SATHYABAMA UNIVERSITY

FACULTY OF BUSINESS ADMINISTRATION

SUBJECT TITLE: FINANCIAL MANAGEMENT SUBJECT CODE: SBA5109
Course: Master of Business Administration Level I Term II

UNIT – I
Meaning, Nature and Scope of Financial Management

Financial Management means the entire activities of managerial efforts devoted to the
management of finance – both its sources and uses of the enterprise. It is mainly concerned with
the proper management of funds. The finance manager must see that funds are procured in a
manner that the risk, cost and control considerations are properly balanced in a given situation
and there is optimum utilization of funds.
According to Phillipatus, “Financial Management is concerned with the managerial decisions that
result in the acquisition and financing of long-term and short-term credit for the firm. As such it
deals with the situations that require selection of specific assets and liabilities as well as the
problem of size and growth of an enterprise. The analysis of these decisions is based on the
expected inflow and outflows of funds and their effects upon managerial objectives.

1. Financial management is an integral part of overall management. Acquisition, maintenance,

replacement of assets, sources and costs of different capital, production, marketing, finance and
personal decisions etc. Have financial implications. So, financial management is pervasive
throughout the organization.

2. The Central focus of financial management is valuation of firm. That is financial decisions are
directed at optimizing the value of the firm.

3. It involves risk return, trade off. Decisions on investment involve choosing the type of assets,
which generate returns accompanied by risks. Generally higher the risk, returns must be greater
and vice-versa.

4. It affects the survival, growth and vitality of the firm. The amount, type, sources, conditions
and cost of finance influence the functioning of the unit.
5. It is the concern of every concern – small or big, individual or corporate undertakings.

6. It is a sub-system of the business system, which has other sub-systems like production,
marketing etc. This subsystem is to be well co-ordinates with other systems.

7. The external legal and economic environment influences it. The investor preferences, stock
market conditions etc. Affect financial decisions of the business.

8. Finance functions are generally centralized, i.e., more decisions are taken at the top level and
ensure unified directions to investment and financing functions.

SCOPE OF FINANCIAL MANAGEMENT

The scope of financial management is studied in terms of
Functions performed

Relationships with other activities and

Approaches to business finance

I) FUNCTIONS TO BE PERFORMED:

(i) For a long time , the finance function was viewed simply as the task of providing funds needed
by the business on favourable terms. But later on, it was realised that finance should cover more
activities than only the supply of funds.

(ii) The functions of procurement of funds continued till early fifties. Later on effective
utilisation of resources was also regarded as vital functions of finance. It focuses attention on.

(a) allocation of funds to specific assets and,

(b) Establishment of best possible mix of financing in relation to the overall
valuation of the firm.

II) RELATIONSHIP WITH OTHER ACTIVITIES:

Every business transaction involves funds. Hence finance is concerned with all business
operations. The problems of finance are intimately connected with problems of purchasing,
production, marketing etc. It also related with fields of law and accounting. Any financial policy
decision must consider its legality. For presenting the financial position the accountant prepared
financial statements. Thus activities of all the departments involve financial problems directly or
indirectly.

III) APPROACHES TO BUSINESS FINANCE:

Over a period of time, some new business finance have been evolved due to the following
charges in approach:

a. In early days, the scope of business finance was limited to keeping accurate financial
records, managing cash position and providing means for payment. In recent years, it
has included the responsibilities of allocating funds to specific assets and securing the
best possible finance mix.
b. Traditionally it emphasised on management of working capital. In modern days, it has
increased as financial planning and control.
c. Earlier, its scope was limited to financial operations and their mechanics. Now it
emphasis on formulation of financial policies.
d. In modern times it is concerned with the valuation of the firm in the over all market.
e. Earlier it was concerned with external analysis of the firm. Now, it also emphasises on
decision making with in the firm.

OBJCTIVES (GOALS) OF FINANCIAL MANAGEMENT:

PROFIT MAXIMISATION

It is commonly believed that a shareholders objective is to maximise profit. To achieve the goal
of profit maximisation, the financial manager takes only those actions that are expected to make a
major contribution to the firm’s overall profits. The total earnings available for the firm’s
shareholders is commonly measured in terms of earnings per share (EPS). Hence the decisions
and actions of finance managers should result in higher earnings per share for shareholders.

