Introduction to Financial

Management

Financial Management is very significant

area for a professional who occupies a key
position in the modern enterprise.
The subject matter of financial management
has been changing at a rapid pace and has
acquired a critical significance now a days
due to increasing influence of foreign finance
in Indian capital market and business.
Introduction continued

 Financial management covers all decisions

which have financial implications.
 In order to take right decision at the right
time,one has to be equipped with sufficient
past and present information about business
and its operations.
 The financial implications of decision are
evaluated in terms of maximization of value
of the firm as reflected in the market price of
the share.
Scope of financial function

The financial decisions to be taken involves

 What kind of finance to be raised.

 How much amount of funds to be raised.
 Available sources for raising the finance.
 The proportion of various finance options available
to be included in the finance to be raised. ( Capital
Mix ).
Financial Decisions
 Investment Decisions
 Decision regarding application of funds
raised by the organisation
– Fixed Assets
– Current Assets
 Dividend Policy Decision
 Declaration of Dividend V/s Retention of
profit in Business
Goals / Objects of Finance Function:

 Profit Maximization:
 Wealth Maximization:
 Profit Maximization is short term
 Profit is accounting based
 Profit Maximisation ignores risk
 Cash is King – Long term and the ‘Truth’
 PV of future cash flows is the right indicator of wealth
 Wealth Accumulation includes risk
Demands on Business
 Governments – Indirect Taxes – VAT,Excise
 Suppliers – Payments for Goods/Services
 Employees – Salaries/Wages & Benefits
 Assets – Cost of using - Depreciation
 Capital Providers – Interest & Dividend/Bonus
 Government – Direct Tax – Income Tax
 Company Itself – Retentions / Reserves
Cost Behavior

 Fixed Costs
– Remain unchanged for different levels of output.
– Represent factor which cannot be changed in
short run – i.e., capital
 Variable Cost
– Changes in proportion to change in output
– Represents factor which can be varied in short
run – e.g. Labour, Raw Material
Forms of Business Organisation

 Proprietary Firms
 Partnership Firms
 Joint Stock Companies
– Private Limited Company
– Public Limited Company
 Other Traditional – Non Profit Motive Forms
- Trust, Cooperative Society, Clubs etc.
Basic Concepts in Accounting & GAAP

 Business entity concept  Dual Aspect Concept

 Money measurement
concept
 Cost Concept
 Going Concern
Concept
 Conservatism Concept
 Accounting Period
concept
 Matching Concept
 Materiality Concept
 Consistency Concept
 Financial Statements:
Balance Sheet
Profit & Loss Account

Structure of Financial Statement:

The Companies Act, 1956
Schedule VI

 Part I: Format of Balance Sheet

 Part II: Profit and Loss
 Part III: Notes forming part of the Balance Sheet & Profit & Loss
account
 Part IV: Balance Sheet abstract
Part I:
Structure of Balance sheet:
T Format

 Share Capital  Fixed Assets

2. Preference 2. Operating for Profits
3. Equity  Investments
 Reserve & Surplus 4. Long Term and
5. Shareholders Funds Fixed Income
6. Third Party Funds  Current Assets and
 Secured Loans Loans & Advances
8. Secured by Assets 6. Working Capital
Receivables
Part I:
Structure of Balance sheet:
T Format

 Miscellaneous
 Unsecured Loans Expenditures
2. Long Terms loans
2. Formation Exp.
without Security
 Current Liabilities & 3. Initial & Preoperative
Provisions Exp.
4. Working Capital  Profit & Loss
Payables Account debit
5. Recognised Balance.
Liabilities
Part II:Vertical Income Statement

 Sales
 Less: Manufacturing/ Factoring Cost
 Gross Profit / First Level or Direct Margin on Basic Activities
 Less: Administrative & Selling Overheads
 Operating Profits / Second Level Margin after Operational Costs
 Less : Non- Operating Expenses
 Add: Non-Operative Income
 Profit Before Tax (PBT)/ EBT / Net Margin subject to Tax
 Less: Tax
 Profit After Tax (PAT)/EAT = Profit Maximisation
 Less: Dividend Paid
 Retained Profit = Wealth Maximisation
Sample Balance Sheet
Numbers in millions

2003 2002 2003 2002

Cash 696 58 A/P 307 303
A/R 956 992 N/P 26 119
Inventory 301 361 Other CL 1,662 1,353
Other CA 303 264 Total CL 1,995 1,775
Total CA 2,256 1,675 LT Debt 843 1,091
Net FA 3,138 3,358 C/S 2,556 2,167
Total 5,394 5,033 Total 5,394 5,033
Assets Liab. &
Equity
Sample Income Statement

Numbers in millions, except EPS & DPS

Revenues 5,000
Cost of Goods Sold 2,006
Expenses 1,740
Depreciation 116
Earning Before Interest & Tax (EBIT) 1,138
Interest Expense 7
Taxable Income (EBT) 1,131
Taxes 442
Net Income (EAT) 689
Earning Per Share (EPS) 3.61
Dividends per share (DPS) 1.08