The PPT Covers the 2 topics
1.Elements of Financial Management
2.Working Capital
which consists of following topics:
Contents :
Finance
Shares
Debentures
Bonds
Right shares
Venture capital
Mutual fund
Importance of working Capital
Types of working Capital
Components of working Capital
➢Meaning
➢Importance
of Working capital
Capital
3. 2.Working capital Management :
Contents :
➢Meaning
➢Importance of
Working capital
➢Types of Working
capital
➢Components Of
Working Capital
4. Finance
The Term Finance Is
Derived From The
Latin Word ‘Finis’.
Finance Can Also Be
Interpreted In Many
Ways Such As Fund,
Money, Investment,
Capital, Amount,
Etc.,
6. Finance Acts As A Medium For Business
Which Involves The Acquisition Of Funds In
Various Departments Such As
Production Department
Purchase Department
Research And Development.
8. Short Term Finance
➢Short term finance are
required primarily to meet
working capital requirements.
➢The focus is on maintaining
liquidity at a reasonable cost.
10. 1.Working capital finance by commercial banks
-Bank Credit may be granted in the following ways:-
Loans
Purchase/ Discounting of bills.
Cash Credit
Over draft
2.Trade Credit
-Trade credit represents credit granted by the suppliers of goods, etc. as an incident of sale.
3.Inter corporate Deposits
-A deposit made by one company to another is called as inter-corporate deposit.
It is generally for working capital funding & is for period not exceeding six months.
4.Factoring
-Factoring is an agreement in which receivable arising out of sale are sold by a firm (client) to the factor (a financial
intermediary).
5.Commercial Paper
-. Commercial paper is an unsecured money market instrument issued in the form of a promissory note
11. Medium Term Loan
➢Medium term finance is defined as money
raised for a period for 1 to 5 years.
➢The medium term funds are required by a
business mostly for the repaired and
modernizing of machinery.
13. 1. Lease Financing
It is a contract In which the assets is purchased initially by the lessor(leasing company) and thereafter leased to the
user(lease company) who pays a specified rent at periodical intervals.
2. Hire Purchasing
Hire purchase transaction, the goods are delivered by the owner to another person the agreement that such
person pays the agreed amount in the periodical installment.
3. EXTERNAL COMMERCIAL BORROWING
ECBs mean foreign currency loan raised by residents from recognized lenders. Financial leases and Foreign Currency
Convertible Bonds are also covered by ECB guidelines.
4. Euro bonds
A bond issued in a currency other than the currency of the country or market in which it is issued.
5. Commercial Banks & State Financial
Money which is obtained through Commercial Banks & State Financial
14. Long Term Finance
Long term finance refer to those
requirements of funds which are
for a period exceeding 5-10 years.
16. 1.Shares : A shares indicates a smaller unit into which
the overall requirement of a company is subdivided.
2. Debentures : It means a document containing
acknowledgement of indebtedness issued by a company
and giving an undertaking to repay the debt at a
specified date.
3. New Debt Instrument :
➢Zero interest bond (ZIB)
➢Deep discount bonds (DDB)
➢Junk bonds
➢Convertible debenture
4. Retained Earnings : Retained earnings means that
part of trading profits which is not distributed in the
form of dividends but retained by directors for future
expansion of the company.
17. 5.Depository Schemes
➢ GDRs :- (Global Depository Receipt)
A negotiable certificate held in the bank of one country
representing no. of shares traded on the exchange of another
country.
➢ ADRs :- (American Depository Receipts)
It allows US investors to buy shares of ADS companies without
the cost of investing directly in Foreign Stock Exchange.
➢ IDRs :- (International Depository Receipt)
It allows foreign companies to raise the funds from Indian
markets.
6. Ventures : The venture capital financing refers to financing &
funding of the small scale enterprises, high technology & risky
volumes.
7. Securitization : It is a process in which illiquid assets are pooled
into marketable securities that can be sold to investors.
18. Some Important Sources Of Finance
1. Seed capital assistance :
Designed by IDBI.
1% service charge for 5 years.