Profit maximisation as a goal is justified based on the argument that pursuit of profit leads
to high rate of growth and allocation of resources. It is relatively the basic criteria for business
decision making and shareholders are mostly interested in returns through the projects.

POINTS INFAVOUR OF PROFIT MAXIMISATION:

 Profit is a barometer through which the performance of a business unit can be measured.
 Profit ensures maximum welfare to the shareholders, employees and prompt payment to
creditors of a company.
 Profit maximisation increases the confidence of management in expansion and diversification
programmes of a company.
 Profit maximisation attracts the investors their savings in securities of time.
 Profit indicates the efficient use of funds for different requirements.

POINTS AGAINST PROFIT MAXIMISATION:

 IT IGNORES THE TIMING OF RETURNS:

It is not the total earnings over the life period of a project that is important to assess the worth of
the project. It is the timing of the earnings that should be given importance. Receipt of funds
immediately should always be preferred to future promise of funds. Because these earnings or
returns could be reinvested for other projects to provide greater future earnings.

 IT IGNORES CASH FLOWS AVAILABLE TO STOCK HOLDERS:

Shareholders receive returns either through cash dividends paid by the firm or by selling their
shares for a higher price than initially paid. A greater earnings per share does not necessarily
mean that dividend per share does not necessarily mean that dividend payment will increase.
Since dividend rate is decided by the Board of Directors at the Annual General Meeting
considering requirements of the firm and the shareholders. Further higher earnings per share do
not necessarily lead to higher stock prices.
 IT DISREGARDS RISK:
The risk that actually occurs may differ from those expected. A trade-off exists between return
and risk. Return and risk are the key determinants of share price. Higher profit pushes share price
higher, whereas higher risk tends to result in a lower share price because shareholders will be
paid higher return when there is high risk.

 ATTRACTS CUTTHROUGHT COMPETITION:

Higher profits may not be on higher account of higher economic performance but may be due to
monopoly. Thus a company which earns high profit due its monopoly position may find it very
difficult to survive if competing firms introduce substitute products. The high profits in this
instance will not be a good indicator of the performance of the firm. In fact, the high profits itself
might be an indicator for other firms to venture into this monopoly market. Thus, profit
maximization becomes narrow.
 GOAL CONFLICT:
The goals of shareholders and management may be differ. The shareholders might be looking for
immediate benefits in the form of quick returns, but management might be considering long-term
benefits for the company. This might create a conflict of whose profit angle should be considered
and whose goals must be satisfied first. Even in a widely held company, there are instances
where a few salaried managers control the assets of the company. Here, the company might really
have conflicting goals of maximizing profits either from the mangers’ view point or shareholders;
view point.

 AMBIGUITY IN MEASUREMENT:
There is in ambiguity in the argument of profit maximization. What profit is to be measured?
Short run or long run? The rate of profit or actual amount of profit? The rate of returns on net
capital or gloss block or net sales?

 It encourages corrupt practices to increase profits.

 The True and fair picture of the organization is not reflected through profit maximisation.
 Huge amount of profit attracts Government intervention.

WEALTH MAXIMISATION AS A GOAL (OBJECTIVE)

The goal of the finance function is to maximise the wealth of the owners for whom the firm is
being carried on. The wealth of corporate owners is measured by the share prices of the stock,
which is turn is based on the timing of return, cash flows and risk. While taking decisions, only
that action that is expected to increase share price should be taken. The market price of shares
(excluding impact of speculation) serves as the standard to judge whether financial decisions have
been taken and implemented efficiently or not. Therefore, maximisation of the firms market
value is considered to be the proper objective. It considers (a) Time value of money on
investment decision (b) The risk or uncertainty of future earnings and (c) effects of dividend
policy on the market price of shares.

POINTS INFAVOUR OF WEALTH MAXIMISATION

 Wealth maximisation is the clear term. Here the present value of cash flow is taken in to
consideration. The net effect of investment and benefits can measure clearly.

