This presentation is made by Toran Lal Verma. Meaning, nature, and scope of Financial Management are discussed. scope and objectives of financial management have been discussed along with merits and demerits.
This presentation is made by Toran Lal Verma. Meaning, nature, and scope of Financial Management are discussed. scope and objectives of financial management have been discussed along with merits and demerits.
The Financing Decision is yet another crucial decision made by the financial manager relating to the financing-mix of an organization. It is concerned with the borrowing and allocation of funds required for the investment decisions
A simple and comprehensive presentation on Profit maximization v/s Wealth Maximization.
By Arvinder Pal Kaur
Faculty of Management
Northwest Group of Institutions
Dhudhike, MOGA
This PPT contains the full detail of topic leverage in financial management
it covers following topics :-
Meaning of Leverage
Types of Leverage
Operating Leverage
Financial Leverage
Difference between Operating & Financial Leverage
Combined Leverage
Illustrations
Exercise
The Financing Decision is yet another crucial decision made by the financial manager relating to the financing-mix of an organization. It is concerned with the borrowing and allocation of funds required for the investment decisions
A simple and comprehensive presentation on Profit maximization v/s Wealth Maximization.
By Arvinder Pal Kaur
Faculty of Management
Northwest Group of Institutions
Dhudhike, MOGA
This PPT contains the full detail of topic leverage in financial management
it covers following topics :-
Meaning of Leverage
Types of Leverage
Operating Leverage
Financial Leverage
Difference between Operating & Financial Leverage
Combined Leverage
Illustrations
Exercise
Business Finance: Introduction to Business Finance, Meaning and Definition of Financial Management, Objectives of Financial Management- (Profit Maximization and Wealth Maximization), Modern Approach to Financial Management- (Investment Decision, Financing Decision, Dividend Policy Decision), Finance and its relation with other disciplines, Functions of Finance Manager
Importance of financial management
Overview of Financial Management
Time Value Of Money
Cost of capital
International Financial Management
Return and Risk
Valuation of financial instruments
Financial Management - Chapter 1 ( B.COM BU IV semester ) Chaitra Mandara
Introduction to Financial Management,meaning , definition, profit and wealth maximization, significance, financing decision and investment decision, dividend decision,financial planning, duties of controller and treasurer.
What are objectives of financial management?Nageshwar Das
What are Objectives of Financial Management? with Describe Definition, Meaning, Nature and Scope! Financial management is one of the functional areas of business. Therefore, its objectives must be consistent with the overall objectives of the business. The overall objective of financial management is to provide maximum return to the owners on their investment in the long- term. This is known as wealth maximization. Maximization of owners’ wealth is possible when the capital invested initially increases over a period of time. Wealth maximization means maximizing the market value of investment in shares of the company.
Sources of Funds:
Transactions which result in an increase in the amount of fund or working capital are called sources of fund.
The following are the sources of funds:
Funds from operations, operating profit or trading profit.
Non operating incomes.
Refund of Income Tax (received).
Issue of Shares for cash or for any other current asset.
Issue of debentures for cash or for any other current asset.
Long term and medium term loans borrowed.
Long term or medium term deposits accepted.
Sale of long term investments for cash or for any other current asset.
Sale of fixed assets for cash or for any other current asset.
Preparation of Funds from Operations
The term Operation means the day to day affairs of the business.
It refers to trading.
Non operating items should not be treated as operational, while ascertaining funds from operations.
Examples of Non Operating expenses:
Depreciation
Loss on sale of fixed assets.
Writing-Off of fictious assets like Goodwill
Preliminary expenses, discount or loss on issue of shares and debentures
FFA- Statement of Schedule of Changes in Working Capitaluma reur
Statement Of Schedule Of Changes In Working Capital
This statement is prepared with the help of current assets and current liabilities relating to two different periods.
An increase or decrease in respect of each of such items should be recorded to ascertain the net increase or decrease in the working capital.
An increase in the value of current assets between two different periods indicates an increase in the working capital. It is an application of funds.
An increase in the value of current liabilities between two different periods indicates decrease in the working capital. It is sources of funds.
Investment:
Relationship between profit and investment is shown by computing “Rate of Return ratios”.
Return on Investment (ROI)
Return on Total Resources
Return on Equity (ROE)
Earning Per Share Ratio (EPS)
Fixed Assets Turnover Ratio
Debt to Total Fund Ratio
Entrepreneurship Development Programme (EDP)uma reur
EDP – Introduction to Entrepreneurship Development Programme
Entrepreneurship Development Programme is primarily meant for developing those first generation entrepreneurs who on their own cannot become successful entrepreneurs. It covers three major variables- location, target group and enterprise.
