FINANCIAL MANAGEMENT

2. Financial Management means planning,
organizing, directing and controlling the
financial activities such as procurement
and utilization of funds of the enterprise. It
means applying general management
principles to financial resources of the
enterprise.

3.  Investment decisions includes investment in
fixed assets (called as capital budgeting).
 Financial decisions - They relate to the
raising of finance from various resources
which will depend upon decision on type of
source, period of financing, cost of financing
and the returns thereby.
 Dividend decision - The finance manager
has to take decision with regards to the net
profit distribution.

4. The objectives can be-
 To ensure regular and adequate supply of funds to
the concern.
 To ensure adequate returns to the shareholders
which will depend upon the earning capacity, market
price of the share, expectations of the shareholders.
 To ensure optimum funds utilization.
 To ensure safety on investment, i.e, funds should be
invested in safe ventures so that adequate rate of
return can be achieved.
 To plan a sound capital structure-There should be
sound and fair composition of capital so that a
balance is maintained between debt and equity
capital.

5.  Estimation of capital requirement
 Determination of capital composition
 Choice of sources of funds
 Investment of funds
 Disposal of surplus
 Management of cash
 Financial controls

6. Key activities nclude budgeting, internal financial
reporting, cost analysis and monitoring of internal
controls, systems and procedures.
 Budgeting. ...
 Financial Reporting. ...
 Variance Analysis. ...
 Internal Controls Monitoring.

7. Financial Services are concerned with the design and delivery
of financial instruments, advisory services to individuals and
businesses within the area of banking and related institutions
 Banking Services Includes all the operations provided by
the banks including to the simple deposit and withdrawal of
money to the issue of loans, credit cards etc.
 Foreign Exchange services Includes currency exchange,
foreign exchange banking or the wire transfer.
 Investment Services: It generally includes the asset
management, hedge fund management and the custody
services.
 Insurance Services: It deals with the selling of insurance
policies, brokerages, insurance underwriting or the
reinsurance.

8. MEANING:
financial Instruments can be defined as
a market for short-term money and
financial assets that is a substitute for
money. The term short-term means
generally a period of one year substitutes
for money is used to denote any financial
asset which can be quickly converted into
money.

9.  Call /Notice-Money is the money borrowed on
demand for a very short period. When money is lent
for a day it is known as Call Money.
 Term Money deposits with maturity period beyond
14 days is referred as the term money.
 Treasury Bills are short-term (up to one year)
borrowing instruments of the union government.
 Certificate of Deposits is a money market
instrument issued in dematerialised form or as a
Promissory Note for funds deposited at a bank, other
eligible financial institution for a specified period.
 Commercial Paper is a note in evidence of the debt
obligation of the issuer.

10.  Capital market is an organised market
which provides long-term finance for
business.
 Corporate Securities Market
 Government Securities Market
 Long-Term Loans Market.
 Money market is the market for short-term
funds.
 Unorganized Market.
 Organized Money Market

11. Indian Financial System aids in increasing the
national output of the country by providing funds
to corporate customers to expand their
respective business. It helps economic
development and raising the standard of living of
people and promotes the development of weaker
section of the society through rural development
banks and co-operative societies. These are the
important facts about Indian Financial system.

12. UNIT 2

13. It such as:
Payback Period.
Discounted Payback Period.
Net Present Value.
Accounting Rate of Return.
Internal Rate of Return.
Profitability Index.

14.  Decisions are based on cash flow not
accounting income
 Timing of cash flow
 Opportunity cost should be considered
 Cash flow should be adjusted for taxes
 Financing Costs Should be Ignored

15. Payback period in capital budgeting
refers to the period of time required to
recoup the funds expended in an
investment, or to reach the break-even
point
The payback period is the length of time
required to recover the cost of an
investment.

16.  Payback Period = Investment Required/Net
Annual Cash Inflow
 Payback Period = Number of years prior to full
recovery of investment + Unrecovered cost at
start of year/Cash flow during full recovery
year

17. discounted cash flow (DCF) analysis is
a method of valuing a project, company, or
asset using the concepts of the time value
of money. All future cash flows are
estimated and discounted by using cost of
capital to give their present values (PVs).

18.  It was assumed that those investment
proposals did not involve any kind of risk,
i.e., whatever the proposal is undertaken,
there would not be any change in the
business risk which are apprehended by
the suppliers of capital.
 decisions are taken on the basis of forecast
which again depends on future events
whose happenings cannot be
anticipated/predicted with absolute
cer-tainly due to some factors.

19. It can be a conflict between the two
methods because of implicit assumptions
with respect to reinvestment of cash
flows.The NPV method is based on the
assumption that all cash inflows are
reinvested at a rate equal to the cost of
capital (or whatever discount rate is
chosen as the cut-off rate).