 It considers the concept of time value of money. The present value of cash inflows and
outflows helps the management to achieve the overall objective of a company.

 Wealth maximisation guides the management in framing consistent strong dividend policy, to
reach maximum returns to the equity holders.

 Firms that perform better than others have higher share prices and can raise additional funds
under more favourable terms. When funds go to firms with favourable share price, the
economy'’ resources are thereby directed to their most efficient use.

POINTS AGAINST WEALTH MAXIMISATION:

1. SHARE HOLDER’S INTERST:

The goal of maximising share prices does not imply that managers should seek to improve the
value of the common stock at the expense of debt/debenture holders. If the managers make
investment on high profit but at the same time high risk projects and if the project turns out to be
successful, the shareholders will benefit substantially, but if the project fails, bond holders, who
have security, will be able to realise their debt but not the shareholders. The profits will be low
and the share value would also decline for the shareholders. So, when taking such decisions, the
shareholders should be assured of risk protection and if not should be offered higher returns.

2. AGENY ISSUE:

Another issue is that the managers may place their own goals and welfare ahead of the interest of
shareholders and bondholders. An agency problem arises when managers, who hold a small
percentage of common stock, work less strenuously than a complete owner of a small unit. That
is the middle level personnel are given to use luxury benefits when they are in business activities,
which are not available in small-scale units. This will increase the cost of employing managers or
agents for the business. However this argument is weak because managers who do not show
good performance are replaced or dismissed. This threat as well as the attractive incentives in
the form of perquisites stimulates the managers to perform better.

3. SOCIAL RESPONSIBILITY:
As economic agents whose actions have considerable impact on the society, business firms must
take into account the implications of their policies and actions on society as a whole. The
expectations of workers, consumers and various interest groups create a greater influence that
must be respected to achieve long run wealth maximization and also for their survival. But this is
a controversial and non-mandatory obligation. Unless the government and industry come together
and come forward to establish rules for corporate behaviour and also see to it that the firms
follow these rules, this might not be a major issue for the corporate enterprises. Thus firms are
called upon to maximise the wealth of the shareholders within the essential constraints imposed
on them by society.
FUNCTIONS OF FINANCIAL MANAGEMENT
Finance functions have been differently defined. According to one definition finance
function means merely providing funds on most favourable terms Another definition suggests
that it deals with procurement of funds and their effective utilisation in the business. Some
functions relate to implement decisions and some relates to business activities of non-recurring
nature.

For the sake of convenience financial functions can be broadly divided as, executive
functions or decisions making and incidental functions. Executive functions are more important
than incidental functions, It is, therefore, essential to study the executive function in details.

EXECUTIVE FUNCTIONS:

They include all those financial decisions of importance, which requires specialised
administrative skill. Some of the executive functions are given below:

 Financial Planning

This is a decision making function. It involves three basic steps namely i) determining short-
term and long-term financial objectives ii) Formulating financial policies and
iii) Making adjustments and readjustments. In setting out the objective, profitability and
financial risk should be considered. Among various objectives profit maximisation and
wealth maximisation are notable.
After setting objectives, the following policies are likely to be formulated. i )policies
determining the total amount of capital required ii) policies determining the selection of
source of capital iii) policies determining debt-equity ratio iv) policies guiding the dividend
policy v) credit policy terms and vi) policies determining the investment of funds in fixed
assets and current assets.

 Financial Control:
Success of a financial plan depends upon suitably designed control system and measures.
Control is essential for checking actual performance with planned one. For control the
following steps are needed:
 1. Developing standards of performance and 2. Comparing actual performance with these
standards. For proper control a system of reports must be established. The function of
financial control should be continuously performed because the working of a firm is
continuously changing.

 Financing decisions:

Financing decisions relate to proportion of debt capital and equity capital in total capital
employed. While making this decision, the financial manager aims at securing optimal
financing mix which secure maximum market price per share in the long run. Financing
decisions are concerned with the choice of sources of funds and the amounts to be raised from
the sources. The cost of financing, the nature of commitment and the period of raising funds
govern selection of sources of particular source of finance.

