Name : Debabrata Chatterjee

RD
BBA 3 Year
Roll : 33005020023

Financial Management and Risk Analysis

Financial management is generally concerned with short term working capital management, focusing on current
assets and current liabilities, and managing fluctuations in foreign currency and product cycles, often
through hedging (see Corporate finance § Financial risk management). The function also entails the efficient and effective
day-to-day management of funds, and thus overlaps treasury management. It is also involved with long term strategic
financial management, focused on i.a. capital structure management, including capital raising, capital budgeting (capital
allocation between business units or products), and dividend policy; these latter, in large corporates, being more the
domain of "corporate finance."
Specific tasks:
Profit maximization happens when marginal cost is equal to marginal revenue. This is the main objective of Financial
Management.
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 company;
see cashflow forecast.
Minimization on capital cost in financial management can help operations gain more profit.
Estimating the Requirement of Funds:Businesses make forecast on funds needed in both short run and long run, hence,
they can improve the efficiency of funding. The estimation is based on the budget e.g. sales budget, production budget;
see Budget analyst.
Determining the Capital Structure: Capital structure is how a firm finances its overall operations and growth by using
different sources of funds.Once the requirement of funds has estimated, the financial manager should decide the mix of
debt and equity and also types of debt.
 Functions of Financial Management
• Let us now discuss the functions of financial management in this section.
• 1. Financial Planning and Forecasting
• As a part of financial management, financial managers have to do financial planning. It is the estimation of the value of the set of variables at some point in the future. It is a
blueprint of what a firm should do in the future. To do so, financial managers need to take various factors into account.
• These include a sales forecast, pro forma statements, asset requirements, economic assumptions and mode of financing investments. Financial planning can be done for a budget,
expenditure and to save future income.
• If financial planning is related to investments, then the capital must be allocated to projects for assets that can produce income. This may include starting a new business or
launching a new product.
• 2. Cash Management
• One of the functions of financial management is cash management. Decisions must be made in regards to what is to be done with the cash. Financial managers need to decide if
they want to pay back to creditors, pay bills, meet current liabilities or invest in maintaining stock.
• 3. Estimating Capital Expenses
• While estimating the capital expense, a company must keep the following points in mind:
• Promotional expenses: It must be kept in mind that promotional expenses are incurred before any receipt. Promoters must be ready to bear these expenses since promoting a
company is an expensive task. This stage requires investment and for that financial managers must be ready.
• Cost of current assets: While estimating capital expenses, expenses on current assets must be included. These are the day to day expenses that are not fixed.
• Cost of fixed assets: Machinery, land, and buildings are all part of fixed assets whose expenses can be calculated quite accurately. Their valuation helps in the accurate estimation
of the capital requirements. Inflationary economic conditions and escalation features guide financial managers to do accurate valuation of fixed assets. This will be extremely
important for estimating total capital requirements.
• 4. Determining Capital Structure
• Capital structure is the combination of debt and equity used to finance the overall operations and growth of a company. This is an important function of financial management.
Following are the factors that help in determining capital structure:
 Objectives of Financial Management
• Financial Managers Need To Determine Financial Management Objectives For Efficient Procurement, Use Of Resources And Minimizing Costs. Here Are The Most Important Financial
Management Objectives That Businesses Across Industries Need To Prioritize:
•
• 1. Profit Maximization
• The Basic Objective Of Financial Management Is To Achieve Optimal Profit, Both In The Short And Long Run. It Even Includes Wealth Maximization, Where Every Shareholder’s Value Or
Hold Over Dividends Should Increase. These Outcomes Are Related To Business Performance, Which Means That The Better A Business Performs, The Higher Its Market Value Of Its
Shares Will Be.
• 2. Proper Mobilization
• Effective Mobilization Is One Of The Most Important Objectives Of Financial Function. It Means That Managers Need To Make Decisions Regarding The Allocation And Utilization Of
Various Funds. Whether It’s Shares Or Debentures, Finance Managers Need To Estimate An Organization’s Requirements And Make Financial Decisions Accordingly.
• 3. Improved Efficiency
• Proper Utilization Of Finance Also Encourages Proper Distribution. From Creating Inventories To Investing In Profitable Businesses, Mobilization And Utilization Of Finances Lead To Better
Business Decisions. This Also Allows Managers To Dedicate Resources And Distribute Them Among Departments, Increasing The Overall Efficiency Of An Organization.
• 4. Business Survival
• The Primary Goal Of Financial Management Is Ensuring An Organization’s Survival. As The Term Suggests, Businesses Need To Survive The Competitive Market And The Best Way To Do So
Is To Manage Their Financial Resources. Managers Need To Make Big Decisions After Due Diligence. They May Consult With External Members Or Agencies If Needed. Every Decision
Makes A Difference As It Impacts The Business.
• 5. Balanced Structure
• As Financial Managers Prepare Capital Structure, It Creates Balance Among Different Sources Of Capital. This Balance Is Essential For Liquidity, Flexibility And Stability. This Further
Decides The Ratio Between Owned Capital And Borrowed Capital.
 Risk and Return