Any of these can become the focus or starting point for initiating and implementing an EDP.
The Khadi and Village Industries Commission (KVIC)uma reur
The Khadi and Village Industries Commission (KVIC) is a statutory body formed in April 1957 (During 2nd Five Year plan) by the Government of India, under the Act of Parliament, 'Khadi and Village Industries Commission Act of 1956'. It is an apex organisation under the Ministry of Micro, Small and Medium Enterprises, with regard to khadi and village industries within India, which seeks to - "plan, promote, facilitate, organise and assist in the establishment and development of khadi and village industries in the rural areas in coordination with other agencies engaged in rural development wherever necessary.“
KVIC also helps in building up reserve of raw materials for supply to producers.
The commission focuses in creation of common service facilities for processing of raw materials, such as semi-finished goods.
KVIC has also helped in creation of employment in Khadi industry.
Schemes Under Khadi and Village Industries Commission
Under the Khadi and Village Industries Commission, you can avail the following schemes:
PMEGP or Prime Minister's Employment Generation Programme
The Ministry of Micro, Small and Medium Enterprises introduced this credit linked subsidy scheme for the creation of employment in both rural and urban areas of the nation. This scheme replaced the previous Rural Employment Generation Programme or in short the REGP.
Under the PMEGP scheme the applicants from the general category are given a 15% to 25% subsidy on the interest rates. Applicants from other categories than general as well as woman applicants, former service members, physically disabled and applicants from the hill or border areas are provided with a subsidy of 20% to 35%.
Entrepreneurship Development Institute of India (EDII)uma reur
EDI has been spearheading entrepreneurship movement throughout the nation with a belief that entrepreneurs need not necessarily be born, but can be developed through well-conceived and well-directed activities.
In consonance with this belief, EDI aims at:
Creating a multiplier effect on opportunities for self-employment,
Augmenting the supply of competent entrepreneurs through training,
Augmenting the supply of entrepreneur trainer-motivators,
Participating in institution building efforts,
Long-Term Financing
Long-term financing is usually needed for acquiring new equipment, R&D, cash flow enhancement, and company expansion. Some of the major methods for long-term financing are discussed below.
Equity Financing
Equity financing includes preferred stocks and common stocks. This method is less risky in respect to cash flow commitments. However, equity financing often results in dissolution of share ownership and it also decreases earnings.
The cost associated with equity is generally higher than the cost associated with debt, which is again a deductible expense. Therefore, equity financing can also result in an enhanced hurdle rate that may cancel any reduction in the cash flow risk.
Sales:
Relationship between profit and sales is shown by computing “Profit margin ratios”.
Gross Profit Ratio
Operating Ratio
Expenses Ratio
Operating Profit Ratio
Net Profit Ratio
From the following information calculate Debtors turnover ratio (DTR) and Average collection period (ACP).
Total Sales Rs.3,80,000, Cash sales Rs. 2,40,000, Opening Debtors Rs. 12,000, Closing Debtors Rs. 16,800. Opening balance of Bills receivable Rs. 9,600 and Closing balance of Bills receivable Rs.14,400.
Creditor’s Turnover Ratio is also known as Payables Turnover Ratio, Creditor’s Velocity and Trade Payables Ratio. It is an activity ratio that finds out the relationship between net credit purchases and average trade payables of a business.
It finds out how efficiently the assets are employed by a firm and indicates the average speed with which the payments are made to the trade creditors.
It is calculated by the following formula:
Role of financial institutions in support of women entrepreneurial activities...uma reur
The RUDSETI type of Institutions aided by GoI will, therefore, have the following objectives:
The trainings offered will be demand driven
Rural BPL youth will be given priority
Area in which training will be provided to a particular rural BPL youth will be decided after assessment of the aptitude of the candidate
Hand holding will be provided for assured credit linkage with Banks
Escort services will be provided for ensuring at least a two year follow up to ensure sustainability of micro enterprise undertaken by the rural BPL youth.
Provide intensive short-term residential self-employment training programmes with free food and accommodation to rural youth for taking up self employment initiatives and skill up gradation for running their micro-enterprises successfully.
Empower rural youth and economically backward sections leading to the development of rural enterprises and entrepreneurship.
Identify, orient, motivate, train and assist rural youth including tribal communities to attain sustainability and economic well being through rural entrepreneurship.
Upgrade technical, agricultural, managerial and service delivery skills.
Promote and train self-help groups.
Identify, develop and transfer appropriate and sustainable rural technologies.
Personality development for school and college students.
Promote awareness and trigger use of non-conventional and energy efficient technologies.
Identification & selection of right candidate for the right course.
Campus and practical approach.
