The document discusses the nature and scope of financial management. It defines financial management and outlines its primary objectives, which include reducing costs of finance and ensuring sufficient fund availability. The document also describes the roles and responsibilities of a finance manager, which involve financial analysis, determining sources of funds, investment of funds, and capital budgeting. Additionally, it explains key financial statements like the cash flow statement and fund flow statement, and discusses the capital structure of a business.

1. NATURE AND SCOPE OF FINANCIAL MANAGEMENT:
“FINANCIAL MANAGEMENT IS THE ACTIVITY CONCERNED WITH PLANNING, RAISING, CONTROLLING AND ADMINISTERING
OF FUNDS USED IN THE BUSINESS.” – GUTHMAN AND DOUGAL
(OR)
“FINANCIAL MANAGEMENT IS THE OPERATIONAL ACTIVITY OF A BUSINESS THAT IS RESPONSIBLE FOR OBTAINING AND
EFFECTIVELY UTILIZING THE FUNDS NECESSARY FOR EFFICIENT OPERATIONS.”- MASSIE
THE PRIMARY OBJECTIVES OF FINANCIAL MANAGEMENT ARE:
• ATTEMPTING TO REDUCE THE COST OF FINANCE
• ENSURING SUFFICIENT AVAILABILITY OF FUNDS
• ALSO, DEALING WITH THE PLANNING, ORGANIZING, AND CONTROLLING OF FINANCIAL ACTIVITIES LIKE THE
PROCUREMENT AND UTILIZATION OF FUNDS.
NATURE OR FEATURES OR CHARACTERISTICS OF FINANCIAL MANAGEMENT:
NATURE OF FINANCIAL MANAGEMENT IS CONCERNED WITH ITS FUNCTIONS, ITS GOALS, TRADE-OFF WITH
CONFLICTING GOALS, ITS INDISPENSABILITY, ITS SYSTEMS, ITS RELATION WITH OTHER SUBSYSTEMS IN THE FIRM, ITS
ENVIRONMENT, ITS RELATIONSHIP WITH OTHER DISCIPLINES, THE PROCEDURAL ASPECTS AND ITS EQUATION WITH
OTHER DIVISIONS WITHIN THE ORGANIZATION.
1. FINANCIAL MANAGEMENT IS AN INTEGRAL PART OF OVERALL MANAGEMENT. FINANCIAL CONSIDERATIONS ARE
INVOLVED IN ALL BUSINESS DECISIONS. SO FINANCIAL MANAGEMENT IS PERVASIVE THROUGHOUT THE
ORGANIZATION.
2. THE CENTRAL FOCUS OF FINANCIAL MANAGEMENT IS VALUATION OF THE FIRM. THAT IS FINANCIAL
DECISIONS ARE DIRECTED AT INCREASING/MAXIMIZATION/ OPTIMIZING THE VALUE OF THE FIRM.
3. FINANCIAL MANAGEMENT ESSENTIALLY INVOLVES RISK-RETURN TRADE-OFF DECISIONS ON INVESTMENT INVOLVE
CHOOSING OF TYPES OF ASSETS WHICH GENERATE RETURNS ACCOMPANIED BY RISKS. GENERALLY HIGHER THE RISK,
RETURNS MIGHT BE HIGHER AND VICE VERSA. SO, THE FINANCIAL MANAGER HAS TO DECIDE THE LEVEL OF RISK THE
FIRM CAN ASSUME AND SATISFY WITH THE ACCOMPANYING RETURN.
4. FINANCIAL MANAGEMENT AFFECTS THE SURVIVAL, GROWTH AND VITALITY OF THE FIRM. FINANCE IS SAID TO BE
THE LIFE BLOOD OF BUSINESS. IT IS TO BUSINESS, WHAT BLOOD IS TO US. THE AMOUNT, TYPE, SOURCES, CONDITIONS
AND COST OF FINANCE SQUARELY INFLUENCE THE FUNCTIONING OF THE UNIT.

