     Zimbabwe United States dollar USD   Zimbabwean dollar

    Note: All Countries Dollar exchange rate, 21 December 2016.

    What is a Dollar Meaning Definition - ilearnlot

  • What is a Rupee?

    What is a Rupee?

    What is a Rupee? Meaning, Definition!

    The rupee is the common name for the currencies of India, Indonesia, Maldives, Mauritius, Nepal, Pakistan, Seychelles, Sri Lanka, and formerly those of Afghanistan, Burma and British East Africa, German East Africa and the Trucial States. Basically, the rupee is monetary unit of India, equal to 100 paise in India, Pakistan, and Nepal. As Wall as equal to 100 cents in Sri Lanka, Mauritius, and Seychelles. What is a Rupee? a system of money in general use in a particular country.

    In the Maldives, the unit of currency is known as the rufiyah, which is a cognate of the Sanskrit rupya. The Indian rupees (₹) and Pakistani rupees (₨) are subdivided into one hundred paise (singular paisa) or pice. The Mauritian and Sri Lankan rupees subdivide into 100 cents. The Nepalese rupee subdivides into one hundred paisas (both singular and plural) or four sukas or two mohors. Definition of Organization, What is Glocalization? Meaning, Definition!

    Rupee Exchange Currency to per US dollar

    1. 67.84 Indian Rupee
    2. 35.95 Mauritian Rupee
    3. 108.52 Nepalese Rupee
    4. 104.85 Pakistani Rupee
    5. 13.27 Seychellois Rupee
    6. 149.76 Sri Lankan Rupee
    7. 13440.00 Indonesian Rupiah
    8. 15.36 Maldivian Rufiyaa

    “All currency Exchanging to per US dollar on a date of 24 December 2016, rupee use in the country of India, Mauritius, Nepal, Pakistan, Seychelles, Sri Lanka, and Indonesia use to Rupiah, the Maldives using Rufiyaa.”

    History of Rupee

    The history of the rupee traces back to Ancient India circa 3rd century BC. Ancient India was one of the earliest issuers of coins in the world, along with the Lydian staters, several other Middle Eastern coinages, and the Chinese wen. The term is from rūpya, a Sanskrit term for the silver coin, from Sanskrit rūpá, beautiful form.

    The Indian rupee was come first introduce issued and termed as rupiya, the silver coin, by Sher Shah Suri (1540–1545), continued by the Mughal rulers. The Kabuli rupee and the Kandahari rupee were using as currency in Afghanistan prior to 1891 when they were standardized as the Afghan rupee. The Afghan rupee, which was subdivided into 60 paisas, was replaced by the Afghan afghani in 1925. After the middle of the 20th century, Tibet’s official currency was also known as the Tibetan rupee.

    The Indian rupee was the official currency of Dubai and Qatar until 1959 when India created a new Gulf rupee (also known as the “external rupee”) to hinder the smuggling of gold. The Gulf rupee was legal tender until 1966 when India significantly devalued the Indian rupee and a new Qatar-Dubai riyal was established to provide economic stability.

    Types of Rupee used by Countries

     

     India Indian rupee INR ₹ 67.73
     Indonesia Indonesian rupiah     IDR Rp 13,024
     Maldives Maldivian rufiyaa MVR Rf 12.80
     Mauritius Mauritian rupee MUR Rs 35.65
       Nepal Nepalese rupee NPR रू 106.76
     Pakistan Pakistani rupee PKR Rs 104.67
     Seychelles    Seychellois rupee SCR SR 13.20
     Sri Lanka Sri Lankan rupee LKR රු 147.04

    What is a Rupee Meaning Definition - ilearnlot

  • 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.

  • Interest Rate Risk on Banks

    Interest Rate Risk on Banks

    Interest Rate Risk on Banks

    The management of interest rate risk should be one of the critical components of market risk management in banks. The regulatory restrictions in the past had greatly reduced many of the risks in the banking system. Deregulation of interest rates has, however, exposed them to the adverse impacts of interest rate risk. Different Types of Risk Faced by Banks Today! 

