Financial management


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Financial management

  2. 2. FINANCIAL MANAGEMENTFinance is defined as the provision of money at the time when itis required. It is the lifeblood of an enterprise without which noenterprise can accomplish its objectives.Financial Management can , therefore, be defined as the art ofprocuring sources of money supply and allocating theseresources on the basis of the forecasted monetary requirementsof the business. It refers to planning, organization, co-ordinationand control of financial activities and resources for achieving theobjectives of an enterprise.Financial Management is applicable to every type oforganization, irrespective of its size, kind or nature . It is as usefulto a small concern as to a big unit. A trading concern gets thesame utility from its application as a manufacturing unit mayexpect.It is completely devoted to a judicious use of capital and acareful selection of sources of capital ,harmonising individualmotives and enterprise goals.It can never be possible to substitute or eliminate the financefunction because the need for money is continous and thebusiness will close down in the absence of finance.Financial Management allows the inflows and outflows of fundsto be properly matched.
  3. 3. PROFILEThe company whose financial functions I referred to for thisproject is PEPSICO.PepsiCo is a leading global food, snack and beverage company.PepsiCo was formed in 1965 with the merger of the Pepsi-ColaCompany and Frito-Lay Inc. Their Major brands—which includeQuaker Oats, Tropicana, Gatorade, Frito-Lay and Pepsi—arehousehold names that stand for quality throughout the world.As of January 2012, 22 of PepsiCos product lines generatedretail sales of more than $1 billion each, and the company’sproducts were distributed across more than 200 countries,resulting in annual net revenues of $43.3 billion. Based on netrevenue, PepsiCo is the second largest food & beverage businessin the world.Indra Krishnamurthy Nooyi has been the chief executive ofPepsiCo since 2006, and the company employed approximately285,000 people worldwide as of 2010. The company’s beveragedistribution and bottling is conducted by PepsiCo as well as bylicensed bottlers in certain regions.PepsiCo Inc. is listed on the New York Stock Exchange (NYSE) andis infact it has been time and again included in the Dow JonesSustainability World Index and is also listed in the S & P 500 andcurrently values around 73 $ per share.
  4. 4. Functions of a Financial ManagerThe changing business model and environment has widened thescope of financial manager. The increasing pace ofindustrialization,innovative technology and cut-throatcompetition have increased the need for financial planning andcontrol of resources.In the present model, a finance manager has diverse functionswhich can be classified under the following heads: 1. Financial Forecating and Planing 2. Deciding the Capital Structure of the Organisation 3. Acquistion of Funds 4. Investment of Funds 5. Proper Cash Management 6. Helping in Valuation Decisions 7. Implementing Financial Controls 8. Maintaining Proper Liquidity 9. Proper Use of Reserves and SurplusesMoreover,a Financial Manager is also required to co-ordinatewith other disciplines of the business like purchase department,production department etc. so that the funds are properlyutilized . Finance function should not limit itself as a basicfunction of management as all important decisions of a businessenterprise are generally taken on the basis of the financemanager’s report and with his consent.
  5. 5. Financial Forecasting and PlanningA Financial manager has to estimate the financial needs of abusiness and estimate the money required for acquiring variousassets and meeting working capital needs. The estimation shouldbe such that neither there are inadequate nor excess funds .In case of Pepsico Inc. they have got a diverse financerequirements starting which are : 1. Raw Materials 2. Direct labour charges 3. Restructuring and Impairment Charges 4. Property,Plant and Equipment and Intangible Assets 5. Taxes 6. Advertising and Maintenance of warehouses 7. Pension,Retiree Medical and Savings PlanAbove all , the Financial Manager also needs to analyse everyfinancial requirement and sort them as per their nature.Raw materials, direct labor and plant overhead, as well aspurchasing and receiving costs, costs directly related toproduction planning, inspection costs and raw material handlingfacilities,are included in cost of sales. The costs of moving,storing and delivering finished product are included in selling,general and administrative expenses.
  6. 6. DECIDING THE CAPITAL STRUCTURECapital Structure refers to the kind and proportion of differentsecurities for raising fund. After deciding the quantum of fundsrequired, it should be decided which type of securities should beraised.It is the function of the financial manager to decide among long-term debt, short-term debt or equity , to be raised by thecompany .But the decision about various sources of fund should be linked tothe cost of raising funds. If the cost of raising funds is too high,then it may not be useful for long .The capital structure of Pepsico Inc. is : Short term obligations 6205 * Long term Obliagations 20568 Total Debt 26773 Pepsico share holders equity 20588*Denotes figures in million dollar.
  7. 7. ACQUISITON OF FUNDSAfter Financial planning ,the next step is to acquire funds. Thereare many sources available for supplying funds. These may beissuing shares or debentures,borrowing from financialinstitutions nd commercial banks etc. The selection of the mostappropriate choice is a delicate task. The choice of a wrongsource for funds might creates much difficulties at any laterstage. The pros and cons should be very carefully analyzedbefore making any final decision.The various sources of funding for PepsiCo are : Issuing Senior Unsecured Notes Revolving credit from PBG, Issuing Commercial Paper Loans borrowed from various Commercial Banks Issuance of Floating Rate NotesMost long-term contractual commitments, except for thelong-term debt obligations, are not recorded on PepsiCo’sbalance sheet.