2. Certificate of deposit :
The main advantage of CD is the banker is not required to encash the
deposit before maturity period and the investor is assured of liquidity
because he can sell the CD in secondary market.
3. Internal cash accrual :
Existing profit making companies which undertake an expansion program
may be permitted to invest a part of their accumulated reserves or cash
profit for creation of capital assets.
21. Equity Shares
➢An equity share, commonly referred to as ordinary
share also represents the form of fractional or part
ownership in which a shareholder, as a fractional
owner, undertakes the maximum entrepreneurial
risk associated with a business venture. The holders
of such shares are members of the company and
have voting rights.
➢A company may issue such shares with differential
rights as to voting, payment of dividend, etc.
23. Merits of equity shares
➢Company need not have the forced obligation to pay dividend to
equity shareholders.
➢Equity share is a permanent source of funds which facilitate
flexibility in usage of funds.
➢The obligation to repay the equity capital arises only at the time
of liquidation of the company.
➢The shareholders can participate in the management of the
company through voting rights.
➢Equity shares can be issued without creating any charge over
the assets
24. Demerits of Equity Shares
➢Equity shares always associated with the expectations of the
investors. It is practically a difficult task to fulfill the
expectations of the investors.
➢Equity shareholders have to bear all the losses at the time of
liquidation. Interruptions of many persons are involved in the
company working. So, in some cases, it creates delay in
decision-making.
➢When the finance has to be raised for less risky projects, then
this is not a good source of raising finance. If only equity shares
are issued then the company can not avail the benefits of
trading on equity. Investors who have a desire to invest in safe
or fixed returns have no attraction of such shares.
25. Features of Equity Shares
1. Right to income
2. Right to control
3. Pre-emptive Right
4. Right to Liquidation
26. 1. Right to income :
The equity investors have residual claim to the income of company.
The income left after satisfying the claims of all other investors belongs to
equity shareholder. This income is simply equal to profit after tax minus
preference shares dividend. The income of equity shareholders may be
retained by the firm or paid out as dividends.
Equity earnings which are retained in firm tend to increase market value of
equity shares & earnings distributed as dividend provide current income to
equity shareholders
2. Right to control
Equity shareholders are owners of the firm. So they can elect the board of
directors & have right to vote on every resolution passed before the
company. The board of directors selects the management & management
controls the operations of firm. Hence, equity shareholders indirectly control
the operation of firm.
27. 3. Pre-emptive Right
The pre- emptive right enables existing shareholders to maintain their
proportional ownership by purchasing the additional equity shares issued by
company. According to law, existing shareholders have first priority to
purchase additional shares on pro rata basis before the others. Ex. if company
has 10,00,000 outstanding shares of equity & proposes to issue 3,00,000
additional equity shares, an equity shareholder owing 100 shares has the first
right to purchase 30 of 3,00,000 new shares before those are offered to
anyone else
4. Right to Liquidation
Equity shareholders have a residual claim over the assets of the firm in
the event of liquidation. Claims of all others- debenture holders, secured
lenders, unsecured lenders, other creditors, & preference shareholders – are
prior to the claim of equity shareholders
28. Evaluations from the view point of Company:
➢Advantages :
1. Permanent capital :
It represents permanent capital. Hence there is no liability for repayment.
2. No obligation to pay dividend :
Equity shares impose no obligation on the company to pay a fixed
dividend to the equity shareholders. They get dividend if adequate profits are
available.
3. No charge on property :
The company is able to procure capital without creating charges on its
property, which remain free & can be utilized when additional funds are
required by the company.
29. 4. Wide scope of marketability :
Equity shares are lower denominations, hence they can be purchased by
persons of limited income also. So there is a wide scope of marketability of
equity shares.
5. High credit worthiness :
The equity capital increases the company’s financial base & thus it’s
borrowing limit increase. Lenders generally lend in proportion to the
company’s equity capital. By issuing Equity shares, the company increases its
financial capability. It can borrow when it needs additional funds.
6. High premium :
The company can easily sell equity shares on premium in times of boom.
Even in such circumstances , people are most eager to buy equity shares.
Hence company can easily & quickly raise fixed capital through equity shares.
