Finacial Management

Chapter 5
FINANCIAL
MANAGEMENT8 marks
Sagar Vetal | E &TC | GGSP

Topics
1. Financial Management
-Objectives & Functions
2. Capital Generation & Management
- Types of capital
- Sources of raising the finance
3. Budgets and accounts
- Types of Budgets
- Profit, Loss accounts & Balance sheet
4. Types of taxes

5.1 Financial Management
Defination:
“
It is study of relationship between
raising the finance and the deployment
of finance.
” Sagar Vetal | E &TC | GGSP

5.1.1 Objectives of Financial Management
- To raise the funds
- To allocate funds properly
- To reduce the misuse of funds
- To maximise the profit in long run
- To maximise the value of the compony
- To fulfill the social responsibility
- To maximize the profit of shareholders

5.1.2 Function of Financial Management
⊸ Understand and estimate the capital requirement
⊸ Determination of Capital composition
⊸ Choosing sources of funds
⊸ Allocation of funds
⊸ Investment of funds
⊸ Managing of fixed assets (Infrastructure, Machines, etc.)
⊸ Managing of woking capital( Capital for day-to-day
operations)
⊸ Management of cash flow
⊸ Management of earning (profit is distributed to all
shareholders, called divident)

5.2 Capital
⊸ Capital means each an every element that that
required by busunessman needs to start an
enterprise.
⊸ e.g. money, land, building, machinery, material,
etc.
⊸ It is a measure of amount of resources of an
enterprise
⊸ Also known as Life-blood of business
⊸ It is lubricant that keeps enterpise dynamic

5.2 Types of Capital
5.2.1 Fixed Capital (Block Capital)
⊸ Capital associalted with long term asstes
⊸ Assets which are used over and over again for a
number of years
⊸ e.g. Building
Equimpments and machinary
Tools
Furniture

5.2.2 Working Capital
⊸ Capital required for day-to-day needs and
expenditures
⊸ e.g. - Purchase of raw material and supplies
- Payment of employees
- Storage cost
- Equipment and plant maintenance cost
- Transportation and shipping expenses
- Expenditure during the time lag between the
sale of the product and payment for them.

5.2.2 Working Capital
⊸ Net Working capital= total assets – current liabilities
⊸ Working capital management refers to managing both
total assets and current liabilities
⊸ Sources:
- Funds from business operations
- Dividents, donations, interest from investment made in
other companies
- sale of useless fixed assets
- long term borrowing

5.2 Sources of finance
1. Internal Sources
2. External Sources
a. Permanent or long term sources
b. Medium term sources
c. Short term sources
d. Specialist Institutions

Sources of finance
1. Internal Sources
1.1 Retained Equity Earning
retaining of earning of shareholders for
internal investments
1.2 Depreciation Provision
Old machinery has less amount of tax
(e.g. Car Insurance)
1.3 Deferred Taxation
Relaxation in taxes if time lag between the
earning of profit and payment is more, In this
case profit in balance sheet less, less amount,
so less tax
1.4 Personal Funds saved or inherited

Sources of finance
2. External Sources
a. Permanent or long term sources of finance
- Sources raised for the period of more than 10 years
i. Savings: Life insurance, shares, mutual funds, bonds, fixed
deposits
ii. Loans: From friends and relations, money lending institutes,
banks
iii. Shares: issuing shares to investors in return of cash
iv. Public Deposits: deposits or loans collected from general
public, employees and shareholders
v. Adding partner to business

Sources of finance
2. External Sources
a. Permanent or long term sources of finance
vi. Debentures:
- Debentures is certificate of indebtedness issued by corporations
- Investment is similar to shares but unlike shareholders debenture
holders has no control over affairs of the company
- Shareholders paid dividend, debenture holders paid a fixed rate of
interest over a stated number of years in debentures
- Debentures are paid weather company is in profit or loss
- Liquidation: debentures gets their money first
vii. Corporate bonds
- Unsecured bonds: also known as debentures
- Secured bonds: claim on assets of corporations if they failed to
pay interest

Sources of finance
2. External Sources
b. Medium term sources of finance
- finance raised for a period of more than 1 year
i. Bank Loans
ii. Hire Purchase: buying goods in installments
iii. Sale and lease back: For getting funds, sell some if the
property with rights to lease back at agreed rent.
iv. Equipment leasing
v. Profit plowback : Whole profit is not distributed to shareholders
as dividend, rather a portion of it is retained in business and used
for growth and finance expansion

Sources of finance
2. External Sources
c. Short term sources of finance
- finance raised for a period of less than 1 year
i. Credit facilities: Obtain goods and services on credit
ii. Trade credit: Purchase goods without paying cash or paying
the supplier at later time
d. Financial Institutions
- finance may be obtained by borrowing from
i. Insurance Company
ii. Investment company
iii. Industrial development corporations Sagar Vetal | E &TC | GGSP

5.3 Budget
Defination:
“It is an instrument of management used as an aid
in planning, programming and control of business
activity.”
It is a written plan of action, includes financial
requirement of different sections of the business for
a specific duration to achieve an estimated profit

