FINANCIAL MANAGEMENT
It is the specialised function of
general management which is
related to the procurement of
finance and its effective utilisation
for the achievement of common
goal of the Organisation.
FINANCIAL MANAGEMENT
• It includes each and every aspect of
financial activity in the business.
• It is the application of planning and control
functions to the finance functions.
• Financial planning, financial administration
and financial control forms the theme of
Financial Management.
FINANCIAL MANAGEMENT
• FUNCTIONS:– EXECUTIVE FINANCE FUNCTIONS:
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Financial forecasting
Establishing ALM policy
Dividend Policy
Cash flows & requirements
Borrowing policy
Negotiation for outside finance
Monitoring financial performance.
FINANCIAL MANAGEMENT
-INCIDENTAL FINANCIAL FUNCTIONS:
1) Supervision of Cash Transactions.
2) Safe custody
3) Record-keeping
THE GOAL
Wealth Maximisation ?
Profit Maximisation ?
FINL. ACCTG. Vs. FIN. MGMT
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Information- Data –Reporting/presentation
FA:-Reveals what has happened ?
Analysis- Interpretation- estimation-forecast
FM- Reveals how it happened ?
FM- Points to strengths and weaknesses in
the financials.
BALANCE SHEET
COMPOSITION
LIABILITIES
ASSETS
CURRENT
CURRENT
MEDIUM & LT
NON-CURRENT
FIXED ASSETS
CAPITAL &
RESERVES
INTANGIBLES
CLASSIFICATIONLIABILITIES
• CAPITAL & RESERVES:– Equity Share Capital
– Preference Share Capital redeemable over 12
years.
– General Reserves
– Share premium
– All other reserves(excluding provisions)
– Surplus in P & L account.
CLASSIFICATIONLIABILITIES
• TERM LIABILITY-( Medium & L.Term)
– Term loans excluding instalments repayable within a
year.
– Debentures repayable after one year
– Redeemable Preference shares redeemable over 1 year
to 12 years.
– Dealer’s Deposits
– Deferred credits
– Term deposits repayable after 1 year.
CLASSIFICATIONLIABILITIES
• CURRENT LIABILITY–
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Bank Borrowings.
Bills Purchased & Discounted- add back to C/L
Term loan /term deposits due within 12 months
Advance payments received
Lease rentals.
PF/Gratuity/Provision for Tax(adv. Tax-net off)
Pref. Shares/debentures redeemable within the year.
Dividend/other provisions.
CLASSIFICATIONLIABILITIES
• CONTINGENT LIABILITIES ??
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Tax disputed.
Letter of credit devolved.
Duty disputed
Bank guarantee invoked.
– EXAMINE AND CLASSIFY
CLASSIFICATIONASSETS
• CURRENT ASSETS:
– Raw material/work in process/finished goods
– Stores/consumbles( imported-12
mths/others-9 mths.)
– Sundry Debtors• Add Bills Negotiated & discounted
• Less: overdue debtors.
CLASSIFICATIONASSETS
• CURRENT ASSETS(contd):–
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Cash and Bank Balances
Dues from employees
Interest accrued on marketable investments
Marketable investments
Prepaid expenses
Advance paid to suppliers.
CLASSIFICATIONASSETS
• NON-CURRENT ASSETS:
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Investment in subsidiaries
Deposits in govt./EB/telephones.
Unquoted investments
Advance paid for capital goods.
Spare parts
Trade investments.
CLASSIFICATIONASSETS
• FIXED ASSETS:–
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Land & Building
Plant & machinery
Furniture & Fixtures
Vehicle
Capital work-in-progress
CLASSIFICATIONASSETS
• INTANGIBLE ASSETS:–
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Preliminary expenses
Directors’ borrowings
Goodwill
Bad & Doubtful debts
Loss
Deferred expenditure
Patents, trade marks etc.
RATIO ANALYSIS
• LIQUIDITY RATIOS:– CURRENT RATIO:- CURRENT ASSETS
CURRENT LIABILITIES
- QUICK RATIO (ACID-TEST):CURRENT ASSETS - INVENTORY
CURRENT LIABILITIES
RATIO ANALYSIS
• SOLVENCY RATIOS:– DEBT/EQUITY RATIO:TOTAL OUTSIDE LIABILITY
TANGIBLE NET WORTH
- FUNDED DEBT/ EQUITY RATIO:MEDIUM & LONG TERM DEBT
TANGIBLE NET WORTH
TANGIBLE NET WORTH
CAPITAL & RESERVES (-)
INTANGIBLE ASSETS
RATIO ANALYSIS
• TURNOVER RATIOS:– DEBTORS VELOCITY:-( in mths)
TRADE DEBTORS X 12
CREDIT SALES
- DEBTORS TURNOVER:-( no. of times)
CREDIT SALES
TRADE DEBTORS
RATIO ANALYSIS
• -CREDITORS VELOCITY(in mths)
TRADE CREDITORS X 12
CREDIT PURCHASES
-CREDITORS TURNOVER:-(No. of times)
CREDIT PURCHASES
TRADE CREDITORS
RATIO ANALYSIS
• INVENTORY TURNOVER RATIO:-
STOCK X 12 (no. of mths)
SALES( COS)
OR
SALES / STOCK( no. of times)
RATIO ANALYSIS
• PROFITABILITY RATIO:GROSS PROFIT X 100
SALES
- DEBT SERVICE COVERAGE RATIO:Net Profit + Depreciation +Int. on loan
Int. on loan + Instalment of loan
- INTEREST COVERAGE RATIO:
RATIOS & INTERPRETATION
red-signals
Current ratio
HIGH
LOW
Low
stock/bookdebts turnover
Low level of
credit received
Creditors
promptly paid
Unable to pay
creditors
Diversion o
funds
RATIOS & INTERPRETATION
red-signals
HIGH
LOW
ACID TEST
RATIO
Idle funds
Strain on
liquidity
Inventory
Turnover Ratio
Brisk trading/
Manufacturing
to trading
Obsolete stocks
Marketing
problem/poor
demand
RATIOS & INTERPRETATION
red-signals
DEBTORS
VELOCITY
HIGH
LOW
UNABLE TO
INSIST ON
PAYMENT
WEAK MGMT.
COMPETITION
CAUTIOUS
TRADING
POOR
QUALITY
ONLY NET
SALES TAKEN
RATIOS & INTERPRETATION
red-signals
CREDITORS
VELOCITY
HIGH
LOW
UNABLE TO
PAY
CREDITORS
POOR
QUALITY OF
GOODS
RECEIVED
POOR
REPUTATION
PRODUCT IN
GREAT
DEMAND
RATIOS & INTERPRETATION
red-signals
PROFITABILITY
RATIO
HIGH
LOW
STOCKS
OVERVALUED
INCREASED
COST OF
PRODN.
SELLING RAW
MATERIALS
STOCK UNDERVALUED
RATIOS & INTERPRETATION
red-signals
DEBT /
EQUITY
RATIO
HIGH
LOW
OVER
TRADING
CONSERVATIVE
LOW STAKE
INABILITY TO
RAISE DEBT