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  Finance Management  

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CAPITAL BUDGETING
 

The total capital (long-term and short term ) of a company is employed in fixed and current assets of the firm. Fixed assets include those assets which are not meant for sale such as land, building, machinery etc. it is a challenging task before the management to take judicious regarding capital expenditures, i.e., investments in fixed assets to that the amount should not unnecessarily be locked up in capital goods which may have fa-reaching effects on the success or failure of an enterprise. A capital asset, once acquired, cannot be disposed of without any substantial loss and if it is acquired on long term credit basis, a continuing liability is incurred over a long period of time, and will affect the financial obligations of the company adversely. It, therefore, requires a long-range planning while taking decision regarding investments in fixed assets. Such process of taking decisions regarding capital expenditure is generally known as capital budgeting. In capital budgeting process, due consideration should b given to the following problems-

(1) Problem of ranking project, i.e., choice of one project over other project.

(2) Problem of capital rationing, i.e., limited budget resources.

(3) Limitations imposed by top management decision on the total volume of investments to be made.

Now-a-days, however, some new analytical techniques are developed for evaluating capital expenditure projects an are under study.

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CAPITAL STRUCTURE
 

Capital structure of a company refers to the make up of its capitalisation. A company procures funds by issuing various types of securities, i.e., ordinary shares, preference shares, bonds and debentures. Before issuing any of these securities, a company should decide about the kinds of securities to be issued. In what proportion will the various kinds of securities be issued, should also be considered. However, in broader sense, capital structure includes all the long term capital resources including loans, bonds, share issued, reserves, etc. and the components of the total capital. A company engaged in devising a financial plan will be faced with problem regarding the proportion of funds to be raised bu issue of its shares and the amount to be raised though borrowings. There is an important difference between these two methods. Funds raised from shareholders require the payments of dividend only out of profits of the company and the amount will be paid only out of profits, if there is any, a company should maintain a fair balance between these two types of securities-(a) fixed cost bearing securities. (debentures and preference shares), and (b) Variable cost bearing securities (ordinary shares). This security mix affects the financial stability of the company. If a company fails in its efforts in maintaining the security mix, its capital structure will be imbalanced which may affect its profitability.

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CAPITALISATION
 

The term capitalization has been defined in a number of ways. As a result, one finds almost as many definitions of the term as there are writers on the subject. On careful analysis, however, one finds two schools of thought on this concept. One of them assigns a broad interpretation to the term, while the outer interprets it in a narrow sense. In the following pages an attempt is mad to examine and discuss the views of both these schools.

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COST OF CAPITAL
 

The cost of capital is a very important factor in formulating a firm's capital structure It is one of the corner-stones of the theory of financial management, yet it is very controversial topic in finance. In deciding the capital structure of a company, it is very necessary to consider the cost of each source of capital and compare them so as to decide which source of capital is in the interest of owners as well as of the contributors, i.e., creditors etc. Now-a-days, cost of capital is the major deciding factor of the capital structure. Prior to tis development, cost of capital was either ignored or by passed. In modern times, cost of capital is used as the very basis of capital budgeting decisions or long term capital investment decisions and to evaluate the alternative sources of capital. Different costs ae used in different times and for different purposes.

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DEPRECIATION POLICIES
 

In every day usage, the term depreciation denotes the decrease in the value of tangible assets due to wear and tear, deterioration an decay of assets with the passage of time, and damage or destruction. It is treated as an expense and is charged against profits of the concern. According to statutory provisions, charging of depreciation to profit and loss account is a must in order to ascertain the net profits available for the distribution of dividend to shareholders. The provision of depreciation is also necessary to have a true and fair view of the fixed assets of the company.

There are so many methods of providing depreciation on fixed asset and the company is free to adopt any of these methods which suits to6the needs of the business. But the method once adopted should be followed throughout the life of the asset unless there is some exceptional circumstances. The
firm should establish a sound depreciation policy taking in view the general principles of providing depreciation and the statutory provisions relating to depreciation because it affects considerably the profits, profitability and the production capacity of to be concern. So, it is the responsibility of the Finical executives to see whether the provision of adequate an reasonable depreciation is being made or not.