• It should be understand that every saving and investment product has different risks and returns. Differences include how readily
investors can get their money when they need it, how fast their money will grow, and how safe their money will be.
• Savings ProductsSavings accounts, insured money market accounts, and CDs are viewed as very safe because they are federally
insured. You can easily get to money in savings if you need it for any reason. But there's a tradeoff for security and ready
availability. The interest rate on savings generally is lower compared with investments.
• While safe, savings are not risk-free: the risk is that the low interest rate you receive will not keep pace with inflation. For example,
with inflation, a candy bar that costs a dollar today could cost two dollars ten years from now. If your money doesn't grow as fast
as inflation does, it's like losing money, because while a dollar buys a candy bar today, in ten years it might only buy half of one.

• Investment Products
• Stocks, bonds, and mutual funds are the most common investment products. All have higher risks and potentially higher returns
than savings products. Over many decades, the investment that has provided the highest average rate of return has been stocks.
But there are no guarantees of profits when you buy stock, which makes stock one of the most risky investments. If a company
doesn't do well or falls out of favor with investors, its stock can fall in price, and investors could lose money.
• There are various classes of possible investments, each with their own positions on the overall risk-return spectrum. The general
progression is: short-term debt; long-term debt; property; high-yield debt; equity. There is considerable overlap of the ranges for
each investment class.
 Cash Flow Statement
• In financial accounting , a cash flow statement, also known as statement of cash flows,is a financial statement that shows
how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to
operating, investing and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and
out of the business. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a
company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7) is the International Accounting
Standard that deals with cash flow statements.
• People and groups interested in cash flow statements include:
• Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate
expenses
• Potential lenders or creditors, who want a clear picture of a company's ability to repay
• Potential investors, who need to judge whether the company is financially sound
• Potential employees or contractors, who need to know whether the company will be able to afford compensation
• Company Directors, who are responsible for the governance of the company, and are responsible for ensuring that the
company does not trade while insolvent
• Shareholders of the company.
Capital Structure Decision

• A company’s financing decision or capital structure decision is concerned with the sources
of funds from where long term finance is raised and the proportion in which the total
amount is raised using these sources of funds. It involves determining how the selected
assets/project will be financed. Broadly, financing decisions involve the following three
issues-
• i. The amount of total long term capital requirement. This is related with capital
budgeting decision of the company.
• ii. Sources of funds from where funds are raised.
• iii. Composition of total funds i.e. the proportion of each specific source in total
capitalization.
 Working Capital
• Working capital, also known as net working capital (NWC), is the difference between a company’s current
assets—such as cash, accounts receivable/customers’ unpaid bills, and inventories of raw materials and
finished goods—and its current liabilities, such as accounts payable and debts. It's a commonly used
measurement to gauge the short-term health of an organization.
• Working Capital FormulaTo calculate working capital, subtract a company's current assets from its current
liabilities. Both figures can found in the publicly disclosed financial statements for public companies, though
this information may not be readily available for private companies.
• Working Capital = Current Assets - Current Liabilities
• Example of Working Capital
• At the end of 2021, Microsoft (MSFT) reported $174.2 billion of current assets.1 This included cash, cash
equivalents, short-term investments, accounts receivable, inventory, and other current assets.The company
also reported $77.5 billion of current liabilities comprised of accounts payable, current portions of long-term
debts, accrued compensation, short-term income taxes, short-term unearned revenue, and other current
liabilities.1Therefore, at the end of 2021, Microsoft's working capital metric was $96.7 billion. If Microsoft
were to liquidate all short-term assets and extinguish all short-term debts, it would have almost $100 billion
of cash remaining on hand.Another way to review this example is by comparing working capital to current
assets or current liabilities. For example, Microsoft's working capital of $96.7 billion is greater than its
current liabilities. Therefore, the company would be able to pay every single current debt twice and still have
money left over.