 Investment decisions:

Investment decisions involves the decision of allocation of funds to long term assets and
current assets which determines the firms risk. Costs of various methods of financing are
affected by this risk. The financial manager is to see that fund on profitable investments.
Some special investment decisions such as merger, acquisitions, reorganization etc. are also
are taken by financial manager.

 Management of Income and Dividend Decisions:

Net profits can be allocated either in the form of dividend to share holders or to employees in
profit sharing plans or by retaining them for further expansion of the concern. The financial
manager is to decide to extent to which funds to be allocated for each purpose. Usually, the
amount to be paid to employees under profit sharing plans is statutorily fixed, therefore, there
is problem in them. He has paid considerable attention to the remaining two choices.
 Decisions relating to dividend relate Dividend payout ratio, stability of dividends over a
period of time, and dividends in the form of shares. The financial manager has to study the
following to determine the optional dividend payout ratio:
The preference of investors or current dividends and for capital appreciation.
The impact of retained earnings on capital structure and
The impact of decisions relating to earnings on weighted average cost of capital.

 Liquidity Decisions:

Liquidity decisions relate current assets management. It should be managed efficiently otherwise
the firm may become insolvency. Investment in current assets affects firm’s profitability and
liquidity. In order to ensure that insufficient and unnecessary funds are invested in current assets
the executive should develop sound techniques of managing current assets. He should estimate
them and make sure that funds should be made available when needed.

 Deciding upon borrowing policy:

Every organisation plans for the expansion of the business for which he requires additional
resources. Personal resources being limited borrowing from banks or by issue of new shares and
new debentures. The financial manager at this juncture, will take a decision about the time when
the funds borrowed from outside sources, how long they will be needed and from what source
they will be repaid. He must choose the capital structure keeping various points such as cost of
capital, return expected and financial risks involved etc. into mind.

 Checking upon financial performance:

The financial manager is under an obligation to check the financial performance of the funds
invested in the business. It requires retrospective analysis of the operating period to evaluate the
efficiency of financial planning.
 The executive functions discussed are interrelated. Therefore, a change in decision with
regard to one of the functions is likely to affect change in decision concerning some or all others.

II INCIDENTAL FINANCIAL FUNCTIONS:

Incidental functions are supplementary to other decision-making functions. Some of the

important incidental functions include:

 Supervisions of cash receipts and safe guarding of cash balances

 Proper custody and safeguarding of the important and valuable papers, securities and
insurance policies.
 Taking care of all mechanical details of financing.
 Recording-keeping and reporting.
 Compliance with Government regulations.
 Opening accounts and depositing funds in banks etc.

People at lower levels perform the incidental and routine functions. The involvement of chief
executive in incidental functions is limited only to setting up rules, establishing standards for
carrying out the functions effectively, and revising the performance whether the instructions
are being followed properly or not.

ORGANISING FINANCE FUNCTION

The size and importance of finance decision depends on size of the firm. In small firms,
the accounting department generally performs the finance function. As the firm grows, a separate
department reporting directly to the top management is created. In medium and large firms, the
top financial executive will be either vice president of finance or chief financial officer. In large
firms, finance and accounting functions are separated under two different departments.
ORGANISATION OF FINANCE FUNCTION

VICE PRESIDENT
(Finance)

Finance Manager Accounts Manager

1. Financial Planning 1. Tax Planning

2. Raising funds( Finance decision) 2.. Cost accounting
3. Investment decision(Capital Exp. Techniques) 3. Mgt. Accounting
4. Cash Management 4. Data processing
5. Credit management 5. Financial Accounting
6. Portfolio management
7. Taxation works

ROLE (RESPONSIBILITIES) OF FINANCIAL MANAGER

The main functions of a finance manager includes the following activities:

 Planning long-term and short-term requirements considering future operations, growth and
changes.
 Organizing finance activities like raising funds, allocating funds, and ensuring availability of
funds, managing funds and investing surplus funds.
 Giving policy directions relating to capital structure, credit and collections, insurance,
pensions and welfare, tax management, dividend policy.
 He coordinates all the activities relating to finance and functions in close relation with other
functional area managers like production manager, accounting manager, marketing manager,
personnel manager etc.
 Maintains and establishing finance, procedures and record and reporting periodically to the
top management on the developments and activities.
 Monitoring internal environment and scanning external environment to keep in touch with
developments and initiating prompt action wherever needed.

