This PPT prepared and delivered to students of CEPT University explains what is meant by finance concepts and discipline of financial management.

1. Financial Management
For Master of Habitat Management
Students of CEPT University
Ravikant Joshi

2. Introduction
◼ Finance is an all pervading activity.
◼ A thread running through all affairs
◼ It is everybody’s business.
◼ Finance function can not be hived off from our
decision making.
◼ All of us need to augment and utilise resources
efficiently and in a sustainable way to ensure future
flow of resources
◼ Everyone of us takes a judgment after taking into
account relative advantages of devoting the
resources to competing ends.

3. Introduction
◼ Institutions undergo different phases - growth,
stagnancy, decline, revival, stabilisation, merger or
de-merger
◼ Finance, being the life-blood of an organisation (an
all-pervasive activity), needs to be managed through
all these phases of an institutional life-cycle.
◼ Decision-makers must know how to manage
finances of their organisation
◼ An organisation get in to financial problems mainly
because of financial mismanagement or neglect
◼ Financial management attempts at optimising output
from the given input of funds

4. What is Financial Function?
◼ Finance Function has now acquired status of central
nerve center of a body.
◼ Finance Function – Procurement of funds and their
effective allocation to competing ends to maximise
returns.
◼ Three decisions – interrelated and their joint impact
should be taken in to account
❑ The Investment Decision (effective utilisation of resources)
◼ allocation and reallocation of capital, involves risk. Capital
Budgeting main tool of this decision.
◼ Includes the decision to reallocate capital when an asset no
longer economically justifies the capital committed to it

5. What is Financial Function?
❑ The Financing Decision (Procurement of Funds)
◼ Multiple needs and methods of financing
◼ Each source characterized by strengths & constrains
◼ Determining the best financing mix or structure for the
organisation. Risk, return and control are the crucial
factors for this decisions.
❑ The Dividend Decision (disbursing or reinvesting
operating surplus)
◼ It deals with decisions like how much dividend should be
paid? The stability of absolute dividend over time,
repurchase of stock etc. The value of dividend to be
equated against the opportunity cost of the retained
earnings lost as a means of equity financing.

6. Relevance of Finance Function
◼ Three areas of financial decision making are generic
& relevant for all types of institutions/municipal bodies
◼ Resources are allocated (investment decision) in
adhoc manner, without scientific project appraisal
resulting in to non-priority, non-essential or wasteful
allocation
◼ This defeats very purpose of public expenditure
◼ Investment decision is most relevant for public sector
(ULBs) than private sector to achieve equity and
social transformation

7. Relevance of Finance Function
◼ Financing decision (procuring adequate
resources at minimum possible cost) is
relevant because cost of services /
governance depends on it
◼ Municipal bodies fail to recover tax or non-tax
resources which increases cost of finance
◼ Dividend decision – maximization of
returns/wealth for the people at large either
by retaining or reinvesting operating surplus

8. What is Financial Management?
◼ It provides holistic solutions to three areas of financial
decision making
◼ It is concerned with the managerial decision that result
in the -
❑ acquisition and financing of long-term & short-term credits for
the firm.
❑ Selection or combination of assets
❑ Selection or combination of liabilities
❑ Problem of size & growth of an enterprise
◼ Analysis of these decisions is based on the inflows &
outflows of funds and their effects upon objectives

9. What is Financial Management?
◼ Financial management is planning, directing,
monitoring, organising and controlling the monetary
resources of an organisation
◼ Financial management is the management of the
finances of a business/organisation in order to achieve
its financial objectives like –
❑ Creating wealth for business
❑ Generating adequate cash
❑ Providing return on investment in tune with risk involved
◼ Financial Management is concerned with efficient use
of important economic sources, namely, Capital Funds.