2. SCOPE OF FINANCIAL MANAGEMENT:
THE INTRODUCTION TO FINANCIAL MANAGEMENT ALSO REQUIRES YOU TO UNDERSTAND THE SCOPE OF FINANCIAL
MANAGEMENT. IT IS IMPORTANT THAT FINANCIAL DECISIONS TAKE CARE OF THE SHAREHOLDER’S INTERESTS. FURTHER,
THEY ARE UPHELD BY THE MAXIMIZATION OF THE WEALTH OF THE SHAREHOLDER’S, WHICH DEPENDS ON THE INCREASE
IN NET WORTH, CAPITAL INVESTED IN THE BUSINESS, AND PLOWED-BACK PROFITS FOR THE GROWTH AND PROSPERITY OF
THE ORGANIZATION.
THE SCOPE OF FINANCIAL MANAGEMENT IS EXPLAINED IN THE DIAGRAM BELOW:
FINANCIAL MANAGEMENT DECISIONS
IN ORGANIZATIONS, MANAGERS IN AN EFFORT TO MINIMIZE THE COSTS OF PROCURING FINANCE AND USING IT IN THE
MOST PROFITABLE MANNER, TAKE THE FOLLOWING DECISIONS:
1. INVESTMENT DECISIONS: MANAGERS NEED TO DECIDE ON THE AMOUNT OF INVESTMENT AVAILABLE OUT OF
THE EXISTING FINANCE, ON A LONG-TERM AND SHORT-TERM BASIS. THEY ARE OF TWO TYPES:
• LONG-TERM INVESTMENT DECISIONS OR CAPITAL BUDGETING MEANS COMMITTING FUNDS FOR
A LONG PERIOD OF TIME LIKE FIXED ASSETS. THESE DECISIONS ARE IRREVERSIBLE AND USUALLY
INCLUDE THE ONES PERTAINING TO INVESTING IN A BUILDING AND/OR LAND, ACQUIRING NEW
PLANTS/MACHINERY OR REPLACING THE OLD ONES, ETC. THESE DECISIONS DETERMINE THE
FINANCIAL PURSUITS AND PERFORMANCE OF A BUSINESS.
• SHORT-TERM INVESTMENT DECISIONS OR WORKING CAPITAL MANAGEMENT MEANS
COMMITTING FUNDS FOR A SHORT PERIOD OF TIME LIKE CURRENT ASSETS. THESE INVOLVE
DECISIONS PERTAINING TO THE INVESTMENT OF FUNDS IN THE INVENTORY, CASH, BANK DEPOSITS,
AND OTHER SHORT-TERM INVESTMENTS. THEY DIRECTLY AFFECT THE LIQUIDITY AND
PERFORMANCE OF THE BUSINESS.

3. 2. FINANCING DECISIONS: MANAGERS ALSO MAKE DECISIONS PERTAINING TO RAISING FINANCE FROM LONG-
TERM SOURCES (CALLED CAPITAL STRUCTURE) AND SHORT-TERM SOURCES (CALLED WORKING CAPITAL). THEY
ARE OF TWO TYPES:
• FINANCIAL PLANNING DECISIONS WHICH RELATE TO ESTIMATING THE SOURCES AND
APPLICATION OF FUNDS. IT MEANS PRE-ESTIMATING FINANCIAL NEEDS OF AN ORGANIZATION TO ENSURE THE
AVAILABILITY OF ADEQUATE FINANCE. THE PRIMARY OBJECTIVE OF FINANCIAL PLANNING IS TO PLAN AND ENSURE
THAT THE FUNDS ARE AVAILABLE AS AND WHEN REQUIRED.
• CAPITAL STRUCTURE DECISIONS WHICH INVOLVE IDENTIFYING SOURCES OF FUNDS. THEY ALSO
INVOLVE DECISIONS WITH RESPECT TO CHOOSING EXTERNAL SOURCES LIKE ISSUING SHARES, BONDS, BORROWING
FROM BANKS OR INTERNAL SOURCES LIKE RETAINED EARNINGS FOR RAISING FUNDS.
3. DIVIDEND DECISIONS: THESE INVOLVE DECISIONS RELATED TO THE PORTION OF PROFITS THAT WILL BE
DISTRIBUTED AS DIVIDEND. SHAREHOLDERS ALWAYS DEMAND A HIGHER DIVIDEND, WHILE THE MANAGEMENT
WOULD WANT TO RETAIN PROFITS FOR BUSINESS NEEDS. HENCE, THIS IS A COMPLEX MANAGERIAL DECISION.