FINANCIAL FORECASTING

To increase the profitability of the firm, the financial manager must be able to anticipate its future
needs for cash. Financial forecasting allows the financial manager to make educated guesses
about the future financial condition of the firm. From these forecasts he or she can then plan the
financing of the firm and arrange for external sources, such as debt and stock, if they are needed.
The financial manager also develops budgets, which indicate, as time passes, whether the
forecasts are proving to be accurate.

TOOLS FOR FINANCIAL FORECASTING

Financial Balance Sheet Income Projected Comparative Common size

Statements statements balance sheet balance sheet balance sheet

Statement Statement Cash flow Funds flow

Showing the changes indicating changes statement statement
In working capital in owner’s capital

ADVANTAGES OF FINANCIAL FORECASTING:

 It indicates to the management the resources, which are needed.

 It enables the management to know how much and how long funds are required.
 It ensures a method of control by which a corrective action can be taken in time.
 It enables the management to gather the necessary information for the formulation of the plan.
 It enables the management to co-ordinate preliminary performances for sales and production
and to pre-determine stock levels.
 It enables the management evaluate plans in financial terms and facilitates comparison with
the results which have been obtained.
 The data obtained from forecasts provide a basis for the decisions regarding cash management
and investment in marketable securities.
 Budgets prepared from forecasts provide a way to maintain control over the firm’s financial
affairs and a signal of changing conditions, which are reflected in the cash flows of the firm.
 The commercial banks are favourably impressed by careful financial planning, especially on
the part of small business where such planning is frequently not done.

SOURCES OF FINANCE

(a) LONG TERM FINANCE

Financing means providing money for investment in the form of fixed assets and also in the form
of working capital needed for day to day operations. Funds can be secured from various sources.
While the availability of finance is of vital importance to any firm, securing it from proper
sources is of prime concern to the finance manger. There are various sources as explained below.

(I) EXTERNAL SOURCES:

1.Owned capital (Preference and Equity Capital)
2.Debentures
3. Public Deposits
4. Lease Financing
5. Hire Purchase
6. Institutional Assistance
7. Government subsidies
8. Mortgage Bonds

(II) INTERNAL SOURCES:

 1. Retained earnings
2.Provision for Depreciation

EXTERNAL SOURCES:

1. Preference Shares:

Preference shares have two preferential rights. One at the time of payment of dividend and
second repayment of capital at the time of liquidation of the company. A fixed rate is
paid and they do not have voting rights, so they have no say in the management of
company. There are many kinds of preference shares. Investors who do not like to risk
their investment prefer these shares. The preference shares are issued in various types and
each of them having change by its nature. They are Participating preference shares, non-
participating preference shares, cumulative preference shares. Non cumulative preference
shares, redeemable preference shares, irredeemable preference shares, convertible
preference shares and non-convertible preference shares.
The company has the following advantages by this way of source:

 No voting rights and normally has no control over the policies.

 The property need not be mortgaged for issue of preference shares.
 Finance through preference shares is less costly as compared to the equity shares.
 Common investors and institutional investors may have special attraction for this
share because of fixed and higher of income. It extends the availability of funds in the
market.

The disadvantages of raising funds by way of preference capital are:

*Compared to equity capital it is a very expensive source of financing.

* Though there is no legal obligation to pay preference dividends, skipping them can
adversely affect the image of the firm in the capital market.
 * Preference shares may lead for insolvency of the company in case where the Directors
continue to pay dividends on them inspite of lower profits to maintain their attractiveness.

2. Equity Shares:

The equity shares are the main sources of finance and the owners of the company contribute
it. It is the source of permanent capital since it does not have a maturity date. The holders of
equity shares have a control over the working of the company. The rate of dividend on them
depends upon the profits of the company. These shares are issued without creating any
charge over the assets of the company. By going for this source the firm have the following
advantages.