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DIVIDEND POLICIES
 

Dividend is that portion of profits of a company which is distributed among its shareholder according to the decision taken and resolution passed in the meeting of Board of Directors. This may be paid as a fixed percentage on the share capital contributed by them or at a fixed amount per share. It means only profits after meeting all the expenses and providing for taxation and for depreciation and transferring a reasonal amount to reserve funds should be distributed to shareholders as dividend. There is always a problem before the top management or Board of Director to decide how much profits should be transferred to Reserve funds to meet any unforeseen contingencies and how much should be distributed to shareholder,. Payment of dividend is desirable because it affects the goodwill of the concern in the market on the one hand, and on the other, shareholders invest their funds in the company in a hope of getting a reasonable return. Retained earnings are the sources of internal finance for the financing of corporate future projects but payment of dividend constitute an outflow of ca to shareholders. Although both-expansion and payment of dividend-are desirable, these two are in conflicts. It is, therefore, one of the important functions of the financial management to constitute a dividend policy which can balance these two contradictory view paints and allocate the reasonable amount of profits after tax between retained earnings and dividend.

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FUNDS FLOW AND CASH FLOW STATEMENTS
 

Every company prepares it balance sheet at the end of its accounting year. It reveals the financial position of the company at a certain point of time. It does not present any analysis. It is simply a statement of assets and liabilities of the concern. Its usefulness is, therefore, limited for analysis and planning purposes. The statement of sources and application of funds serves the purpose, which is popularly known as 'Funds Flow Statement'.

Funds-Flow-Statement is a widely used tool in the hands of financial executives for analyzing the financial performance of a concern. Good concerns always prepare such statement along with the balance sheet at the end of year. This statement shows how the activities of a business have been financed or how the available financial resource have been used during a particular period. But it is quite different from income statement which is primarily a presentation of revenue and expenses items and computation of net income for the period while the funds flow statement is a report of financial operations of a business undertaking. It generally reports changes in current assets and current liabilities and is much useful for financial executives, financial institutions and creditor for the analysis of financial position of the company.

INSTITUTIONAL FINANCING OF INDUSTRY
 

Capital market comprises the sources of long-term finance for industry and Government. It is the market that attracts savings from various sources and makes them available to the sectors of the economy requiring funds for productive uses the savings and to he funds are converted into investments through the issue of new securities by the Government, public bodies and industrial and commercial companies. The major constituents of the capital market are the savers and the bodies which mobilizes savings and chanalise them into investment channels. Savers of funds may be individuals or institutions and the mobilizers of savings includes savings banks, investment trusts, specialised finance corporations and stock exchanges. Prominent among he savings institutions investing in industry is the Life Insurance Corporations and other insurance companies, banks and finance corporations. The capital market needs to be distinguished from the money market which is concerned with the supply of short-term money to trade and industry an from the discount market which consists in dealings in bills of different kinds and supply of money to discount houses for discounting of bills. The money market comprises the commercial banks, exchange banks, co-operative banks, etc., and the central bank (i.e., the Reserve Bank of India in India). The discount maker consists of brokers, banks discounting bills, discount houses, etc.

In this lesson, we concern ourselves with those important constituents of the capital market which serve to channelize funds into industry by investing in the shares and debentures issued by companies and otherwise.

These are:-

1. Investment Trusts
II. Unit Trust of India
III. LIC. and Insurance Companies
IV. Industrial Finance Corporation
V. State Finance Corporations
VI. The Industrial Credit and Investment Corporation

INTRODUCTION
 

Finance is the life-blood of modern business economy. We cannot imagine a business without finance in the modern world. It is the basis of all economic activities, no matter, the business is big or small. The problem of finance and that of financial management is to be dealt within every organisation. The problem of finance is equally important to government, semi-governments and private bodies, and to profit and non-profit organisations. It is therefore, essential to clearly understand the meaning of financial management, its scope and goals.