30. Evaluations from the view point of Company:
Disadvantages:
1. Cost of equity :
Cost of equity is generally highest. The rate of return required by equity
shareholders is generally higher than rate of return required by other
investors.
2. Floatation cost :
Floatation cost means cost of issuing equity shares, which is higher than
cost of issuing other types of securities. Underwriting commission ,
brokerage costs & other issue expenses are higher for equity capital.
3. Interference in management :
Equity shareholders have voting rights. Hence there may be interference
in existing pattern of management.
31. 4. Speculation :
There are the higher chances of speculation because it is traded in
stock market.
5. Dividend is not tax deductible :
Equity share dividend is not tax deductible payment
6. Dilution of control :
Sale of Equity shares to outsiders may result in dilution of control of
existing shareholders
32. Preference Shares
➢ Preference share holders have no
voting rights ; so they have no say
in the management of the company.
➢ A fixed rate of dividend is paid on
preference share capital.
34. Types Of Preference Shares
1. Cumulative preference share
2. Non cumulative preference share
3. Redeemable preference share
4. Irredeemable preference share
5. Participating preference share
6. Non participating preference share
7. Convertible preference share
8. Non convertible preference share
35. 1. Cumulative Preference Shares : These share holders
have a right to claim dividend for those years also for
which there are no profits.
2. Non-Cumulative Preference Shares : These share
holders are paid dividend if there are sufficient profits.
3. Redeemable Preference Shares : These shares are
issued on the terms where they are liable to be
redeemed at either a fixed time, or the company's
option or at the shareholders option. In other words, the
company can buy back preference shares at an agreed
time and price.
4. Irredeemable Preference Shares : Those shares
which cannot be redeemed unless the company is
liquidated.
36. 5. Participating Preference Shares : The holders of
these shares participate in the surplus profits of the
company.
6. Non-Participating Preference Shares : They do not
have such rights to participate or claim for a part in the
surplus profits of a company.
7. Convertible Preference Shares : The holders of
these shares may be given a right to convert their
holding into equity shares after a specific period.
8. Non-Convertible Preference Shares : Those
shares which cannot be converted into equity shares
are known as non-convertible preference shares.
37. Features
➢Maturity:- Preference Shares generally
resembles with equity shares in case of maturity.
The company is required to repay the amount
only at the time of liquidation of the company,
after meeting the claim of creditors but before
paying back the equity share holders.
➢Claims on Income:- Whenever the company
has distributable profit, firstly, a fixed rate of
dividend is paid to preference share holders.
38. ➢Claims on Assets:- Usually, the preference
share holders do not have any right in the
surplus assets of the company. However,
company may issue participating preference
shares which entitle its holder to participate
even in the surplus assets of the company at
the time of liquidation in agreed ratio.
➢Control:- Ordinarily, Preference Share
holders do not have any voting rights, so they
do not have any say in the management or
control of the company.
39. Advantages
The company has many advantages by issuing preference shares, like-
➢ No legal obligation to pay dividend
➢ Preference Shares provides long term capital for the company.
➢ No liability to redeem during lifetime of company.
Investors or Shareholders in preference shares enjoy the following advantages:
➢ Fixed rate of dividend
➢ Superior security over equity shares
➢ Preferential rights in regard to payment of dividend
40. Disadvantages
The company has following disadvantages :-
➢ It is an expensive source of finance.
➢ Cumulative Preference Shares became a permanent burden.
➢ Dividend on preference shares is non deductible expense.
Investors suffers from the following demerits of preference shares:-
➢ Preference Shareholders do not have any voting right in the management.
➢ Rate of dividend is usually lower than equity shares.
➢ The market prices of preference shares fluctuate much more than that of debentures
41. Debentures
➢ Debenture holders are not the owners of the company. They are considered
the creditors of the corporation or in other words, the company borrow
money from them through issuing debenture.
➢ It is a long-term debt instrument or security.
➢ It is also known as BOND.
➢ Bond issued by government do not have any risk of default.
➢ A company in India can issue secured or unsecured debentures.