5.3 Budget:
Objectives of budget
1. It should specify units to be produced, precies size, style,
and cost of production
2. It should analyze all the factors affecting the department
as well as business
3. It should help in removing waste and raise profit of the
business
4. Prediction about capital expenditure for future
5. It should help in coordiantion among departments,
stabilizing the production

5.3 Budget:
Advantages of budget
1. Polcy, plans and actions taken are all reflected in bugdet
2. Target, goals and policies of business are clearly defined
3. Better understanding, coordination in business, as all are
takes part in budget preparation
4. It provides management a guide for their current, future
spending’s
5. It facilitates finance control
Limitations:
1. Budget is based on estimations, it may need periodic
revision, as estimation may not cent per cent true.
2. Budget may not work properly if the idea of budgeting is not
properly understood by all department

5.3 Budget:
Types of budget
1. Fixed Budget:
A fixed or static budget shows one plan, one volume of
output or sales and the related fixed cost
It depends upon the ability to predict income, sales with
accuracy and no provision is made for any changes that
may occur during the budget period
E.g. research project, hospitals, schools and collages, etc.

5.3 Budget:
Types of budget
1. Fixed Budget:

5.3 Budget:
Types of budget
2. Variable Budget:
A variable or flexible budget recognizes the unreliability of
income or sales predictions and makes provision in advance
for variation in production and expenditure in accordance
with the variation
It shows the range of volumes or sales or cost for each
spending’s
Variable budget takes account only those cost which varies
the output and over which department has control over it.

5.3 Budget:
Types of budget
2. Variable Budget:

5.3 Budget:
Types of budget
Production Budget
⊸ Prepared by production manager
⊸ It includes quantity of product to be manufacture based on
- Sales budget
- Factory Capacity
- Stock Requirement
- Availability raw
⊸ Production budget is a part of manufacturing budget
⊸ Manufacturing budget helps in keeping production at even rate
And controlling the use of labor, material, equipment, etc.

5.3 Budget:
Types of budget
Production Budget:
It incudes estimated volume of production, division of estimated output into types of
product, scheduling of operation by month and quarters, etc.

5.3 Budget:
Types of budget
Labor Budget
⊸ It contains an estimation of labor required to manufacture the product
shown on production budget
⊸ How to calculate labor requirement
i. Split the product into operation
ii. Using work study calculate the standard time for each
operation
iii. from step (ii), calculate total no. of hours required for
production
iv. Convert hours into labor requirement
⊸ While Preparing labor budget following this are considered
- Calculation of ma power requirement's for the department,
determine the grade(i.e. male or female) and the number of
workmen/worker
- Set standard wage rate for workmen

5.3 Budget:
Types of budget
Labor Budget:
10 8 300/day 300 3000

Tax
“A fee charged by govt. on product, income or service
is called Tax.”
Why Govt. needs tax
- Administration service
- Defense service
- Police for maintenance of law and order
- Judicial courts for administration of justice
- Schools and collages for giving education to people
- Hospitals for preservation of health, etc.
Principles of taxation
• Taxation should be equal
• Taxation should be certain/fix
• Taxation should be timely
• Taxation should be economical to collect

Types of Taxes
1. Direct Tax:
- Tax which is paid directly by an individual or
organization to the govt.
- Examples: Income Tax, Wealth tax, Gift tax,
Corporate tax, Estate duty etc.
2. Indirect Tax:
- Tax which increases the price of good in such
way that consumers are actually paying the tax by paying
more for the product they are buying
- Examples: Sales tax, service tax, Excise duty,
custom duty, entertainment tax, VAT, Octroi

Excise Duty/Tax
- It is Indirect type of tax on manufacturing and paid by
manufacturer but the money is recovered from customers
- Rules and provision are given in Central excise Act 1944
- Excise duty is imposed to those goods which are
manufactured in India
- Types of excise duty
1. Basic Excise duty(Schedule 1 in1985)
2. Special Excise duty(Schedule 2 in 1985)
3. National Calamity Contingent Duty(Finance act 2001)
4. additional duty on textile products(1978)
5. Educational cess
6. Additional tax on goods with special importance

Service Tax
- It is indirect type of tax imposed on services provided by an
entity
- Service tax rate: 14% since April 2015
- It is exempted for small scale service provides if total value
of service provided by them is during a year is less than 10
lakh
- VAT is the Indirect type of tax, imposed on the sale of
movable goods
- VAT is multipoint destination taxation system, where tax is
imposed on value addition at each stage of transaction in
production or supply chain
- State govt. responsible for imposing and collection of tax
VAT(Value added Tax)

Income Tax
- Income Tax is direct tax, paid by an individual based on
his/her taxable income in a given financial year
- provisions for income tax is in the Income Tax Act, 1961
- Tax is payable if the taxable is above the minimum taxable
limit and is paid as per the differing rates announced for each
tax slab for the financial year
- Slabs of income tax:

Custom Duty
- Custom duty is the tax on import or export of goods
- It controls the flow of goods including animals, personal
artifacts, hazardous items in and out of country
- Custom duty includes
- Import Duty
- Export Duty
HomeWork:
- Profit and loss account
- Balance sheet

Thanks!
Any questions?
Referance:
Industrial Engineering and Management
- O. P. Khanna

Finacial Management

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