Use of simulation exercises, group discussions, role plays during training period.
Field visits & experience sharing with role models.
Interactions with Bankers /Govt. Officials.
Turnover Ratios or Activity Ratios or Performance Ratios
Turnover ratios are used to determine how efficiently the financial assets and liabilities of an organization have been used for the purpose of generating revenues. These ratios measure the operating efficiency of an enterprise.
The types of Turnover ratios are: –
Inventory Turnover Ratio or Stock Turnover Ratio.
Debtors Turnover Ratio.
Creditors Turnover Ratio.
Cash Turnover Ratio.
Working Capital Turnover Ratio.
Fixed Assets Turnover Ratio.
Capital Turnover Ratio or Sales to Net Worth Ratio.
It is also referred as the stock turnover ratio which is used to measure the number of sales generated from its inventory and how efficiently the inventories in a company is used.
This ratio reveals the number of times stock is replaced during a given accounting period.
It is calculated by the following formula:
Illustration 1:
From the following information calculate stock turnover ratio. Opening stock 30,000, purchases 90,000, carriage inward 7500, sales 1,50,000, closing stock 15,000, gross profit 37,500.
The Debtors Turnover Ratio also called as Receivables Turnover Ratio or Debtors velocity shows how quickly the credit sales are converted into the cash. This ratio measures the efficiency of a firm in managing and collecting the credit issued to the customers.
It is calculated by the following formula:
De퐛퐭퐨퐫퐬 퐓퐮퐫퐧퐨퐯퐞퐫 퐑퐚퐭퐢퐨=(퐍퐞퐭 퐂퐫퐞퐝퐢퐭 퐒퐚퐥퐞퐬)/(퐀퐯퐞퐫퐚퐠퐞 퐃퐞퐛퐭퐨퐫퐬)
Interpretation:
Standard credit period is 30 days
If the credit period is more than 30 days it indicates that the concern is not efficient.
If the credit period is less than 30 days it indicates that the concern is efficient.
The Average Collection Period, also called as Debt Collection Period, shows how much time business takes to realize the credit sales. Simply, how long will it take to recover payments from the debtors against the credit sales?
It is calculated by dividing the number of months or days or weeks by the debtors turnover ratio.
Leverage Ratios or Solvency Ratios or Capital Structure Ratios
Leverage or Solvency ratios can be defined as a type of ratio that is used to evaluate whether a company is solvent and well capable of paying off its debt obligations or not. These ratios are used to measure the long term financial position as a test of solvency of an organisation.
The types of Leverage ratios are: –
Proprietary Ratio or Equity Ratio
Equity to Fixed Asset Ratio
Equity to Current Assets Ratio
Current Liabilities to Shareholders Funds Ratio
Debt Equity Ratio
Capital Gearing or Leverage Ratio
Liquidity Ratios
This type of ratio helps in measuring the ability of a company to take care of its short-term debt obligations. A higher liquidity ratio represents that the company is highly rich in cash.
The types of liquidity ratios are: –
Current Ratio or Working Capital Ratio
Quick Ratio or Liquidity Ratio or Acid Test Ratio
Absolute Liquid Ratio or Cash Ratio
Stock to Working Capital Ratio
Current Ratio: The current ratio is the ratio between the current assets and current liabilities of a company. The current ratio is used to indicate the liquidity of an organization in being able to meet its debt obligations in the upcoming twelve months. A higher current ratio will indicate that the organization is highly capable of repaying its short-term debt obligations.
Current Ratio = Current Assets / Current Liabilities
Current Assets:
Current Assets means cash and those assets which can be converted into cash within one year in ordinary course of business.
Current Liabilities:
Current Liabilities are those which are to be paid by the firm in one year.
Quick Ratio or Liquidity Ratio or Acid Test Ratio :
The quick ratio is used to ascertain information pertaining to the capability of a company in paying off its current liabilities on an immediate basis.
The formula used for the calculation of a quick ratio is-
Quick Ratio = (Cash and Cash Equivalents + Marketable Securities + Accounts Receivables) / Current Liabilities
. Absolute Liquid Ratio or Cash Ratio:
The cash ratio measures a company’s ability to pay off short-term liabilities with cash and cash equivalents:
Cash ratio = Cash and Cash equivalents / Current Liabilities
Stock to Working Capital Ratio:
It is calculated by dividing the value of stock (or inventories such as raw materials, work in progress, finished goods, stores and packing materials) by the Working capital.
Role of financial institutions in support of women entrepreneurial activities...uma reur
The ‘District Industries Centre’ (DICs) programme was started by the central government in 1978 with the objective of providing a focal point for promoting small, tiny, cottage and village industries in a particular area and to make available to them all necessary services and facilities at one place. The finances for setting up DICs in a state are contributed equally by the particular State Government and the Central Government.
