financial management

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What Is Financial Management In any business organization normally the following managerial functions are found : 1.Production Management Deals with----------------- `Product‘ 2.Marketing Management Deals with---------------- ``Customer'‘ 3.Personnel Management Deals with-----------------``Manpower'‘ 4.Financial Management Deals with----------------- ``Funds'‘ Thus, financial management is that specialized branch of management which deals with management of `Funds'. The term `Funds' includes money plus any thing, tangible or intangible which has economic or exchange value. For example, cash in hand and bank, inventory, debtors, land and building and machinery, etc., all are funds. Financial management basically relates to 3 aspects of funds as follows : 1. Supply of additional funds 2. Investment of available funds 3. Distribution of profit as dividend. FINANCIAL MANAGEMENT

Definition of Financial Management : 

Definition of Financial Management (A) As Art or Management Function ``Financial management is the process OR Art of raising and investment of funds and distribution of dividend in such way that objectives of the company are achieved .'‘ (B) As a Science ``Financial management is that branch of knowledge, which deals with principals and techniques of raising funds for the company making investment of funds and distribution of dividend.'‘ Nature or Characteristics of Financial Management 1. It is both Art and Science 2. Its core is to manage `Funds' 3. There are 3 main financial functions : (a) Supply of Funds (b) Investment Decision (c) Dividend Decision 4. It is both theoretical as well as numerical. 5. Finance is important function. 6. Financial management exists in all business organizations – Big or Small. 7. Normally it is handled by top management. 8. Its scope is still expanding.

Scope of Financial Management : 

Scope of Financial Management Scope of financial is very vast. But some of important activities under the scope of financial management may be discussed as follows: 1. Financing Decisions These include the following Forecasting and Financial Planning Working Capital Management Capital Structure Decisions Raising of Funds through Debt and Issue of Shares and Debentures, etc. 2. Investment Decisions These include the following : Cost of Capital Capital Budgeting Project Management Security Analysis and Portfolio Management 3. Dividend Decisions These include the following : Computation of Distributable Profit Management of Retained Earnings Dividend Policies and Practice Dividend and Valuation of Securities. 4. Other Areas of Financial Management These are: Accounting Auditing Tax Planning International Financial Management

Roles of Financial Management : 

Roles of Financial Management Financial Management provides life blood, i.e., `funds' or `capital' to other functional areas. Its roles in any company are many. Some of these are as follows : 1. Financial Planning Setting of financial objectives Preparation of financial plan to test adequacy of funds for plans suggested by production and marketing departments. 2. Procurement of Funds Raising of funds of short-term and long-term at right time from right sources and at lowest cost. This will include raising working capital loans from banks. This will also include issue of shares and debentures, etc. 3. Financial Administration Greating various departments like Accounting, Audit, Tax Management, Cash Collection, Cash Payments, etc. Liquidity Control Inventory and other Assets Control.

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4. Allocation of Net Profit Preparation of final Accounts Allocation of Profit Declaration of Dividend 5. Evaluation and Control of Financial Performance Budgeting Stand costing Funds flow analysis Ratio Analysis 6. Management of Extra-Ordinary Financial Events Mergers & Acquisitions Rehabilitation / Turn around Winding up.

Sources of Funds : 

Sources of Funds Sources of funds means `Instruments' and agencies' providing finance to companies. `Instruments' are like, debit, shares and debentures, etc. `Agencies' are like commercial banks, IDBI, SIDBI & stock exchanges, etc. Sources of Funds are of 2 types 1. Short-term Sources—Capital is provided for one year or less. For exam, overdraft provided by commercial banks to current A/c holders. Long-term Sources- Funds are provided for more than one year.

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Types of Long Term Sources of Funds In companies

Ownership Funds : 

Ownership Funds

Borrowed Funds : 

Borrowed Funds

Equity Shares : 

Equity Shares Definition : ``Equity shares are those whose holders are owners of the company and they bear the risk of the company.'‘ Characteristics of Equity Shares 1. Holders are owners. 2. Carry Voting Rights 3. Can be elected as Directors 4. Return of Capital is made at the end of every other category of classes in company is liquidated. Merits 1. Permanent Source 2. Less Risk (No Risk) 3. Allows sharing of surplus profit (High Return) 4. Possibility of price-increase in share market. Limitations 1. Issue of shares by loss making companies not possible. 2. High funding through shares will not allow advantage of tax on company profits. 3. New shareholders can disturb old Director's control of company.

Preference Shares : 

Preference Shares Definition —These are those shares, of a public company, which carry 3 preferences as follows : 1. On these shares `Dividend Rate' is pre-quoted. For example, 12% Preference shares. 2. Preference Shareholders get their dividend before distribution of equity shares dividend. 3. If company goes into winding up, capital of preference shareholders is returned to them before any payment to equity shareholders. Characteristics 1. Preference shareholders are owner. 2. On these shares rate of dividend is quoted as the time of issue. 3. Preference to holders at the time of dividend distribution and return of capital.

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Types of Preference Shares 1. Redeemable and Irredeemable Preference shares 2. Cumulative and Non-Cumulative Preference Shares. 3. Participative and Non-Participative Preference Shares. 4. Convertible and Non-Convertible Preference Shares. Merits of Preference Shares 1. Permanent capital source. 2. Preference shareholders do not participate in voting and, hence, do not dilute control of existing Director. 3. Minimizes risk of Co. Limitation 1. Only limited scope of raising capital. 2. No chance of capital appreciation to shareholders.

Debentures and Bonds : 

Debentures and Bonds Definition : ` `Debentures include bonds and any other securities issued by a company as acknowledgement of debt raised from public.'' Thus, a debenture or bond is an acknowledgement of debt, issued under common seal of the Co., containing terms and conditions of debt. In India Debentures and Bonds are the same. In practice companies call their debt-______________ as Debentures and Govt. and PSKs as Bonds. Characteristics 1. Holders are creditors 2. A definite denomination. 3. Reward is called Interest. 4. Mode may be physical or De-mat (Virtual) Types 1. Secured and unsecured Debentures. 2. Redeemable and Irredeemable Debentures. 3. Convertible and non-Convertible Debentures. 4. Bearer and Registered. Merits 1. Owners do not disturbs control of Directors. 2. Advantage of tax on income of Cos. 3. Marketability higher as risk lower than shares. Limitation 1. Loss making Cos may not be able to issue debentures. 2. Increases Risk-Debt Proportion.

PROCEDURE OF ISSUE OF SHARES : 

PROCEDURE OF ISSUE OF SHARES I. PRIVATE CO. BY PRIVATE CIRCULATION BAN ON PUBLIC NOTICE PUBLIC CO. (A) FIRST ISSUE PREPARATION OF PROSPECTUS ARRANGEMENTS WITH MANAGERS, BROKERS, BANKERS PERMISSION FROM SEBI & STOCK EXCHANGES ADVERTISEMENT APPLICATION ALLOTMENT OF SHARES CALLS

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(B) SUBSEQUENT ISSUES (I) RIGHTS ISSUE RESOLUTION MAILING LIST LETTER OF OFFER ALLOTMENT (II) PUBLIC ISSUE (A) NORMAL PROSPECTUS PERMISSION FORM SEBI & STOCK EXCHANGE, ETC. ADVERTISEMENT APPLICATION ALLOTMENT

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BOOK BUILDING / BOOK RUNNING RED HERRING PROSPECTUS NOC FOR SEBI, BSE, NSE, ETC. AGREEMENT WILL MANAGER, BANKERS, ETC. ADVERTISEMENT APPLICATION / ALLOTMENT DR. UVESH HUSAIN (M.com, M.B.A, PhD)