10. What is Financial Management?
◼ Its basic objectives are
❑ maintenance of liquid assets & maximization of
the profitability of the organisation
❑ Ensuring operational efficiency by efficient &
effective utilisation of finances
❑ Ensuring financial discipline in the organisation
◼ Objective has changed from maximisation of
profit to maximisation of wealth

11. Types of Finance Required
◼ Long-term – more than 5 years – for
acquiring assets – land, building big
infrastructure projects, machinery
❑ Requirement depends on size and nature of a
municipal body
◼ Medium-term – one to five years – for
modernisation, for adopting new methods of
operations, for small infrastructure projects
❑ Need arises from technology change and
increased demand for services

12. Types of Finance Required
◼ Short-term – less than one year – for current
operations, for stock purchase,
❑ Requirement depends on nature & volume of day
to day expenditure and time lag between recovery
of taxes and charges and expenditure
◼ Short term funds usually cost less than the
long term funds but may cost more also
depending on liquidity position in market
◼ Financial management is procuring funds in
appropriate manner at minimum possible cost

13. Financial Management Process
Financial
Planning
Financial
Decision
Making
Financial
Control

14. Financial Management Process
◼ Three basic processes –
❑ Financial Planning – ensuring sufficient funding is
available and their application is planned
❑ Financial Decision-making – deciding regarding
investment, financing and dividends
❑ Financial Control – ensuring funds are procured
and spent as per planning. Also checking whether
◼ Assets are being used efficiently
◼ Assets are secure
◼ Management is acting in best interest of shareholders
and in accordance with business rules

15. Financial Management Process
◼ Basic three processes can be extended and can be
grouped as follows
❑ Creating Financial Framework
◼ Evaluating Financial Conditions
◼ Financial Policy Making
◼ Financial Planning and Forecasting
❑ Managing Financial Framework
◼ Financing and managing of operating budget
◼ Financing and managing of capital budget
❑ Enabling Financial Management System
◼ Accounting System, Assets Management System,
Procurement System, Performance Measurement System,
corporate or good governance (social responsibility) System

16. Financial Management Process
Managing
operative
Budget
Managing
Capital
Investment
Plan
Corporate or Good Governance
Financing of
operative
Budget
Financing of
Capital
Investment
Plan
Accounting
Performance
Measurement
Asset Management
Evaluating Financial
Condition
Financial
Policy Making
Financial Planning
& Forecasting
Creating Financial
Framework
Managing Financial Framework
Enabling Performance
Procurement
Managing
operative
Budget
Managing
Capital
Investment
Plan
Corporate or Good Governance
Financing of
operative
Budget
Financing of
Capital
Investment
Plan
Accounting
Performance
Measurement
Asset Management
Evaluating Financial
Condition
Financial
Policy Making
Financial Planning
& Forecasting
Creating Financial
Framework
Managing Financial Framework
Enabling Performance
Procurement

17. Creating Financial Framework
Evaluating Financial Conditions (financial
analysis)
Financial Policy Making
Financial Planning and Forecasting

18. Evaluating Financial Conditions (financial
analysis)
◼ Financial analysis is the first process or
starting point of financial management.
Whether it is setting up a new business;
expanding or diversifying a business; reviving
a stagnant or declining business; or simply
running the business,
◼ Financial analysis is a continuous process of
measuring and monitoring of an
organisation’s/ULB’s financial condition.

19. Financial Condition - definition
Maintain existing
service levels
“financial condition can be broadly defined as a
organisation’s ability to finance its operations on a
continuing basis. More specifically, financial condition
refers to a organisation’s ability to (1) maintain existing
service levels, (2) withstand local and regional
economic disruptions, and (3) meet the demands of
natural growth, decline, and change.”
Withstand local
and regional
economic
disruptions
Meet demands of
natural growth,
decline and
change

20. Evaluating Financial Condition – some
basic truths
◼ Most financial problems do not develop suddenly
❑ A decline in revenues
❑ An increase in expenditure pressures,
❑ Decreasing cash and budgetary surpluses
❑ A growing debt burden
❑ The accumulation of unfunded liabilities
❑ The erosion of capital plant
❑ A decline in tax base or an increase in the need for
public services

21. Failure of Conventional Systems
◼ Budget, balance sheet and other financial statements fails
to provide multiyear perspective of emerging good or bad
Financial Condition of an organisation/a municipal body
❑ Maintenance costs that are being postponed.
❑ Accumulated unfunded pension liabilities or employee
benefit liabilities.
❑ Reductions in purchasing power caused by inflation.
❑ Decreasing flexibility in the use of monies that results from
unfunded central government mandates.
❑ Erosion of plants, machinery, buildings, other capital assets.
❑ Impact of economic and demographic changes to changes
in revenue and expenditure rates.