To facilitate the process of small enterprise development, DICs have been entrusted with most of the administrative and financial powers. For purpose of allotment of land, work sheds, raw materials etc., DICs functions under the ‘Directorate of Industries’. Each DIC is headed by a General Manager who is assisted by four functional managers and three project managers to look after the following activities :
The important objectives of DICs are as follow :
i. Accelerate the overall efforts for industrialisation of the district.
ii. Rural industrialisation and development of rural industries and handicrafts.
iii. Attainment of economic equality in various regions of the district.
iv. Providing the benefit of the government schemes to the new entrepreneurs.
v. Centralisation of procedures required to start a new industrial unit and minimisation- of the efforts and time required to obtain various permissions, licenses, registrations, subsidies etc.
CEDOK Established in 1992 is a Government of Karnataka Organisation promoted by the Department of Industries and Commerce with the support of State level industrial developmental agencies such as :
Karnataka State Small Industries Development Corporation (KSSIDC),
Karnataka State Financial Corporation (KSFC),
Karnataka State Industrial Investment Development Corporation (KSIIDC),
Karnataka Industrial Area Development Board (KIADB),
and national level financial institutions such as
Industrial Development Bank of India (IDBI),
Industrial Finance Corporation of India (IFCI),
Industrial Credit and Investment Corporation of India (ICICI) and
Government of India through Development Commissioner (SSI), New Delhi
with a objective to contribute to the development and dispersal of entrepreneurship by undertaking various entrepreneurship development and skill development / upgradation training programmes thus expand the social and economical base of entrepreneurial class
Role of financial institutions in support of women entrepreneurial activities...uma reur
Origin of SIDBI
In order to promote small scale industries in the country, a special Act was passed in Parliament in April 1990 for starting of Small Industries Development Bank of India. SIDBI is a wholly owned subsidiary of IDBI. It is providing assistance to all those institutions which are promoting small scale industries.
Capital of SIDBI
SIDBI has an authorised capital of Rs. 1000 crores. The RBI has also allocated INR 10,000 Crores to SIDBI for various venture capital activities and company startups in 2015. The entire operations of IDBI connected with small scale industries are now handed over to SIDBI.
Objectives of SIDBI:
To promote marketing of products of small scale sector.
To upgrade technology and also undertaking modernization of small scale units.
To provide more financial assistance to small scale ancillary and tiny sector.
To encourage employment oriented industries.
To coordinate all the other institutions involved in the promotion of small scale industries.
Financial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company. The numbers found on a company’s financial statements – balance sheet, income statement, and cash flow statement – are used to perform quantitative analysis and assess a company’s liquidity, leverage, growth, margins, profitability, rates of return, valuation, and more.
Modes of Expression of Ratios:
Ratios may be expressed in any one or more of the following ways:
(a) Proportion,
(b) Rate or times
(c) Percentage.
Advantages of Ratio Analysis:
The information shown in financial statements does not signify anything individually because the facts shown are inter-related. Hence it is necessary to establish relationships between various items to reveal significant details and throw light on all notable financial and operational aspects. Ratio analysis caters to the needs of various parties interested in financial statements. The basic objective of ratio analysis is to help management in interpretation of financial statements to enable it to perform the managerial functions efficiently.
Limitations of Ratio Analysis:
Ratios are precious tools in the hands of management but the utility lies in the proper utilisation of ratios. Mishandling or misuse of ratios and using them without proper context may lead the management to a wrong direction. The financial analyst should be well versed in computing ratios and proper utilization of ratios. Like all techniques of control, ratio analysis also suffers from several ‘ifs and buts’ and for proper computation and utilization of ratios the analyst should be aware of the limitations of ratio analysis.
Uses and Users of Financial Ratio Analysis
Analysis of financial ratios serves two main purposes:
1. Track company performance
Determining individual financial ratios per period and tracking the change in their values over time is done to spot trends that may be developing in a company. For example, an increasing debt-to-asset ratio may indicate that a company is overburdened with debt and may eventually be facing default risk.
2. Make comparative judgments regarding company performance
Comparing financial ratios with that of major competitors is done to identify whether a company is performing better or worse than the industry average. For example, comparing the return on assets between companies helps an analyst or investor to determine which company is making the most efficient use of its assets.