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MANAGEMENT OF INVENTORY
 

Inventories are the stocks of the product of a company and components thereof that make up the product. The different forms in which inventories exist are- raw materials, work in process (or semi finished goods) and finished goods. Raw materials are those inputs that are converted into finished product. Work in progress inventories are semi-finished products. That requires more work before they are ready for sale. Finished goods inventories are those which are completely manufactured products and are ready for sale. Raw materials and semi finished goods inventories facilitate production while finished goods inventories are required for smooth marketing operations. Thus inventories serve as a line between the production and the consumption of goods.

Inventories constitute, in every business concern, the most significant part of working capital or current assets. Inventories in Indian industries constitute more than 60% of the current assets. Inventories are significant elements in cost process. It is, therefore essential to control the inventories. Inventories control is usually used in two ways-unit or physical control and value control. Purchase and production department officials use this wok in terms of unit control because they are concerned only with the physical control of the inventories. Where as in accounting department official use it in terms of value control because

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MARKETING AND UNDERWRITING OF SECURITIES
 

One of the important functions of Financial Management is the marketing of securities of a company i.e., shares and debentures. Marketing is a process which a company resorts to approach the investing public for collecting funds for the company. For this purpose, various methods and techniques are used. The problem of marketing of securities arises for the first time when the company comes into existence and collects funds by the issue of shares and again at the time of subsequent issues of shares an debentures. Trading in outstanding or old securities-shares and debentures-are negotiable and the Stock Exchanges provide the continuous market for the sale and purchase of securities in the process of mobilizing savings of individuals, and institutions. For this purpose, a company has to utilise the services of certain intermediaries which help the company in selling, transferring, underwriting and sometimes in direct subscribing the securities of the company. By marketing of securities, here we mean, the primary distribution of securities by the company at the time of its formation or at any time after its first issue either direct or trough an underwriting agreement.

PROBLEMS OF CASH MANAGEMENT
 

Cash management has very serious problems attached to it. We can examine these problems under the following four heads:-

1. Controlling of level of cash,

2. Controlling inflow of cash,

3. Controlling outflow of cash

4. Optimal investment of surplus cash.
PROBLEMS OF NEW ISSUE
 

A company requires funds from time to time to meet its financial requirements for expansion projects. For this purpose, company issues securities-ordinary shares, preference shares or debentures. While fissuring securities company faces so many problems as to:-

(i) How to market such securities-direct or through some intermediaries or whether to underwrite the issue or hot.

(ii) What is the time of issuing securities, that should naturally be the proper time to issue a particular security taking in view the stock market conditions.

(iii) What price should be fixed or at what price at security should be issued i.e., at par, at premium or at discount, i.e., problem of pricing is there.

(iv) The problems attached to the rights issues.

The first problem i.e., the problem is of marketing and under writing. The other three problems are the timing of issue, the pricing of issue and the right issue.

The success of a new capital issue depends largely on as to how these problems have been tackled: if the hurdles i these problems have been overcome, the company will face no difficulty in raising the funds to meet its needs properly otherwise they will imperil even the existence of the company. Therefore, careful considerations are needed

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Meaning of Financial Management
Financial Management is that 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.   Read Full Article Meaning of Financial Management
Functions of Financial Management
Finance function for the sake of convenience may broadly be classified into groups i.e., executive finance function and incidental finance function.   Read Full Article Functions of Financial Management
Executive Finance Functions
Executive finance functions include all those financial decisions of importance which require specialized administrative skill.  Read Full Article Executive Finance Functions
Incidental Finance Functions
We have already discussed the executive finance functions in the foregoing paragraphs. Now we shall discuss the various incidental finance functions.   Read Full Article Incidental Finance Functions
Objectives of Financial Management
Finance functions-both executive and incidental-are there in an organisation to achieve certain financial objectives.  Read Full Article Objectives of Financial Management
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