  8. 8. INVESTMENT OF FUNDSFunds acquired by any organization should be used in the thebest possible way as to expect maximum returns. The foremostthing to do while taking any investment decision is to comparethe cost of acquiring the funds and the returns on investment(ROI). The channels which generate higher returns should bepreffered.The objective of maximizing profits will be achievedonly when funds are efficiently used and they do not remain idleat any time. A financial manager needs to keep in minds all theprinciples of safety , liquidity and soundness of the organizationwhile investing funds.PepsiCo Inc. has invested funds throughout many sectors of theeconomy.In the recent development ,the company has invested funds inthe following sectors : Investment for contract farming in Jharkand,India A 2.5 billion $ investment in china to expand its presence in the country A considerable investment in O.N.E ( One Natural Experience) , the Los Angeles based coconut water company.
  9. 9. PROPER CASH MANAGEMENTCash Management is a very important task of finance manager.He has to access various cash needs at different times and thenmake arrangement for the cash. Cash may be required to(a)Purchase raw materials (b) make payments to creditors(c) meet employee wage bills.The usual sources of finance are :(a)Cash Sales (b) Collection of debts (c) short-term casharrangement from banksThe cash management should be such that neither there isshortage of it and nor is it idle because any shortage of cash willdamage the credit-worthiness of the organization whereas anyidle cash in the business means that it is not properly used.PepsiCo inc. follows a simple procedure for revenue recognitionand cash management. PepsiCo recognize revenue uponshipment or delivery to their customers based on written salesterms that do not allow for a right of return.For short term cash requirements PepsiCo can issue floating debtnotes and approach local commercial banks of the operationalarea .
  10. 10. HELPING IN VALUATION DECISIONSA number of mergers and consolidations take place in thepresent competitive industrial world. A finance manager issupposed to assist management in making valuation and to seethat all the transactions are well reflected in the books . It alsoneeds to see if any change in the capital structure is requiredinside the organization an to assist and advise the managementregarding the same.He is the financial end of the organization and any transactionwithin the organization.PepsiCo has a good history of mergers and acquisition which hashelped the organization rise to the present stature of a multi-national conglomerate.Some of the worthable mergers were- The merger in 2000 with Quaker Oats Acquistion on Tropicana in 1998 Merger with Pepsi Bottling Group (PBG) in 2009. Merger with PepsiAmericas (PAC) Partnership with Basix for contract farming for its frito-lay division Even , the company ,PepsiCo, itself was formed by a merger of the Pepsi-cola company and Frito-lay .
  11. 11. IMPLEMENTING FINANCIAL CONTROLSAn efficient system of financial management necessitates use ofvarious control devices. Financial control devices generally usedare :(a)Return on Investment(b)Budgetary Control(c)Break-even Analysis(d)Cost Control(e)Ratio analysis(f) Cost and Internal AuditReturn on Investment is the best control device to evaluate theperformance of various financial policies. The higher thispercentage, the better the financial performance. The use ofvarious control techniques by the finance manager will help himin evaluating the performance in various areas and takecorrective measures as and when required.PepsiCo is responsible for the objectivity and integrity of theirconsolidated financial statements. The Audit Committee of theBoard of Directors has engaged independent registered publicaccounting firm, KPMG LLP, to audit their consolidatedfinancial statements, and they expressed an unbiased opinion.
  12. 12. MAINTAINING PROPER LIQUIDITYEvery concern is required to maintain some liquidity for meetingday-to-day needs. Cash is the best source for maintainingliquidity . It is required to purchase raw materials , pay workers,meet other expenses , etc. A Finance Manager is required todetermine the need for liquid assets and then arrange them insuch a manner that there is no scarcity of funds.For the need to have proper liquidity , the companymanagement quotes as follows:“Global capital and credit markets, including the commercialpapermarkets, experienced considerable volatility . This volatilitydid not have a material unfavorable impact on our liquidity, andwe continue to have access to the capital and credit markets. Inaddition, we have revolving credit facilities . We believe that our cashgenerating capability and financial condition, together with ourrevolving credit facilities and other available methods of debtfinancing, will be adequate to meet our operating, investing andfinancing needs.”
  13. 13. PROPER USE OF RESERVES AND SURPLUSESThe utilisation of profits or surpluses and proper reserve creationis also an important factor in financial management . A judicioususe of surpluses is essential for expansion and diversificationplans and also in protecting the interest of shareholders. Theploughing back of profits is the best policy but it clashes withinterest of shareholders. It is the function of the financemanager that a balance be struck in using funds for payingdividends and retaining earnings for financing expansion plans,financing Corporate Social Responsibility . The market value ofthe shares is affected by each decision of the financial manager.A judicious policy for distributing surpluses will be essential formaintaining proper growth of the unit.PepsiCo Inc. has got a good control over its surplus distributionso as to create maximum benefit for both the organisation andthe share-holders.The company have taken special care to createreserve for the benefit of its employees by providing them withpension plans and medical plans. The company have also takendue care to fulfil its Corporate Social Responsibilty (CSR) and hasa special reserve for the same.
  14. 14. CONCLUSIONFinancial Management is an indispensible organ of any businessorganisation. Its main aim is to use business funds in such a way that thefirms value is maximised. Financial Management provides a frameworkfor selecting a proper course of action and deciding a viable commercialstrategy.In the context of PepsiCo , we have seen that it has evolved itself into agiant conglomerate from a small beverage unit. It has come up as a greatbusiness model which is now diversifying its interest into various sectors.It has all been possible because of its strong managerial committee andabove all a strong financial model . It has been the finance managerswho truly proved to be the backbone of the organsiation and coulddetermine the future needs and were always to face any situation .