    Interest rate risk on banks is the potential negative impact on the Net interest income and it refers to the vulnerability of an institutions financial condition to the movement in interest rates. Changes in interest rate affect earnings, value of assets, liability, off-balance sheet items and cash flow. Hence, the objective of interest rate risk management is to maintain earnings, improve the capability, ability to absorb potential loss and to ensure the adequacy of the compensation received for the risk taken and effect risk return trade-off.

    Management of interest rate risk aims at capturing the risks arising from the maturity and re-pricing mismatches and is measured both from the earnings and economic value perspective.

    The Net Interest Income (NII) or Net Interest Margin (NIM) of banks is dependent on the movements of interest rates. Any mismatches in the cash flows (fixed assets or liabilities) or repricing dates (floating assets or liabilities), expose bank’s NII or NIM to variations. The earning of assets and the cost of liabilities are now closely related to market interest rate volatility.

    Earnings perspective involves analyzing the impact of changes in interest rates on accrual or reported earnings in the near term. This is measured by measuring the changes in the Net Interest Income (NII) equivalent to the difference between total interest income and total interest expense.

    Economic value perspective involves analyzing the expected cash inflows on assets minus expected cash outflows on liabilities plus the net cash flows or off-balance sheet items. The economic value perspective identifies risk arising from long-term inteerst rate gaps.

    In detail Interest Rate Risk on banks, is the risk due to changes in market interest rates, which might adversely affect the bank’s financial condition. The immediate impact of change in interest rates is on the bank’s earnings through fall in Net Interest Income (NII). Process of Investment, Ultimately the impact of the potential long-term effects of changes in interest rates is on the underlying economic value of bank’s assets, liabilities and off-balance sheet positions. The interest rate risk when viewed from these two perspective is called as “Earning’s Perspective” and “Economic Value Perspective”, respectively.

    In simple terms, high proportion of fixed income assets would mean that any increase in interest rate will not result in higher interest income (due to fixed nature of interest rate) and likewise reduction interest rate will not decrease interest income. Low proportion of fixed assets will have the opposite effect.

    Banks have laid down policies with regard to Volume, Minimum Maturity, Holding Period, Duration, Stop Loss, Rating Standards, etc., for classifying securities in the trading book. Risk Management Model, The statement of interest rate sensitivity is being prepared by banks. Prudential limits on gaps with a bearing on total assets, earning assets or equity have been set up.

    Interest rate will be explained with the help of examples!

    For instances, a bank has accepted long-term deposits @ 13% and deployed in cash credit @ 17%. If the market interest rate falls by 1%, it will have to reduce interest rate on cash credit by 1% as cash credit is repriced quarterly. However, it will not be able to reduce interest on term deposits. Thus, the net interest income of the bank will go down by 1%.

    Or suppose a bank has 90 days deposit @ 9% deployed in one year bond @ 12%. If the market interest rate arises by 1%, the bank will have to renew the deposits after 90 days at a higher rate. However it will continue to get interest rate at the old rate from the bond. In this case too, the net interest income will go down by 1%.

    Types of Interest Rate Risk on Banking

    The various types of interest rate risk in banking are identified as follows:

    Price Risk: Price risk occurs when assets are sold before their stated maturities. In the financial market, bond prices and yields are inversely related. The price risk is closely associated with the trading book, which is created for making profit out of short-term movements in interest rates. Banks which have an active trading book should, therefore, formulate policies to limit the portfolio size, holding period, duration, defeasance period, stop loss limits, marking to market, etc.

    Reinvestment Risk: Uncertainty with regard to interest rate at which the future cash flows could be reinvested is called reinvestment risk. Any mismatches in cash flows would expose the banks to variations in NII as the market interest rates move in different directions.

    Interest-Rate-Risk-on-Banks

  • Different Types of Risk Faced by Banks Today!

    Different Types of Risk Faced by Banks Today!

    Different Types of Risk Faced by Banks Today!