Users of financial ratios include parties external and internal to the company:
External users: Financial analysts, retail investors, creditors, competitors, tax authorities, regulatory authorities, and industry observers
Internal users: Management team, employees, and owners
The Roman Empire A Historical Colossus.pdfkaushalkr1407
The Roman Empire, a vast and enduring power, stands as one of history's most remarkable civilizations, leaving an indelible imprint on the world. It emerged from the Roman Republic, transitioning into an imperial powerhouse under the leadership of Augustus Caesar in 27 BCE. This transformation marked the beginning of an era defined by unprecedented territorial expansion, architectural marvels, and profound cultural influence.
The empire's roots lie in the city of Rome, founded, according to legend, by Romulus in 753 BCE. Over centuries, Rome evolved from a small settlement to a formidable republic, characterized by a complex political system with elected officials and checks on power. However, internal strife, class conflicts, and military ambitions paved the way for the end of the Republic. Julius Caesar’s dictatorship and subsequent assassination in 44 BCE created a power vacuum, leading to a civil war. Octavian, later Augustus, emerged victorious, heralding the Roman Empire’s birth.
Under Augustus, the empire experienced the Pax Romana, a 200-year period of relative peace and stability. Augustus reformed the military, established efficient administrative systems, and initiated grand construction projects. The empire's borders expanded, encompassing territories from Britain to Egypt and from Spain to the Euphrates. Roman legions, renowned for their discipline and engineering prowess, secured and maintained these vast territories, building roads, fortifications, and cities that facilitated control and integration.
The Roman Empire’s society was hierarchical, with a rigid class system. At the top were the patricians, wealthy elites who held significant political power. Below them were the plebeians, free citizens with limited political influence, and the vast numbers of slaves who formed the backbone of the economy. The family unit was central, governed by the paterfamilias, the male head who held absolute authority.
Culturally, the Romans were eclectic, absorbing and adapting elements from the civilizations they encountered, particularly the Greeks. Roman art, literature, and philosophy reflected this synthesis, creating a rich cultural tapestry. Latin, the Roman language, became the lingua franca of the Western world, influencing numerous modern languages.
Roman architecture and engineering achievements were monumental. They perfected the arch, vault, and dome, constructing enduring structures like the Colosseum, Pantheon, and aqueducts. These engineering marvels not only showcased Roman ingenuity but also served practical purposes, from public entertainment to water supply.
Students, digital devices and success - Andreas Schleicher - 27 May 2024..pptxEduSkills OECD
Andreas Schleicher presents at the OECD webinar ‘Digital devices in schools: detrimental distraction or secret to success?’ on 27 May 2024. The presentation was based on findings from PISA 2022 results and the webinar helped launch the PISA in Focus ‘Managing screen time: How to protect and equip students against distraction’ https://www.oecd-ilibrary.org/education/managing-screen-time_7c225af4-en and the OECD Education Policy Perspective ‘Students, digital devices and success’ can be found here - https://oe.cd/il/5yV
Palestine last event orientationfvgnh .pptxRaedMohamed3
An EFL lesson about the current events in Palestine. It is intended to be for intermediate students who wish to increase their listening skills through a short lesson in power point.
2024.06.01 Introducing a competency framework for languag learning materials ...Sandy Millin
http://sandymillin.wordpress.com/iateflwebinar2024
Published classroom materials form the basis of syllabuses, drive teacher professional development, and have a potentially huge influence on learners, teachers and education systems. All teachers also create their own materials, whether a few sentences on a blackboard, a highly-structured fully-realised online course, or anything in between. Despite this, the knowledge and skills needed to create effective language learning materials are rarely part of teacher training, and are mostly learnt by trial and error.
Knowledge and skills frameworks, generally called competency frameworks, for ELT teachers, trainers and managers have existed for a few years now. However, until I created one for my MA dissertation, there wasn’t one drawing together what we need to know and do to be able to effectively produce language learning materials.
This webinar will introduce you to my framework, highlighting the key competencies I identified from my research. It will also show how anybody involved in language teaching (any language, not just English!), teacher training, managing schools or developing language learning materials can benefit from using the framework.
We all have good and bad thoughts from time to time and situation to situation. We are bombarded daily with spiraling thoughts(both negative and positive) creating all-consuming feel , making us difficult to manage with associated suffering. Good thoughts are like our Mob Signal (Positive thought) amidst noise(negative thought) in the atmosphere. Negative thoughts like noise outweigh positive thoughts. These thoughts often create unwanted confusion, trouble, stress and frustration in our mind as well as chaos in our physical world. Negative thoughts are also known as “distorted thinking”.
This is a presentation by Dada Robert in a Your Skill Boost masterclass organised by the Excellence Foundation for South Sudan (EFSS) on Saturday, the 25th and Sunday, the 26th of May 2024.