ROLES AND RESPONSIBILITIES OF FINANCE MANAGER:
“FINANCIAL MANAGEMENT IS THE OPERATIONAL ACTIVITY OF A BUSINESS THAT IS RESPONSIBLE FOR
OBTAINING AND EFFECTIVELY UTILIZING THE FUNDS NECESSARY FOR EFFICIENT OPERATIONS.”
--JOSEPH MASSIE
IT IS A GENERAL ASSUMPTION THAT A FINANCE MANAGER WORKS ONLY IN THE ACCOUNTS DEPARTMENT OR
HE HAS TO DEAL WITH THE CASH FLOW. IN REALITY, HE HAS A LARGE NUMBER OF THINGS TO CATER TO. ALSO, EVERY
ORGANIZATION, PUBLIC OR PRIVATE, NEEDS PEOPLE FROM THE FINANCE BACKGROUND.
DUTIES:
1. FINANCIAL ANALYSIS AND INTERPRETATION
FINANCIAL ANALYSIS IS TAKING THE FINANCIAL DATA OF THE COMPANY, ORGANIZING IT AND ANALYZING IT TO FIND
THE STRENGTHS OF THE COMPANY. THIS IS CONVERTED INTO PATTERNS AND A CONCLUSION WILL BE DRIVEN OUT OF
IT. THIS HELPS THE HIGHER MANAGEMENT TO TAKE WISE DECISIONS. IT ALSO HELPS IN EVALUATING THE FINANCIAL
HEALTH OF THE COMPANY. IT IS A VERY TEDIOUS TASK, WHICH NEEDS TO BE DONE ARTICULATELY.
2. DETERMINING THE SOURCE OF FUNDS
A FINANCE MANAGER IDENTIFIES THE SOURCES OF FUNDS, ESPECIALLY WHILE STARTING A NEW VENTURE. IT INVOLVES
IDENTIFYING THE LENDERS AND BANKS THAT CAN LEND MONEY TO THE COMPANY. ALSO, IT DEALS WITH KNOWING
YOUR CUSTOMERS AND TARGET AUDIENCE.

4. 3. INVESTMENT OF FUNDS
A FINANCE MANAGER CONDUCTS AN IN-DEPTH STUDY ABOUT THE INVESTMENT THAT A COMPANY SHOULD MAKE AND
THE POSSIBLE R O I (RETURN ON INVESTMENT). HE PROVIDES A BROADER SELECTION OF INVESTMENT OPPORTUNITIES
WITH A LOWER RISK. SO A FINANCE MANAGER HAS TO DO RISK ANALYSIS TOO.
4. PROFIT PLANNING AND CONTROL
PROFIT PLANNING AND CONTROL INVOLVES ESTABLISHING PROFIT GOALS, DETERMINING THE EXPECTED SALES
VOLUME, ESTIMATING EXPENSES, DETERMINING PROFIT AND MUCH MORE. AFTER PLANNING PROFIT SUCCESSFULLY,
AN ORGANIZATION NEEDS TO CONTROL PROFIT. PROFIT CONTROL INVOLVES MEASURING THE GAP BETWEEN THE
ESTIMATED LEVEL AND ACTUAL LEVEL OF PROFIT ACHIEVED BY AN ORGANIZATION.
5. CAPITAL BUDGETING
A FINANCE MANAGER DETERMINES AND EVALUATES POTENTIAL EXPENSES OR INVESTMENTS THAT ARE LARGE
IN NATURE. SUCH EXPENDITURE CAN BE ANYTHING LIKE HAVING A NEW BRANCH OFFICE.A FINANCE MANAGER PLAYS A
VITAL ROLE AS FINANCE IS THE BACKBONE OF ANY ORGANIZATION. THE ORGANIZATION CAN GROW BY LEAPS AND
BOUNDS, PROVIDED SOUND BUSINESS DECISIONS ARE TAKEN AT THE RIGHT TIME. THESE IMPORTANT DECISIONS COME
FROM THE FINANCE MANAGER’S DESK
RESPONSIBILITIES:
• PERFORM FINANCIAL ANALYSIS, REPORTING AND MANAGEMENT ACTIVITIES.
• ENSURE THAT THE FINANCIAL REPORTS ARE PREPARED AND DELIVERED ON TIME.
• REVIEW FINANCIAL DATA FOR ACCURACY, CORRECTNESS AND COMPLETENESS.