 It does not involve any fixed obligation for payment of dividends.

 The larger the equity base, the higher the ability of the company to detain credit.
 It can be issued with out creating any charge on the assets of the company.
 The liability of the firm is limited to the extent of their capital contribution.
 Equity shares are of small face value. Even the small investors can become members
of big organisation. This enhances the opportunity to raise the finance from the
market.

The disadvantages of raising funds by way of equity capital are:

The cost of equity capital is high. The rate of return required by equity shareholders is
generally higher than the rate of return required by other investors.

The cost of issuing equity share is generally higher than the cost of issuing other types of
securities. Underwriting commission, brokerage cost and other issue expenses are higher
for equity capital.

Issuing excess equity shares may lead to over capitalisation.

 The control of the company can be easily absorbed through cornering of shares by a group
of shareholders for their personal advantage at the cost of company’ s interest.

3. Debentures:

Debentures are certificates issued by the company acknowledging the debt due by to its
holders with or without a charge on the assets of the company. It is payable at some specified
time mentioned in the instrument. A fixed interest has to be paid regularly till the principal
has been fully repaid by the company. Debentures provide an opportunity for trading on
equity. They do not entitle to participate in the management of the company. Cautious
investors prefer them. Companies such as transport, electricity etc may get more benefits
from debentures. The Company enjoys the following advantages by utilising this source.

 The Company is able to secure capital without giving any control to the debenture
holders.
 The Company can raise this capital at lesser flotation cost.
 It provides an opportunity to the company to trade on equity and increase the return on
equity and to increase the return on equity capital.
 Since debentures are issued on redemption basis the company can avoid over
capitalisation by refunding the debt when financial needs are no large necessary.
 Debenture holders pay to the company for a specific period and cannot withdraw their
money before the expiry of that period. In this way there is certainty about the
availability of finances for a specific period.

The disadvantages of raising funds by way of debentures are:

Raising of funds through debentures is risky, since in the event of failure of the company
to pay interest or the principal installment in time, the debenture holder may go for the
remedy if filing a petition for winding up of the company.
 Debentures are particularly not suitable for companies whose earnings are always
fluctuating.

4. Institutional Assistance:

The Government has set up certain special financial corporation with the object of stimulating
industrial development in the country. These include IFC, SFC, ICICI, IDBI etc. Such
corporations provide both long term and medium tem loans on easy installments to big
industrial houses. The assistance of these institutions are help in promotion of new
companies, expansion and developments of existing companies. They exist in direct
subscription to company securities, under writing of shares and meeting the financial
requirements of companies during economic depression.

5. Public Deposits:

Public deposits are the another important source for the firms. Companies prefer public
deposits because:

 These deposits carry lower rate of interest

 These are unsecured deposits
 Less formalities are needed and
 These deposits are comparatively for a long period in comparison with the sources of
working capital.

6. Lease Finance:

Lease financing involves the acquisition of the economic use of an asset through a contractual
commitment to make periodic payments called lease rentals to the person who owns the asset.
Thus this is a mode of financing to acquire the use of assets. Through the ownership of the
asset is not with the business enterprise, the right to use the asset is vested with the business
 unit. Leasing allows flexibility for the funds in the hands of the business firms and the cost of
obtaining long-term finance is reduced to a large extent.

7. Hire Purchase:

Hire purchase is also a form of acquiring the assets. Assets involving huge amounts if other
sources of long-term finance are too costly may be acquired through hire purchase. The terms
of hire purchase are set out at the time of entering into the contact itself. As per the
contractual agreement, the business firm will pay a hire purchase charge for a fixed duration
till the hire purchase price of the equipment is fully paid. Hire purchase formalities are lesser
and are easier and less costly mode of financing long-term needs.

8. Government Assistance:

Government subsidies and concessions are other modes of financing long-term requirement.
Subject to the government regulations, subsidies and concessions are granted to business
enterprises. This relieves to a large extent to obligations which otherwise the company would
have to incur. Though there are procedural delays in obtaining this form of finance, this is the
cheapest and most beneficial source of long-term finance for the business firms.