    All companies which have a profit maximizing objective hold a certain degree of risk whether through microeconomic or macroeconomic factors. Banks also face a number of risks atypical of non financial companies due to the payment and intermediary function which they perform. What is Risk Management? Recent changes in the banking environment has lead to an increased pressure to maximize shareholder value, this means that banks take on a higher risk in order to gain a higher return. It is due to this increased pressure and market volatility that banking risk needs such effective management to ensure the banks continued solvency. Risk can be defined as an “exposure to uncertainty of outcome” measured by the volatility (standard deviation) of net cash flow within the firm. Banks aim to add equity to the bank by maximizing the risk adjusted return to shareholders highlighting the importance of fully considering the risk and return business equation. Exposure to risk does not always lead to a loss, pure risk only has a downside from the expected outcome but speculative risk can produce either a better or worse result that expected. 

    Credit risk is the risk that the counterparty will fail to repay the loan in part or full. This includes delayed payments or any default on the loan agreement. It is widely know that credit risk is one of the most damaging risks to banks, for this reason there is usually a separate credit department run around a credit culture of the management’s views. The objective of the credit department will be to maximize shareholder value added through credit risk management. To manage credit risk banks do sometimes take a security over the loan such as property or shares which the bank can take possession of in the event of default on the loan agreement. If the market prices of the security become volatile the bank may ask for more security to offset the probability of marginal default increasing. Credit constraints are implemented to make sure there is a restriction on certain loan agreements to a specific category of borrower, well defined credit limits will reduce the risk of adverse selection. Pricing the loan is a technique which uses a risk adjusted premium to determine the rate of interest on a loan, with the riskier the loan the higher the premium, although a higher interest rate may increase probability of default so must be monitored regularly. The final credit risk management method is to reduce credit losses by building a portfolio with diversification between low and high risk lending. This essentially offsets high risk and return lending with low risk and return lending to minimize any losses incurred.

    A similar but more specific concept to credit risk is sovereign risk involving risk that a government will default on a loan agreement from a private sector bank. Risk Management Model, This case is unusual because if a government sates that the default is due to movement of resources to resolve domestic issues it can declare the loan agreement void due to immunity in the legal process, this will barrier debt recovery through the taking the possession of assets and often leave the bank with partial or full loss of the loan. Debt repudiation is an extreme case where the government no longer recognizes their debt or obligations to creditors. Due to problems and the high risk associated with government lending a foreign currency sovereign credit rating was defined in an attempt to enable informed investor lending decisions.

    An interest rate is a premium paid in order to consume resources in the present rather than at a later date. Interest rate risk is loss or gain in the value of a position due to changes in the interest rate, it is a speculative risk because the changes in interest rates can lead to both a positive and negative result. There are two types of interest rate which are fixed rate and rate sensitive, the simpler form of risk lies with fixed rate assets and liabilities because a change in the interest rate above or below the fixed rate with lead to a loss or gain in capital. Simulation approaches are highly complex and involve an assessment of the potential changes of interest rates on earnings, future economic value and impact on cash flow. Static simulations assess only the cash flow of on and off balance sheet activity, whereas dynamic simulations build a model predicting the future changes of interest rates and expected changes in the banks activity. The best known interest rate risk management method is gap analysis. This is a detailed analysis of the gap between interest rate sensitive assets and interest rate sensitive liabilities over a specific duration. A rate sensitive asset or liability is defined by an asset or liability in which the cash flow changes in the same direction as interest rates. The changes in interest rates have a detrimental effect if there is a mismatch between rate sensitive assets and liabilities, this is because if the level of rate sensitive liabilities is higher than rate sensitive assets, an increase in interest rates will lead to less profits. High quality interest rate risk management can effectively increase or decrease the gap in order to maximize revenue.

    Operational risk is defined at the risk of loss from a breakdown in internal processes and/or management failure. This can occur through different events such as a law suit, systems failure, or damage to assets and its effects can lead to an increase in unsystematic market risk and liquidity risk. Although there has been significant importance placed upon operational risk there is at present still no clear method of measuring its risk and effects on a general basis.

    The Basel II accord provided three suggested methods of calculating the operating risk of a firm. The basic approach allocates capital using gross income as an indicator for the bank’s exposure to operational risk. The Standardized approach divides the bank into business units and lines and uses individual indicators to calculate a department specific level of exposure to operational risk. The final method of calculating operational risk is the internal measurement approach which allows each bank to use individual internal loss data to determine the capital allocation.