22. Framework for Evaluating Financial
Condition
◼ Need to ask following questions -
❑ Can a corporate body/an organisation
continue to pay for what it is now doing?
❑ Are there reserves or other ways for financial
crisis?
❑ Is there enough financial flexibility with an
organisation to adjust to change?
◼ If a corporate body/an organisation can
meet these challenges, it is having a
sound condition

23. Aspects of Financial Analysis
◼ Financial Analysis looks at
❑ External economic conditions – inflation, employment,
interest rates, economic growth, etc.
❑ Political culture, governmental policies, legal framework,
etc.
❑ Internal economic conditions/practices like repeated use of
one-time revenue resources, i.e., reserves, or sale of
assets
❑ One-time accounting changes
❑ Internal borrowings
❑ Possibilities of deferring a large amount of current costs to
the future, deciding on maintenance and pension, ignoring
long range or full life cost of a liability – purchasing assets,
examining long-term costs

24. Financial Policy Making
◼ Word Policy has several meaning - can be called a philosophical
or ideological stance or a statement of intent or a plan or an
expression of future direction
◼ ‘financial policy’ describes the principles and goals that guide the
financial management of an organisation.
❑ Influences financial decision-making
❑ Leads to development of strategies to achieve mission and vision
of organisation
❑ Provides standards for evaluating and monitoring performance of
organisation’s FMS
◼ It is not sufficient to have a single or one policy, but it is crucial to
have a policy framework.
◼ Policy framework can be defined as “a system or structure of
policies that provide guidelines for decision-making -- achieving a
comprehensive financial strategy for sound financial oversight.”

25. Financial Policy Making Process
Organize/
Define Process
Implement /
Publicize Policy
Benchmark Policy
and Practice
Review/
Adopt Policy
Review
Existing Policy
Monitor
Implementation
Draft Policy
Statement
◼ Effects of having no Policy
❑ Uncertainty about a business organisation's position
❑ Lack of confidence on the part of investors and users of
financial information
❑ Adoption of improper financial practices
❑ Low public image

26. Financial Policies - example
◼ A organisation will maintain a year-to-year fund carryover
balance of at least 5% of general operating revenues in order to
maintain adequate cash flow and to reduce the demand for short-
term borrowing.
◼ No more than 30% of a municipal body’s cash management
investment portfolio will be in long-term securities for a period of
longer than three years.
◼ Uncollected bills should not exceed five to eight percent of total
bills/demand raised.
◼ A deficit of more than five to ten percent of the total operating
budget in any one year may be a danger signal.
◼ Short-term debt outstanding at the end of the fiscal year should
not exceed five percent of operating revenues.
◼ Annual debt service as a percentage of recurring revenues
should not be more than 15 percent.

27. Financial Planning and Forecasting
◼ Financial planning is a process in which coordinated
comprehensive strategies are developed and
implemented to achieve the financial goals and
policies of a municipal body/an organisation.
◼ Tools of financial planning
❑ Strategic planning
❑ Financial forecasting
❑ Budgeting
❑ Multi-year capital investment planning
❑ Debt Planning
❑ Trend Monitoring

28. Financial Analysis, Policy Making,
Planning and Forecasting - Relationship

29. Managing Financial
Framework
Financing & Managing Operating Budget
Financing & Managing Capital Budget

30. Budgeting tool for managing financial
framework
◼ operating budget and capital budget are the two wheels of the
financial management chariot
◼ Financial management mainly happens through these two
mechanisms
◼ Budgeting is identifying what we want and devising ways to
achieve it. Historically it evolved as a controlling tool, today it is a
management tool involving planning and controlling functions.
◼ Budget in the public institution context is an instrument of socio-
economic reforms.
◼ The transparency about a municipal body’s/an organisation’s
vision stems from the structure and format of its budget.
◼ The budget provides benchmarks for efficiency analysis and also
provides modalities for fixing up accountability.