9. Mortgage Bonds:

Mortgage bonds are secured by a lien on fixed assets of the company. It is a written promise
given by the company to the investor to repay a specified sum of money at a specified rate of
interest at a specified time. If the company defaults in any of the provisions of bond
agreement, the trustee on behalf of the bondholders, has the power to take over and sell it,
using the amount to pay the bond. If the sale proceed is less than the amount of the issue
outstanding the bondholders become unsecured creditors for the balance amount.

(II) INTERNAL SOURCES

 1. Retained Earnings :

A company out of its profits, a certain percentage is retained ad that amount is re-invested
into the business for its development. This is also known ploughing back of profits.
According to this device, a part of total profits is transferred to various reserves. These
reserves can help the units to come over depression. These methods are cheaper and best
source of internal financing. This method adds credit worthiness of the company and
increases public confidence in the solvency of the company. A Company with adequate
surplus can follow stable dividend policy. It is an ideal source of finance for expansion and
modernisation. By going for this source the firm have the following advantages.

 It enables business reputation and also increases the capacity of the business to absorb
unexpected and sudden business shocks.
 This method of financing has been found to be useful financing improvements and
expansion.
 As compared to other sources of financing this method of financing is least costly since it
does not involve any flotation cost.

The disadvantages of raising funds by this way of are:

 The management can misuse the retained earnings.

 The shareholders may also object for the continuous use of retained earnings.

2. DEPRECIATION:

Depreciation means decrease in the value of the asset due to wear and tear, lapse of time
and accident. This is also considered as one of the source of financing to business.
Depreciation does not generate funds but it definitely saves funds. The firm can get the
benefit of reducing its income by deducting this non-cash expense in its profit and loss
account. So that the income tax liability for the period is reduced.
FINANCIAL INFORMATION SYSTEM

Financial information system is a channel and carrying and providing information to the
management. The efficiency of an organisation is to ascertain extent governed by the
regularity of the information provided to those who perform the functions of
management. An effective system of FIS collects financial data from the financial records
and transactions. The information is properly processed and stored for use in future. The
need and purpose of FIS is outlined under:

1. The primary aim of FIS is to provide information for sound judgement on the
basis of operating results.
2. To provide understanding and acceptance of the judgement by the people engaged
in various aspects of the organisation.
3. To provide information to top management to help them in planning and
organisation.

FIS reports are to be directed to co-ordinate executives in order to assist them in

administering policies and in appraising the programme.

USES FINANCIAL INFORMATION SYSTEM:

PLANNING AND CONTROL:

FIS is to establish, coordinate and administer and act as integral part of

management. FIS is useful for planning, programmes for capital investing and financing.
In addition, it helps in sales forecasting, expense budgets and cost standards.

REPORTING AND INTERPRETING:

 FIS device is a useful tool for compare performance and operating plans and
standards and to report and interpret the results of operations at all levels of management.

EVALUATING AND ADVISING:

FIS is to evaluate the effectiveness of policies, organisational structure and

procedures in attaining the business objectives.

TAX ADMINISTRATION:

FIS helps in administration of tax policies and procedures FIS assists in

supervising all matters relating to tax accounting.

GOVERNMENT REPORTING:

FIS is a tool for supervise and coordinate the preparation of reports to government
agencies. FIS helps in submission of periodical statements to Government in appropriate
time.

SOURCES OF FINANCIAL INFORATION IN INDIA

I. NEWS PAPERS:

Most of the daily newspapers used to carry important financial news, market reports,
quotations etc. However, the coverage of financial news is usually quite limited. The
dailies such as The Economic Times, Financial Express and Business Line publish the
most comprehensive and daily reports of financial information, quotation etc. They also
provide detailed information on the transactions on various stock exchanges and
commodity markets, statistics and news on various economic and business matters,
feature articles on the trend and development of business, company earnings, reports,
dividend news, final accounts etc. The news papers also publish the financial summaries
regarding the commodity markets, foreign exchange rates, Price and economic indicators.
II. JOURNALS:

At present many journals are published in India containing various aspects of the Indian
economy as well as the companies. They are weeklies, fortnights, monthlies and yearly