He discussed the concept of quality improvement, emphasizing its applicability to various aspects of life, including personal, project, and program improvements. He defined quality as doing the right thing at the right time in the right way to achieve the best possible results and discussed the concept of the "gap" between what we know and what we do, and how this gap represents the areas we need to improve. He explained the scientific approach to quality improvement, which involves systematic performance analysis, testing and learning, and implementing change ideas. He also highlighted the importance of client focus and a team approach to quality improvement.
How to Create Map Views in the Odoo 17 ERPCeline George
The map views are useful for providing a geographical representation of data. They allow users to visualize and analyze the data in a more intuitive manner.
Operation “Blue Star” is the only event in the history of Independent India where the state went into war with its own people. Even after about 40 years it is not clear if it was culmination of states anger over people of the region, a political game of power or start of dictatorial chapter in the democratic setup.
The people of Punjab felt alienated from main stream due to denial of their just demands during a long democratic struggle since independence. As it happen all over the word, it led to militant struggle with great loss of lives of military, police and civilian personnel. Killing of Indira Gandhi and massacre of innocent Sikhs in Delhi and other India cities was also associated with this movement.
2. NATURE OF FINANCIAL MANAGEMENT
THE NATURE OF FINANCIAL MANAGEMENT REFERS TO ITS OBJECTIVES, SCO PE AND FUNCTIONS.
OBJECTIVES OF FINANCIAL MANAGEMENT
Basic Objectives Other Objectives
1. Maintenance of Liquid Assets
2. Profit Maximisation
3. Wealth Maximisation
1. To protect liquidity and solvency of the
firm.
2. To utilise the available financial resources
effectively
3. To provide social welfare.
4. To build-up adequate reserves for
financing, growth and expansion.
5. To ensure a fair rate of return in
3. BASIC OBJECTIVES:
1.Maintenance of Liquid Assets:
• What are Liquid assets ?
• Liquid assets are those assets that can easily be converted into cash in a
short amount of time. Liquid assets include things like cash, money market
instruments, and marketable securities.
• The financial management assures that there are adequate liquid assets,
i.e, cash in hand to meet all its obligations.
4. PROFIT MAXIMISATION
Profit maximization is the traditional approach and the primary
objective of financial management. It implies that every decision
relating to business is evaluated in the light of profits. All the
decisions with respect to new projects, acquisition of assets,
raising capital etc are studied for their impact on profits and
profitability. If the result of a decision is perceived to have a
positive effect on the profits, the decision is taken further for
implementation.
BASIC OBJECTIVES:
5. PROFIT MAXIMISATION
• All business firms are profit seeking organisations.
• Main aim is earning profit.
• Profit is a measure of efficiency of business enterprise.
• Profit is the parameter of the business operation.
• Profit reduces risk of the business concern.
• Profit is the main source of finance.
• Profitability meets the social needs also.
6. PROFIT MAXIMIZATION THEORY / MODEL
The Rationale / Benefits:
Profit maximization theory of directing business decisions is encouraged because of following advantages associated with it.
• ECONOMIC SURVIVAL
Profit maximization theory is based on profits and profits are a must for survival of any business.
• MEASUREMENT STANDARD
Profits are the true measurement of the viability of a business model. Without profits, the business losses its primary objective
and therefore has a direct risk to its survival.
• SOCIALAND ECONOMIC WELFARE
The profit maximization objective indirectly caters to social welfare. In a business, profits prove efficient utilization and
allocation of resources. Resource allocation and payments for land, labor, capital, and organization takes care of social and
economic welfare.
7. LIMITATIONS OF PROFIT MAXIMIZATION :
Profit maximization is criticized for some of its limitations which are discussed below:
• THE HAZINESS OF THE CONCEPT “PROFIT”
The term “Profit” is a vague term. It is because different mindset will have a different perception of profit. For e.g. profits can be the net
profit, gross profit, before tax profit, profit per share or the rate of profit etc. There is no clearly defined profit maximization rule about the profits.
• IGNORES TIME VALUE OF MONEY
The profit maximization formula simply suggests “higher the profit better is the proposal”. In essence, it is considering the naked profits without
considering the timing of them. Another important dictum of finance says “a dollar today is not equal to a dollar a year later”. So, the time value of
money is completely ignored. Alternatively we can say that it ignores timing pattern of cash flow.
•
• IGNORES THE RISK
A decision solely based on profit maximization model would take a decision in favour of profits. In the pursuit of profits, the risk involved is
ignored which may prove unaffordable at times simply because higher risks directly question the survival of a business. Between project A and B,
project A may be more profitable however if it is substantially riskier, than project B may be preferable.
• IGNORES QUALITY
The most problematic aspect of profit maximization as an objective is that it ignores the intangible benefits such as quality, image, technological
advancements etc. The contribution of intangible assets in generating value for a business is not worth ignoring. They indirectly create assets for
the organization.