31. Characteristics of an efficient budget
system
◼ Transparency
◼ Accountability
◼ Responsiveness
◼ Workability
◼ Compatibility
◼ Performance Measurement
◼ Performance Audit
◼ Finding the cost and containing the cost

32. Operating Budget
◼ An operating budget is a clear, logical plan for
the allocation of resources for day-to-day
operations of an organisation. There are two
aspects of this element:
❑ Management of the operating budget process -
comprises improving budget structure, applying
different budgeting techniques, employing
performance measurement systems and
controlling budget.

33. Operating Budget
◼ Procurement of funds to finance the operating budget - all of the
functions that go into estimating, collecting, administering and
investing revenues to ensure that there are sufficient monies
available on an on-going basis to finance the operating budget
the yearly plan for accomplishing goals and objectives of a
municipal body through day-to-day operations.”
◼ Three types of sources of funds
❑ Own Sources of revenue
❑ Borrowing
❑ Grants
◼ Also involves preparation of cash budget for cash management
and working capital management through which it can increase
profitability without affecting liquidity by efficient budgeting

34. Process of Operating Budget
Departmental
Requests
Budget Review
by CEO
Draft Budget
Governing Body
Review
Revenue
Estimates
Organize
Process
Integrate
other Plans
Involve Citizens
Budget
Administration
Amendments
Final review
Public hearings

35. Financing & Managing Capital Budget
◼ Capital budget is a plan for proposed capital
improvement projects and the means of financing
them
◼ Need arises for separate capital budget because
nature of receipts & expenditure is different having
future long term impact
◼ Depends on comprehensiveness and quality of CIP
◼ Capital investment plan - is a multi-year (usually 5-6
year) plan of capital investment projects listed in
priority order by year
◼ Cost measurement and containment is important

36. Financing & Managing Capital Budget
◼ ‘Life Cycle cost approach should be adopted
◼ Conventional approach – only Capital and O
& M cost taken in to account
◼ Life Cycle cost approach – takes in to
account
❑ Capital cost, finance cost, operating cost,
maintenance, replacement and alteration cost,
residual or salvage values

37. Life Cycle Phases of Capital Investment
Project
◼ Stage/Phase 1- Organising
❑ Determine organisational structure and process
❑ Establish policies
❑ Develop forms and instructions
◼ Stage/Phase 2 - Planning
❑ Get stakeholders’, citizens’ input
❑ Assess capital needs
❑ Conduct any needed studies for construction projects
◼ Stage/Phase 3 – Prepare a preliminary capital
improvement plan
❑ Prepare project requests
❑ Review capital investment project requests
❑ Prioritise project requests

38. Life Cycle Phases of Capital Investment
Project
◼ Stage/Phase 4 - Approval
❑ Stakeholders’/Citizens’ review of proposed CIP and budget
❑ Governing Body adoption of CIP and budget
◼ Stage/Phase 5 - Implementation
❑ Establish project management
❑ Choose project delivery system
◼ Stage/Phase 6 – Controlling - Ensure financial controls
◼ Stage/Phase 7 - Construction
❑ Contract administration
❑ Project reporting
◼ Stage/Phase 8 – Occupancy (holding assets) - Relocation
◼ Stage/Phase 9 – Disposal of Assets - Getting good salvage
value

39. Financing Capital Budget
◼ It is essentially financing assets (creating,
acquiring or improving) or retiring liability
◼ Private Sector - it happens in only two ways
❑ decrease in one or other form of assets
❑ Increase in one or other form of liability
◼ Public Sector - two additional ways
❑ Grants, Subsidies from Govt./Public Donations
❑ Using sovereign power – Development charge

40. Financing Capital Budget
◼ Decrease in Assets Stock
❑ Operating or revenue surplus (operating income – operating expenditure)
❑ Using accumulated reserves or surplus
❑ Selling assets or leasing out assets
◼ Increase in Liabilities
❑ Raising new debt
❑ Raising new equity
◼ One-time capital revenue
❑ Charge development fees
❑ Benefit assessments and levy special charge on beneficiaries
❑ Accept capital contribution from consumers to recover capital cost
◼ Other special capital receipts
❑ State grants and subsidies for capital improvement projects
❑ Public private partnerships
❑ Donations from people at large