(a)WEEKLY PUBLICATIONS:

Among weekly publications, familiar of them are Business Today and Business India.
They publish stock and share quotations and financial, economic, industrial, banking and
commodity developments. These journals will publish company news including
chairman’s speech, dividend declarations etc. They also provide statistical information on
exchange rates, production and import-export trade of India, position of banks, index
numbers of security prices, wholesales price, consumer prices and comprehensive picture
of stock and share quotations etc.
Journals like ‘Indian Finance’ and Business Week cover financial , banking and
Industrial development in India and in the world in the form of articles and news items.

(b)FORNIGHTLY JOURNALS:

These are some fortnightly journals like “ The Company Law Journal”, Financial analysis
journal and Harvard Business Review, Capital Market and Dalal Street. They are
publishing information about the impact of all acts and amendments, articles in the field
of security analysis and topics covering every aspects of Business including finance and
investment marketing.
Apart from weekly and fortnightly journals, there are some monthly publications
like ‘Reserve Bank of India Bulletin’, Dun’s Review and The Chartered Accountant
Institute Journal are also available to provide sources of financial information in India.
III. OTHER SOURCES:

In addition to newspapers and Journals and magazines, there are other publications,
which are helpful in spreading useful information about trade and industry. There are
financial services which provide financial ate and other company and supplementary
data.
(a). Financial Services:
The following are the financial services which provide financial data about individual
companies and financial entities as well as summary statistics about selected industries.
 Kothari’s Economic Guide
 Investors’ Giude (organised by CJ. Dalal & co)
 Stock Exchange year Books
 Investors’ Encyclopaedia.

(a) Company Data:

The following are the other sources publishing company’s annual reports including
chairman’s speech, company’s announcements and publication of prospectus.
Moody’s Manuals and Surveys – These manuals are publishing information about
companies in five separate volumes i.e. industrial, banks, investment trusts, public
utilities and real estate.
Standard Manuals and Surveys – These manuals and surveys provide industry surveys,
forecast of security markets and monthly earnings and stock rating.
Stock Exchange Official Directories – These directories provide information and
analytical review of almost all the companies listed in various stock exchanges in India.
The Directory publish the following information:
 Comparative and common size financial statements of companies for ten years.
 Trend percentages of selected years.
 Equity share data for 10 years.
 Graphs and charts of equity prices, net sales, net profits, dividends etc.
 History of capital structure of each company.

In addition to the above, the Economic Times and The Financial Express also publish
indexes of ordinary share prices, based on quotations of some sensitive scripts from
foreword and cash lists, The analysis is made industry wise.
 The financial executives have to examine the relevant publications containing the
required information before taking any decision considering the company’s financial
position and expected developments in the general economy into account.

Questions:
PART A

1. What are the three key activities of the Financial Management.

2. Outline the factors behind Indian Companies according greater importance to the goal of
shareholders wealth maximization.
3. “The profit maximization is not an operationally feasible criterion”. Do you agree?
4. What are the three basic reasons why profit/EPS maximization fails to the consistent with
wealth maximization.
5. Discuss briefly various short term sources of finance.
6. State briefly the advantages and disadvantages of long term financing.
7. Study the characteristics of sources of finance.
8. Enumerate factors determining sources of finance.
9. Describe the advantages and disadvantages of financial forecasting techniques.
10. Bring out the problems of International Financial Management.

PART B

1. Comment on the emerging role on the finance manager in India.

2. How the finance function is typically organised in the large Organisation? Explain with
organization chart.
3. Should the titles of Controller and Treasurer be adopted under Indian context? Would
you like to modify their functions in view of the company practices in India? Justify your
opinion.
4. When can these arise of conflict between shareholders and managers goals? How does
wealth maximization goal take care of this conflict?
5. In which directions the field of finance evolved in year years? Also state the scope of
financial management.
6. Write a detail note on financial forecasting.
7. Outline the methods and tools of financial forecasting.
8. State the objectives of the financial management.
9. Explain the concept of FIS.
10. Discuss briefly various sources of Long Term finance.