➢ In case of debentures, the rate of debentures are fixed and known to investors.
42.
43. PURPOSE OF ISSUING DEBENTURES
➢For setting up a new project.
➢Expansion or diversification of Existing project.
➢Normal capital expenditure for modernization.
➢Merge of companies.
44. Features
➢Date of Maturity: For all the non convertible and redeemable
debentures, the issuing company has to issue repayment to the
debenture holders on the date of maturity. This date is also
mentioned on the certificates and it infers the total time for
which the money is invested by the lenders which is interval
between the date of issue to the date of maturity.
➢Charge on Assets and Profits in case of Default: The debenture
holders may have claims over the profits and assets of the
company in case the company has defaulted in the payment of
either the interest or the capital repayment.
➢Convertibility: Certain types of debentures are issued with the
option of conversion into equity. The ratio of conversion and
the time period after which conversion will take place is
mentioned in the agreement of debenture. Debentures may be
fully or partly convertible in nature.
45. ➢ No voting rights: The debenture-holder is not a shareholder
and cannot vote in the company's general meetings.
➢Fixed rate of interest: A debenture with a fixed charge has a
fixed rate of interest. It can be presented as "10% Debenture".
They are always unsecured and earns a fixed rate of interest
but has no share of the profit.
➢Control: Since, debentures holders are creditors of the
company and not its owners, they do not have any control
over the management of the company. They do not have any
voting rights to elect the directors of the company or on any
other matters. But, at the time of the liquidation of the company
they have prior claim over share holders and if remain unpaid,
they may take control over the company.
47. Bonds
Bonds refer to debt instruments bearing interest
on maturity. In simple terms, organizations
may borrow funds by issuing debt securities
named bonds, having a fixed maturity period
(more than one year) and pay a specified rate of
interest (coupon rate) on the principal amount
to the holders. Bonds have a maturity period of
more than one year which differentiates it from
other debt securities like commercial papers,
treasury bills and other money market
instruments.
48. TYPES OF BONDS
Municipal Bonds:
Municipal bonds are debt obligations issued by states, cities,
countries and other governmental entities, which use the money to
build schools, highways, hospitals, sewer systems, and many other
projects for the public good.
When you purchase a municipal bond, you are lending money to a
state or local government entity, which in turn promises to pay you
a specified amount of interest (usually paid semiannually) and
return the principal to you on a specific maturity date.
Not all municipal bonds offer income exempt from both federal and
state taxes. There is an entirely separate market of municipal
issues that are taxable at the federal level, but still offer a state—
and often local—tax exemption on interest paid to residents of the
state of issuance. Most of this municipal bond information refers to
munis which are free of federal taxes.
49. Government Bonds:
Government Bonds are securities issued by the Government for
raising a public loan or as notified in the official Gazette. They
consist of Government Promissory Notes, Bearer Bonds, Stocks or
Bonds held in Bond Ledger Account. They may be in the form of
Treasury Bills or Dated Government Securities.
Mortgage and Asset Backed Bonds:
Mortgage-backed securities (MBS) and Asset-backed securities
(ABS) represent the largest segment of the global bond market
today. In simple terms, investing in MBS means lending your
money to hundreds of individual mortgage borrowers across the
country. In return for a higher yield than Treasury notes, investors
are subject to added "prepayment" risk, meaning money invested
may be repaid much sooner than maturity.
50. Corporate Bonds
Corporate bonds are debt obligations issued by private and public
corporations. They are typically issued in multiples of 1,000 and/or
5,000. Companies use the funds they raise from selling bonds for a
variety of purposes, from building facilities to purchasing
equipment to expanding their business.
Zero Coupon Bonds
Zero coupon bonds are bonds that do not pay interest during the
life of the bonds. Instead, investors buy zero coupon bonds at a
deep discount from their face value, which is the amount a bond
will be worth when it "matures" or comes due. When a zero coupon
bond matures, the investor will receive one lump sum equal to the
initial investment plus the imputed interest
51. Risks of Investing in Bonds
Interest rate risk
When interest rates rise, bond prices fall; conversely, when rates decline, bond
prices rise. The longer the time to a bond’s maturity, the greater its interest rate
risk.