41. Approaches for financing project
◼ Pay as You Go –
❑ through operating surplus, reserves etc and
❑ passing on concurrently or in advance, capital and increased
operating cost to consumers or stakeholders
❑ Avoids interest cost of financing debt; savings can be used to
expand services or reduce taxes
❑ Provides greater flexibility to finance operating costs
❑ Conserves debt capacity to enhance creditworthiness
❑ Provides no chance for irresponsible incurring of too much debt
❑ Provides benefit for the next generation of taxpayers in the form
of “paid for” infrastructure
◼ Pay as You Use –
❑ through debt financing (leveraging)
❑ Capital and increased operating cost is recovered as consumers
use the services or assets

42. Financing Capital Budget
◼ Two concepts for decision making
❑ Opportunity cost of alternative investment as one asset is
replacing another asset or one asset is selected over other
❑ Cost of capital
◼ Methods of evaluating capital investment projects
❑ average rate of return,
❑ pay back period,
❑ internal rate of returns,
❑ net present value and
❑ profitability index

43. Enabling Financial
Management Systems
Accounting & Financial Reporting
Performance Measurement
Assets Management
Procurement
Corporate and Good Governance

44. Accounting and Financial Reporting
◼ Accounting is the process of recording, classifying and
summarising events & transactions in a meaningful manner and
interpreting the results thereof. It is a process of identifying,
measuring and communicating information to permit judgment
and decision by the users of the accounts
◼ Decision makers need to use information provided by accounting
system
◼ On its own accounting system can not ensure good financial
management
◼ Transparency and accountability two important aspects
associated with accounting system
◼ Financial reporting – furthers transparency & accountability – a
communication with stakeholders, people at large – builds
credibility for an organisation

45. Performance Measurement
◼ Measurement, assessment or appraisal of the
results (and outcomes) and efficiency of services or
programmes on continuous basis
◼ It should provide insight into the causes of the
outcomes and serve following objectives
❑ Response to public demands for accountability
❑ Help in making resource allocation decisions
❑ Help in highlighting and remedying performance problems
❑ Motivation personnel to continue improvement efforts
❑ Providing data for programme evaluations
❑ Support in strategic and other long-term planning efforts
❑ Communicate better with the public to foster public trust
❑ Providing better services that too more effectively

46. Assets Management
◼ Very important component of financial management
❑ assets need to be maintained and this involves a sizeable cost
(burden on resources);
❑ assets represents locked resources, which can be freed to
finance new assets or to reduce liabilities
◼ Asset management is an approach to develop and maintain
assets owned by an organisation to ensure that:
❑ Asset requirements and asset management strategies are driven
by defined service levels and performance standards.
❑ Scarce financial resources are properly allocated and managed
to optimise investment in infrastructure.
❑ A long-term (life-cycle) approach is taken when determining asset
operations, maintenance, renewal and development strategies.

47. Procurement
◼ It constitutes one of the main expenditure component for any
organisation, so very important from cost control aspect
◼ Procurement is not simply purchasing
◼ Procurement includes
❑ the functions of purchasing, inventory control, traffic and
transportation, receiving, inspection, store-keeping, salvage and
disposal operations
❑ supply chain management, logistics management and materials
management.
◼ Procurement is buying the right quality in the right quantity, at the
right price, from the right source. The key word here is “right.”
◼ Transparency and Accountability becomes important in case of
public sector

48. Corporate and Good Governance
◼ Improving financial management is not only saving
resources or wealth maximisation but also
attainment of good governance
◼ Governance means: the process of decision-making
and the process by which decisions are
implemented (or not implemented).
◼ Corporate Governance -holding the balance
between economic and social goals and between
individual and communal goals
◼ SEBI – Trusteeship, commitment to values, ethical
business conduct

49. Good Governance
◼ For all non-
corporate bodies
Consensus
oriented
Transparent
Equitable &
inclusive
Responsive
Accountable
Follows the
rule of law
Effective &
Efficient
Participatory
Good
Governance

50. Financial Management
Thank You