• HIRE AND TRAIN NEW EMPLOYEES ON FINANCIAL OPERATIONS.
• MONITOR AND MANAGE ALL EXPENSE WITHIN THE ALLOTTED BUDGET.
• ESTABLISH KEY FINANCIAL STRATEGIES TO ENHANCE BUSINESS PROFITABILITY.
• ENSURE FINANCIAL TEAM FOLLOWS COMPANY POLICIES AND REGULATIONS.
• DEVELOP STANDARD ACCOUNTING PROCEDURES TO IMPROVE FINANCIAL OPERATIONS EFFICIENCY.
• PARTICIPATE IN PERFORMANCE EVALUATION OF FINANCE STAFF AND CONDUCT COUNSELING SESSIONS TO
IDENTIFY SKILL DEVELOPMENT NEEDS.
• REVIEW ANNUAL BUDGETS AND RECOMMEND ANY CHANGES IF NEEDED.
• ASSIST IN ACCOUNT PAYABLE AND RECEIVABLE ACTIVITIES.
• PERFORM ACCOUNT RECONCILIATION ACTIVITIES.
• GENERATE FINANCIAL REPORTS RELATED TO BUDGETS, ACCOUNT PAYABLES, ACCOUNT RECEIVABLES,
EXPENSES, ETC.
• ENSURE ACCURATE CALCULATION AND DISTRIBUTION OF SALARIES AND OTHER BENEFITS TO EMPLOYEES.
• ESTABLISH ACCURATE FORECASTS REGARDING EXPENSES AND REVENUES AND MANAGE REGULAR REPORTING
REQUIREMENTS.
• MONITOR COMPETITOR ACTIVITY AND STAY UPDATED ABOUT LATEST INDUSTRY TRENDS.

5. CASH FLOW STATEMENT: SHOWS THE CHANGES IN THE CASH POSITION (INFLOWS AND OUTFLOWS) OF A FIRM. IT IS
AN ANALYTICAL RECONCILIATION STATEMENT WHICH EXPLAINS THE REASONS FOR THE DIFFERENCES BETWEEN THE
OPENING AND CLOSING CASH BALANCES OVER A PERIOD.
ADVANTAGES
1. IT SHOWS THE ACTUAL CASH POSITION AVAILABLE WITH THE COMPANY BETWEEN THE TWO BALANCE SHEET DATES
WHICH FUNDS FLOW AND PROFIT AND LOSS ACCOUNT ARE UNABLE TO SHOW. SO IT IS IMPORTANT TO MAKE A CASH
FLOW REPORT IF ONE WANTS TO KNOW ABOUT THE LIQUIDITY POSITION OF THE COMPANY.
2. IT HELPS THE COMPANY IN ACCURATELY PROJECTING THE FUTURE LIQUIDITY POSITION OF THE COMPANY
ENABLING IT ARRANGE FOR ANY SHORTFALL IN MONEY BY ARRANGING FINANCE IN ADVANCE AND IF THERE IS EXCESS
THAN IT CAN HELP THE COMPANY IN EARNING EXTRA RETURN BY DEPLOYING EXCESS FUNDS.
3. IT ACTS LIKE A FILTER AND IS USED BY MANY ANALYST AND INVESTORS TO JUDGE WHETHER COMPANY HAS
PREPARED THE FINANCIAL STATEMENTS PROPERLY OR NOT BECAUSE IF THERE IS ANY DISCREPANCY IN THE CASH
POSITION AS SHOWN BY BALANCE SHEET AND THE CASH FLOW STATEMENT, IT MEANS THAT STATEMENTS ARE
INCORRECT.
DISADVANTAGES
1. SINCE IT SHOWS ONLY CASH POSITION, IT IS NOT POSSIBLE TO DEDUCE ACTUAL PROFIT AND LOSS OF THE
COMPANY BY JUST LOOKING AT THIS STATEMENT.
2. IN ISOLATION THIS IS OF NO USE AND IT REQUIRES OTHER FINANCIAL STATEMENTS LIKE BALANCE SHEET, PROFIT
AND LOSS ETC…, AND THEREFORE LIMITING ITS USE.
FUND FLOW STATEMENT: IS A STATEMENT THAT SHOWS THE UPS AND DOWNS OF THE FINANCIAL POSITION OR THE
CHANGES IN WORKING CAPITAL OF THE ENTITY BETWEEN THE TWO FINANCIAL YEARS.