Reinvestment risk
When interest rates are declining, investors have to reinvest their interest
income and any return of principal, whether scheduled or unscheduled, at lower
prevailing rates.
Inflation risk
Inflation causes tomorrow’s rupee to be worth less than today’s; in other words,
it reduces the purchasing power of a bond investor’s future interest payments
and principal, collectively known as “cash flows.” Inflation also leads to higher
interest rates, which in turn leads to lower bond prices.
Market risk
The risk that the bond market as a whole would decline, bringing the value of
individual securities down with it regardless of their fundamental characteristics.
Default risk
The possibility that a bond issuer will be unable to make interest or principal
payments when they are due. If these payments are not made according to the
agreements in the bond documentation, the issuer can default
52. Venture capital
➢It’s a private funding used to support risky new
business and speculative ventures, usually with high
growth potential.
➢A typical venture capital investment usually involves
the business owner giving up equity to venture
capitalist in return for funding.
53. Venture capital funding
➢Venture capitalists are typically very selective in deciding what to
invest in;
➢Funds are most interested in ventures with exceptionally high growth
potential, providing the financial returns and successful exit event
within the required timeframe (typically 3–7 years) that venture
capitalists expect.
➢Young companies to raise venture capital require a combination of
innovative technology, potential for rapid growth, a well-developed
business model, and an impressive management team.
54. Disinvestment
➢Time of exit from the firm’s capital is almost never predetermined, but
depends on the development of the company.
➢In successful cases, divestments take place when the company has
reached the level of expected development and the value of the
company and thus the membership, has consequently increased.
➢ Disinvestments happens when the conviction that is no more
possible to solve the situation created takes hold.
55. Mutual fund
➢A mutual fund is a common pool of money into which
investors place their contributions that are to be invested in
different types of securities in accordance with the stated
objective.
➢ An equity fund would buy equity assets – ordinary shares,
preference shares, warrants etc.
➢ A bond fund would buy debt instruments such as debenture
bonds, or government securities/money market securities.
➢ A balanced fund will have a mix of equity assets and debt
instruments.
➢ Mutual Fund shareholder or a unit holder is a part owner of
the fund’s asset.
58. Advantages of Mutual Funds
➢ Liquidity:
Investors may be unable to sell shares directly, easily and quickly. When they
invest in mutual funds, they can cash their investment any time by selling the
units to the fund if it is open-ended and get the intrinsic value. Investors can
sell the units in the market if it is closed-ended fund.
➢ Convenience and Flexibility:
Investors can easily transfer their holdings from one scheme to other, get
updated market information and so on. Funds also offer additional benefits
like regular investment and regular withdrawal options.
➢ Transparency:
Fund gives regular information to its investors on the value of the
investments in addition to disclosure of portfolio held by their scheme, the
proportion invested in each class of assets and the fund manager's
investment strategy and outlook
59. Disadvantages of Mutual Funds
➢ No control over costs:
The investor pays investment management fees as long as he
remains with the fund, even while the value of his investments
are declining. He also pays for funds distribution charges which
he would not incur in direct investments.
➢ Managing a portfolio of funds:
Availability of a large number of funds can actually mean too
much choice for the investor. So, he may again need advice on
how to select a fund to achieve his objectives.
➢ Delay in redemption:
It takes 3-6 days for redemption of the units and the money to
flow back into the investor’s account.
61. Definition Of Working Capital
In An Ordinary Sense, Working Capital
Denotes The Amount Of Funds Needed For
Meeting Day-to-day Operations Of A
Concern.
62. Need/Importance of Working Capital
➢ It helps measure profitability of an enterprise. In its absence, there
would be neither production nor profit.
➢ Without adequate working capital an entity cannot meet its short-term
liabilities in time.
➢ A firm having a healthy working capital position can get loans easily
from the market due to its high reputation or goodwill.
➢ Sufficient working capital helps maintain an uninterrupted flow of
production by supplying raw materials and payment of wages.
➢ Sound working capital helps maintain optimum level of investment in
current assets.