8. Profit maximization ruled the traditional business mindset
which has gone through drastic changes. In the modern
approach of business and financial management, much higher
importance is assigned to wealth maximization in comparison
of Profit Maximization vs. Wealth Maximization. The losing
importance of profit maximization is not baseless and it is not
only because it ignores certain important areas such as risk,
quality, and the time value of money but also because of the
superiority of wealth maximization as an objective of the
business or financial management.
9. WEALTH MAXIMISATION
Wealth maximization: Wealth maximization (shareholders' value
maximization) is also a main objective of financial management. Wealth
maximization means to earn maximum wealth for the shareholders. So,
the finance manager tries to give a maximum dividend to the
shareholders. He also tries to increase the market value of the shares. The
market value of the shares is directly related to the performance of the
company. Better the performance, higher is the market value of shares
and vice-versa. So, the finance manager must try to maximize
shareholder's value.
10. • This concept is to improve the value or wealth of the
shareholders.
• It considers both time and risk of the business concern.
• It provides efficient allocation of resources.
• It ensures the economic interest of the society.
WEALTH MAXIMISATION
11. Thus, Wealth maximisation objective of a firm is to
maximise its wealth and the value of its shares.
WEALTH MAXIMISATION
12. Wealth maximization is a modern approach to financial
management. Maximization of profit used to be the main aim of
a business and financial management till the concept of wealth
maximization came into being. It is a superior goal compared
to profit maximization as it takes broader arena into
consideration. Wealth or Value of a business is defined as the
market price of the capital invested by shareholders.
WEALTH MAXIMISATION
13. THE CONCEPT OF WEALTH MAXIMIZATION DEFINED AS FOLLOWS:
• It simply means maximization of shareholder’s wealth. It is a combination of two words viz. wealth and
maximization. A wealth of a shareholder maximizes when the net worth of a company maximizes. To be even
more meticulous, a shareholder holds share in the company/business and his wealth will improve if the share
price in the market increases which in turn is a function of net worth.
• This is because wealth maximization is also known as net worth maximization.
• Finance managers are the agents of shareholders and their job is to look after the interest of the shareholders.
• The objective of any shareholder or investor would be a good return on their capital and safety of
their capital.
Both these objectives are well served by wealth maximization as a decision criterion for business.
14. FACTORS AFFECTING WEALTH MAXIMISATION:
• Avoid high level of risk: To maximise the value of the firm, proper balance
should be maintained between risk and return.
• Pay Dividends: Payment of regular dividend on shares increase the market value
of shares and also the goodwill of the firm.
• Maintain growth in sales: Increase in sales, increase the earnings. Hence, the
company should have large volume of sales.
• Maintaining the market value of shares: Firm should take numerous steps to
maintain the market value of shares at reasonable level. Maximisation of
shareholders wealth is closely related to the maximisation of firms value in the
market.
15. • Advantages:
1. Avoiding the Ambiguity
2. Quality of benefits
3. Time Value of Money
4. Promotes the economic welfare
of shareholders
5. Payment of regular Dividends.
WEALTH MAXIMISATION
• Disadvantages:
1. Equity of wealth is not
maintained.
2. Firms wealth is not considered
3. Benefits to the society is not
considered
4. Government restrictions
5. Reduce the profitability
6. Prescriptive idea
16. DIFFERENCE BETWEEN PROFIT MAXIMISATION AND WEALTH MAXIMISATION
The essential difference between the maximization of profits and the
maximization of wealth is that the profits focus is on short-term earnings, while
the wealth focus is on increasing the overall value of the business entity over
time. These differences are substantial, as noted below:
Planning duration. Under profit maximization, the immediate increase of
profits is paramount, so management may elect not to pay for discretionary
expenses, such as advertising, research, and maintenance. Under wealth
maximization, management always pays for these discretionary expenditures.
Risk management. Under profit maximization, management minimizes
expenditures, so it is less likely to pay for hedges that could reduce the
organization's risk profile. A wealth-focused company would work on risk
mitigation, so its risk of loss is reduced.
17. Pricing strategy. When management wants to maximize profits, it prices products as
high as possible in order to increase margins. A wealth-oriented company could do the
reverse, electing to reduce prices in order to build market share over the long term.
Capacity planning. A profit-oriented business will spend just enough on its productive
capacity to handle the existing sales level and perhaps the short-term sales forecast. A
wealth-oriented business will spend more heavily on capacity in order to meet its long-
term sales projections.