ADVANTAGES
1. FUNDS FLOW STATEMENT REVEALS THE NET RESULT OF BUSINESS OPERATIONS DONE BY THE COMPANY DURING
THE YEAR.
2. IN ADDITION TO THE BALANCE SHEET, IT SERVES AS AN ADDITIONAL REFERENCE FOR MANY INTERESTED PARTIES
LIKE ANALYSTS, CREDITORS, SUPPLIERS, GOVERNMENT TO LOOK INTO FINANCIAL POSITION OF THE COMPANY.
4. IT REVEALS THE CAUSES FOR THE CHANGES IN LIABILITIES AND ASSETS BETWEEN THE TWO BALANCE SHEET DATES
THEREFORE PROVIDING A DETAILED ANALYSIS OF THE BALANCE SHEET OF THE COMPANY.
5. FUNDS FLOW STATEMENT HELPS THE MANAGEMENT IN DECIDING ITS FUTURE COURSE OF PLANS AND ALSO IT ACTS
AS A CONTROL TOOL FOR THE MANAGEMENT.

6. DISADVANTAGES
1. FUNDS FLOW STATEMENT HAS TO BE USED ALONG WITH BALANCE SHEET AND PROFIT AND LOSS ACCOUNT FOR
INFERENCE OF FINANCIAL STRENGTHS AND WEAKNESS OF A COMPANY IT CANNOT BE USED ALONE.
2. FUND FLOW STATEMENT DOES NOT REVEAL THE CASH POSITION OF THE COMPANY, AND THAT IS WHY COMPANY
HAS TO PREPARE CASH FLOW STATEMENT IN ADDITION TO FUNDS FLOW STATEMENT.
3. FUNDS FLOW STATEMENT ONLY REARRANGES THE DATA WHICH IS THERE IN THE BOOKS OF ACCOUNT AND
THEREFORE IT LACKS ORIGINALITY. IN SIMPLE WORDS IT PRESENTS THE DATA IN THE FINANCIAL STATEMENTS IN
SYSTEMATIC WAY AND THEREFORE MANY COMPANIES TEND TO AVOID PREPARING FUNDS FLOW STATEMENTS.
4. FUNDS FLOW STATEMENT IS BASICALLY HISTORIC IN NATURE, THAT IS IT INDICATES WHAT HAPPENED IN THE PAST
AND IT DOES NOT COMMUNICATE ANYTHING ABOUT THE FUTURE, ONLY ESTIMATES CAN BE MADE BASED ON THE
PAST DATA AND THEREFORE IT CANNOT BE USED THE MANAGEMENT FOR TAKING DECISION RELATED TO FUTURE.
MEANING A CASH FLOW STATEMENT IS A STATEMENT
SHOWING THE INFLOWS AND OUTFLOWS OF
CASH AND CASH EQUIVALENTS OVER A PERIOD.
A FUND FLOW STATEMENT IS A STATEMENT
SHOWING THE CHANGES IN THE FINANCIAL
POSITION OF THE ENTITY IN DIFFERENT
ACCOUNTING YEARS.
PURPOSE OF
PREPARATION
TO SHOW THE REASONS FOR MOVEMENTS IN
THE CASH AT THE BEGINNING AND AT THE END
OF THE ACCOUNTING PERIOD.
TO SHOW THE REASONS FOR THE CHANGES IN
THE FINANCIAL POSITION, WITH RESPECT TO
PREVIOUS YEAR AND CURRENT ACCOUNTING
YEAR.
BASIS CASH BASIS OF ACCOUNTING. ACCRUAL BASIS OF ACCOUNTING.
ANALYSIS SHORT TERM ANALYSIS OF CASH PLANNING. LONG TERM ANALYSIS OF FINANCIAL
PLANNING
DISCLOSES INFLOWS AND OUTFLOWS OF CASH SOURCES AND APPLICATIONS OF FUNDS
OPENING &
CLOSING
BALANCE
CONTAINS OPENING AND CLOSING BALANCE OF
CASH AND CASH EQUIVALENTS.
DOES NOT CONTAINS OPENING BALANCE OF
CASH AND CASH EQUIVALENTS.