➢ It enhances liquidity, solvency, credit worthiness and reputation of
enterprise.
➢ It provides necessary funds to meet unforeseen contingencies and thus
helps the enterprise run successfully during periods of crisis.
63. KINDS OF WORKING CAPITAL
WORKING CAPITAL
BASIS OF
CONCEPT
BASIS OF
TIME
Gross
Working
Capital
Net
Working
Capital
Permanent
/ Fixed
WC
Temporary
/ Variable
WC
Regular
WC
Reserve
WC
Special
WC
Seasonal
WC
65. 2.Net Working Capital:
The difference between current assets and current liabilities of a
business concern is termed as the Net working capital.
Net working capital = Stock + Debtors + Receivables + Cash –
Creditors – Payables.
1.Gross Working Capital:
The sum total of all current assets of a business concern is
termed as gross working capital.
Gross working capital = Stock + Debtors + Receivables + Cash.
66. Basis Of Time
Permanent Working
Capital
➢ Regular Working
Capital
➢ Reserve Working
Capital
Temporary Working
Capital
➢ Seasonal Working
Capital
➢ Special Working
Capital
67. Permanent/Fixed Working Capital
A Part Of The Investment In Current Assets Is
As Permanent As The Investment In Fixed
Assets. It Covers The Minimum Amount
Necessary For Maintaining The Circulation Of
The Current Assets. Working Capital Invested
In The Circulation Of The Current Assets And
Keeping It Moving Is Permanently Locked Up.
It is again sub divided into two:
1) Regular Working Capital
2) Reserve Working Capital
68. 1. Regular working capital:
It is the minimum amount of liquid capital required to keep
up the circulation of the capital from cash to inventories to
receivables and back again to cash. This would include a
sufficient amount of cash to maintain reasonable quantities
of raw materials for processing into finished goods to
ensure quick delivery etc.
2. Reserve margin or cushion working capital:
It is extra capital required to meet unforeseen contingencies
that may arise in future. These contingencies may crop up
on account of rise in prices, business depression, strikes,
lock-outs, fires and unexpected competition. It is needed
over and above the regular working capital
69. Temporary Working Capital
➢The temporary working capital is also called
as variable working capital it usually
fluctuates with the volume of business.
It may be sub-divided into:
(i) Seasonal
(ii) Special working capital.
70. (i) Seasonal working capital:
It refers to liquid capital needed during the particular season. According to
Gestenberg, “Beyond initial and regular working capital, most businesses will
require at stated intervals a large amount of current assets to fill the demands of
the seasonal busy periods”.
During the season, the business enterprises have to push up purchase of raw
materials (sugarcane by sugar mills, wool by woolen mills) and employ more people
to convert them into finished goods and thus require large amount of working
capital.
(ii) Special working capital:
It is that part of the variable capital which is needed for financing special operations
such as the organisation of special campaigns for increasing sales through
advertisement or other sale promotion activities for conducting research
experiments or execution of special orders of Government that will have to be
financed by additional working capital.
The distinction between permanent and variable working capital is important in
arranging the finance for an enterprise. Permanent working Capital should be
raised in the same way as fixed capital is procured.
71. Components of working capital
Working capital is composed of various
current assets and current liabilities,
which are as follows:
➢ Current Assets
➢ Current Liabilities
72. Current Assets:
These assets are generally realized within a
short period of time, i.e. within one year.
Current Liabilities:
Current liabilities are those which are
generally paid in the ordinary course of
business within a short period of time, i.e.
one year.
Current assets include:
(a) Inventories or Stocks
(i) Raw materials
(ii) Work in progress
(iii) Consumable Stores
(iv) Finished goods
(b) Sundry Debtors
(c) Bills Receivable
(d) Pre-payments
(e) Short-term Investments
(f) Accrued Income and
(g) Cash and Bank Balances
Current liabilities include:
(a) Sundry Creditors
(b) Bills Payable
(c) Accrued Expenses
(d) Bank Overdrafts
(e) Bank Loans (short-
term)
(f) Proposed Dividends
(g) Short-term Loans
(h) Tax Payments Due