    Market risk is the risk of movement in the price function of financial instruments, resulting in the loss/gain in value. It is a speculative risk, measured by the probability in potential loss/gain in value of a portfolio. The risk occurs in two separate forms; Systematic market risk is caused by the price movement of all financial instruments due to changes in the macroeconomic climate. Unsystematic risk occurs when an instrument moves out of line with the rest of the market due to internal factors with the issuer. Systematic market risk can be prepared for in event of downturn in the economic climate by capital allocation to the specific risk calculated by the risk adjusted rate on capital. Value at risk is a measure of potential losses incurred to a portfolio due to adverse market price movements often used in risk management. Unsystematic risk can be offset by diversification of investments into several different countries and/or industries effectively spreading the risk in attempt to avoid huge losses in specific sector investment. The diversification of investment into foreign countries may increase the potential probability of currency risk.

    Exchange rate flexibility exposes all firms with a short or long term position in any given currency to currency risk. Globalized markets have lead to increases in multinational firms and foreign investment, increasing the level of foreign exchange and political risks. Any exchange of money in a currency other than the firm’s home currency would be expressed as a purchase of foreign currency. Foreign exchange transactions can involve many forms of on and off balance sheet financial instruments. Duration analysis can be used to compare the value of foreign bond to the foreign or domestic currency interest rates. Measures of net risk exposure for each currency can be assessed using gap analysis and will be equal to the difference between assets and liabilities in each currency.

    Political risk arises through the risk of political interference in the operations of a private sector bank, the exposure of which can range between interest rate and exchange regulations to the nationalization of the financial service industry. The main factors which have been stated as to affect political risk is internal or external armed conflict, democratic government, and government stability.

    The level of Liquidity risk can affected by many of the other risks and is defined as the risk that the bank will have insufficient liquid assets on its balance sheet and is therefore unable to fulfil financial commitments without the sale of assets; this is generated from a mismatch in size and maturity of assets and liabilities on the balance sheet or due to loan defaults with a surge of depositor demands. Day to day liquidity risk (funding risk) relates to the daily withdrawals and is predictable due to low depositor withdrawals, if there was a surge of withdrawals then many banks would rely in loans from the interbank market to cover the short term illiquidity. A more unpredictable risk also arising from increased depositor withdrawals is a liquidity crisis. The increase in withdrawals often stems from lack of confidence in the bank, this situation will force the bank to borrow at an elevated interest rate or rely on central bank intervention and deposit insurance to avoid a run. In this situation the central bank can provide provisions in the form of high interest loans or advances, however this is costly and can further damage the banks reputation. Ideally the bank could use a method of maturity matching to guarantee liquidity and eliminate the funding risks. This is the coordination of cash flow by matching the maturity of an asset with the maturity of a liability. This is unlikely to be a widely used approach as asset transformation is a key source of banking profit. Usually the bank will hold a certain level of liquid assets to reassure creditors and signal to the market that the bank is doing well, an increase holding of liquid assets will avoid the liquidity problem but due to a trade off between liquidity and profitability lower return on investments. The most widely used technique of managing banks liquidity is Gap analysis, the liquidity gap is defined by the difference between net liquid assets and unpredictable liabilities. This gives the ability to monitor available capital over time.

    Financial services differ from other firms because of the high level of financial risks that they assume through the payment and intermediary functions. It is therefore critical to manage the risks faced to ensure solvency and to maximize the firm’s value added. In some cases the management of an individual risk can have a positive or negative effect on another risk which shows that they are not mutually exclusive. Many of the main financial crises have risen from a combination of risks surrounding losses due to poor credit risk management, it is important to highlight diversification of a portfolio and asset liability management as influencing factors in effective risk management as they can reduce the probability of several risks. In the future it is important to continue developing new formal and quantitative risk management processes to ensure continues solvency within the financial services industry.

    Different-Types-of-Risk-Faced-by-Banks-Today