20. The rate of return on investment,
defined by equations (1) and (2) above,
goes by the name, margi-nal efficiency of
capital or internal rate of return. These two
concepts are identical only for a uniform
series of cash flows. However, it is very
difficult to apply these concepts in practice
because the solution for r depends on both
the amounts and the timings of the cash
flows, both of which are estimates.

21. The decision maker must specify at the outset
the degree of risk in a particular investment
decision. If the risk exceeds the risk of an
„average‟ invest-ment, a risk premium has to be
added into the „av­erage‟ discount rate. This risk-
adjusted discount rate is to be used to calculate
net present values. It follows quite logically that
investments with less than the average risk are
discounted at lower rates.

22.  The probability distribution approach is
slightly better than the previous two methods. It
calculates an NPV amount for each possible
outcome related to an investment.
 Assume that these periods are possible with
the following probabili-ties:
(1) two year, p = .2,
(2) three years, p = .5; and four years, p = .3.

23. UNIT -3

24. Working capital is the life blood of the
business funds required for the purchase
of raw materials payement of wages and
other day to day expenses are known as
working capital.
It is part of the firms capital which is used
for financing shortterm operations.hence
it is also known as circulating capital or
shortterm capital

25. “Any acquisition of fund which the
current asset increases working capital
for they are one and the same”.
-Bonne ville

26. Working capital means excess of current
asset over current liabilities
Funds invested in current asset is known
as “GROSS WORKING CAPITAL”.
The difference between current asset
and current liabilities is known as “NET
WORKING CAPITAL”

27. There are 2 components of
working capital namely
*** PERMANENT ( OR) FIXED WC
***TEMPORARY (OR) VARIABLE WC

28. It is a minimum amount of current assets
required for conducting a business
operations
This capital will remain permanent in
current assets and should be financed out
of long-term funds the amount varies
from year to year depending upon the
growth of the company

29. It is a amount of additional current assets
required for a short period
It is needed to meet the seasonal
demands at different time during the
year
The capital can be temporary and should
be financed out of short term funds
The wc starts decreasing when the peak
season is over

30. Nature of business
Credit policies
Manufacturing process
Changes in technology
Rapidity of turnover
Business cycle
Seasonal variations
Fluctuation of supply
Dividend policy

31. Working capital depends upon the nature
of business.
service oriented concern like
electricity,water supplies,need limited
working capital.
whereasvthe manufacturing concerns
required sufficient wc.
since they have to maintain stocks and
debtors

32. A company allows credit to its customer
shall need more amount of working capital
like wise a company enjoying credit
facilities from its supplieries will need
lower amount of wc.

33. Manufacturing process involves
convention of raw materials
intoinfluencing wc requirement finished
product.
Longer the proces higher the
requirement of wc. Therefore the length
of manufacturing period is one of the
factor

34. Changes in technology affect the
requirement of wc
If the firm adopt labour intensive process
it requires more working capital
If the firm adopt automation then it
improves the raw material processing
reducing the wastages and make fast
production hence the requirement of wc
is less

35. High rate of turnover requires low
amount of wc and lower and slow moving
stocks needs a larger wc
Examples- jewellary shop have to
maintain different types of jewellary
which requires high wc but high moving
grossary shop requires low wc

36. Change in a economy also influences the
wc. when a business prosperous with
requires huge amount of capital also
during depression huge amount of wc
required for unsold stock and
uncollected debtors.

37. Industries which are manufacturing and
selling goods seasonally requires large
amount of wc during the season.

38. Firms have to maintain large reserves of
raw in stores to avoid unintrupted
production reqired large amount of wc

39. If a conservative dividend policy is
followed by an management the needs for
wc can be met with the retained earnings it
consequently drains of large amount of wc

40. Adequate wc make possible to receive
cash discount from the suppliers which
reduce the purchase price
It creates and maintains the goodwill of
the firm
It provides facilities to meet the crises
during the depression period
It enable the credit worthyness of the
business

41. • It ensures regular supply of raw material and
continueous production
• It increases the morale of employees and their
efficiency
• It can create favourable market condition by
purchasing material in bulk
• Materials in bulk when prizes are lower hold the
stock to realized better prize
• It generate high rate of return by using effictive
utilisation of fixed assests
• It enables the firms to pay regular dividend

42. Every bussiness firm should maintains an
adequate wc.it should be neither excess
nor inadequate however out of the 2
inadequate is more dangerous

43.  It result in intruption of production which
leads to increase in cost and reduction in
profit
 It leads to borrow loans at high rate of
interest
 The firm cannot buy the raw materials in
bulk order and cannot take the advantages
of cash discount
 It may failed to pay dividend because of
non-availability of funds
 It leads to liquidation because of low
liquidity position
 It leads to under utilisation of fixed assests
,thus the rate of return on investments falls

44. It results in idle funds which earns no
profit
It makes an imbalance between liquidity
and profitability
It leads to more production then the
demand
It indicates excessive debtors and
incidence of bad debts
It may tempt to over trade and lose hevily