It should be apparent from the preceding discussion that profit maximization is a strictly
short-term approach to managing a business, which could be damaging over the long
term. Wealth maximization focuses attention on the long term, requiring a larger
investment and lower short-term profits, but with a long-term payoff that increases the
value of the business.
DIFFERENCE BETWEEN PROFIT MAXIMISATION AND WEALTH MAXIMISATION
Continued …..
18. HOW TO CALCULATE WEALTH?
Present Value of
Cash Inflows
=
CF1
+
CF1
+……….+
CFn
——— ——— ———
(1 + K)1 (1 + K)2 (1 + K)n
Wealth is said to be generated by any financial decision if the present value of future cash
flows relevant to that decision is greater than the costs incurred to undertake that activity.
Increase in wealth is equal to the present value of all future cash flows less the
cost/investment. In essence, it is the net present value (NPV) of a financial decision.
Increase in Wealth = Present Value of cash inflows – Cost.
Where,
19. ADVANTAGES OF WEALTH MAXIMIZATION MODEL:
Wealth maximization model is a superior model because it obviates all the drawbacks of
profit maximization as a goal of a financial decision.
Firstly, the wealth maximization is based on cash flows and not on profits. Unlike the
profits, cash flows are exact and definite and therefore avoid any ambiguity associated
with accounting profits. Profit can easily be manipulative, if there is a change in
accounting assumption/policy, there is a change in profit. There is a change in method
of depreciation, there is a change in profit. It is not the case in case of Cashflows.
Secondly, profit maximization presents a shorter term view as compared to wealth
maximization. Short-term profit maximization can be achieved by the managers at the
cost of long-term sustainability of the business.
20. CONTD ….
Thirdly, wealth maximization considers the time value of money. It is
important as we all know that a dollar today and a dollar one-year latter do not
have the same value. In wealth maximization, the future cash flows are
discounted at an appropriate discounted rate to represent their present value.
Suppose there are two projects A and B, project A is more profitable however it
is going to generate profit over a long period of time, while project B is less
profitable however it is able to generate return in a shorter period. In a situation
of an uncertainty, project B may be preferable. So, timing of returns is ignored
by profit maximization, it is considered in wealth maximization.
Fourthly, the wealth-maximization criterion considers the risk and uncertainty
factor while considering the discounting rate. The discounting rate reflects both
time and risk. Higher the uncertainty, the discounting rate is higher and vice-
versa.
21. ECONOMIC VALUE ADDED
In the light of modern and improved approach to wealth maximization, a
new initiative called “Economic Value Added (EVA)” is implemented and
presented in the annual reports of the companies. Positive and higher EVA
would increase the wealth of the shareholders and thereby create value.
Economic Value Added
= Net Operating Profits after tax – Capital Employed x Weighted Average Cost of Capital.
In summary, the wealth maximization as an objective to financial
management and other business decisions enables the shareholders to
achieve their objectives and therefore is superior to profit maximization. For
financial managers, it is a decision criterion being used for all the decisions.
For more clarity, refer Profit Maximization vs. Wealth Maximization.
22. HOW TO MAXIMIZE SHAREHOLDER’S WEALTH?
Capital investment decisions of a firm have a direct relation with wealth maximization. All capital
investment projects with an internal rate of return (IRR) greater than cost of capital or having positive NPV or
creates value for the firm. These projects earn more than the ‘required rate of return’ of the firm. In other
words, these projects maximize the wealth of the shareholders because they are earning more than what they
can earn by investing themselves.
By analyzing the projects with the methods of capital budgeting, we come to know whether wealth
will or won’t be created in a particular project. But, what is the real source of wealth creation? What is that
characteristic of the project which becomes the root cause of value creation?
SOURCE OF WEALTH CREATION
Normally, two types of environment are faced by us – one is external and other is internal. If both the
conditions support an organization, it tastes the success. A most important external factor which creates value is
industry attractiveness and a similar internal factor is the competitive advantage of the firm.
Two main sources of wealth creation or value creations are the industry attractiveness and competitive
advantage of the firm.
23. FUNCTIONS OF FINANCIAL MANAGEMENT
Managerial Functions
(Executive Functions)
Incidental Functions
(Routine Functions)
1. Fund requirement decision
2. Financial Planning
3. Financing decision
4. Investment decision
5. Dividend decision
6. Cash flow and requirements
7. Appraisal of Financial performance
8. Borrowing Policy decision
9. Advise the top management
10. To make efforts for increasing productivity and
capital
1. To supply the funds
2. To negotiate with bankers and other
Financial institutes
3. To safe guard cash balance
4. Proper custody and safe keeping of
documents
5. Record keeping and reporting
6. To provide information to the top
management
7. To keep track of stock exchange quotations.