PART OF
FINANCIAL
STATEMENT
YES NO

7. CAPITAL STRUCTURE:
THE TERM ‘STRUCTURE’ MEANS THE ARRANGEMENT OF THE VARIOUS PARTS. SO CAPITAL STRUCTURE MEANS THE
ARRANGEMENT OF CAPITAL FROM DIFFERENT SOURCES SO THAT THE LONG-TERM FUNDS NEEDED FOR THE BUSINESS
ARE RAISED.
THUS, CAPITAL STRUCTURE REFERS TO THE PROPORTIONS OR COMBINATIONS OF EQUITY SHARE CAPITAL, PREFERENCE
SHARE CAPITAL, DEBENTURES, LONG-TERM LOANS, RETAINED EARNINGS AND OTHER LONG-TERM SOURCES OF FUNDS
IN THE TOTAL AMOUNT OF CAPITAL WHICH A FIRM SHOULD RAISE TO RUN ITS BUSINESS.
DEFINITION:
“CAPITAL STRUCTURE IS THE COMBINATION OF DEBT AND EQUITY SECURITIES THAT COMPRISE A FIRM’S FINANCING OF
ITS ASSETS.”
FACTORS AFFECTING CAPITAL STRUCTURE
• SIZE OF COMPANY-SMALL COMPANIES MAY HAVE TO RELY ON THE FOUNDER’S MONEY BUT AS THEY GROW
THEY WILL BE ELIGIBLE FOR LONG-TERM FINANCING BECAUSE LARGER COMPANIES ARE CONSIDERED LESS
RISKY BY INVESTORS.
• NATURE OF BUSINESS -IF YOUR BUSINESS IS A MONOPOLY YOU CAN GO FOR DEBENTURES BECAUSE YOUR
SALES CAN GIVE YOU ADEQUATE PROFITS TO PAY YOUR DEBTS EASILY OR PAY DIVIDENDS.
• THE REGULARITY OF EARNINGS-A FIRM WITH LARGE AND STABLE INCOMES MAY INCUR MORE DEBT IN ITS
CAPITAL STRUCTURE, UNLIKE THE ONE THAT IS UNSTABLE.
• CONDITIONS OF THE MONEY MARKETS–CAPITAL MARKETS ARE ALWAYS CHANGING. YOU DON’T WANT TO
ISSUES COMPANY SHARES DURING A BEAR MARKET, YOU DO IT WHEN THERE IS A BULL RUN.
• GOVERNMENT POLICY– THIS IS IMPORTANT TO CONSIDER. A CHANGE IN LENDING POLICY MAY INCREASE
YOUR COST OF BORROWING.
• COST OF FLOATING– THE COST OF FLOATING EQUITY IS MUCH HIGHER THAN THAT OF FLOATING DEBT. THIS
MAY INFLUENCE THE FINANCE MANAGER TO TAKE DEBT FINANCING THE CHEAPER OPTION.
• DEBT -EQUITY RATIO– AS STATED DEBT IS A LIABILITY WHOSE INTEREST HAS TO BE PAID IRRESPECTIVE OF
EARNINGS. EQUITY, ON THE OTHER HAND, IS SHAREHOLDERS MONEY AND PAYMENT DEPEND ON PROFITS
BEING PAID. HIGH DEBT IN THE CAPITAL STRUCTURE IS RISKY AND MAY BE A PROBLEM IN ADVERSE TIMES.
HOWEVER, DEBT IS CHEAPER THAN ISSUING SHARES. DEBT INTEREST HAS SOME TAX DEDUCTIONS THAT IS NOT
THE CASE FOR DIVIDENDS PAID TO EQUITY HOLDERS.

8. FEATURES OF A GOOD CAPITAL STRUCTURE
• PROFITABILITY-IT SHOULD ENSURE MOST PROFITS ARE EARNED. IT SHOULD OFFER THE LEAST COST OF
FINANCING WITH MAXIMUM RETURNS
• SOLVENCY-THE STRUCTURE SHOULD NOT LEAD THE COMPANY TO A POINT IT RISKS BEING INSOLVENT. TOO
MUCH DEBT THREATENS A COMPANY’S SOLVENCY SO ANY DEBT TAKEN SHOULD BE MANAGEABLE
• FLEXIBILITY-SHOULD THINGS CHANGE THE CAPITAL STRUCTURE SHOULD BE ONE THAT CAN BE EASILY
MANEUVERED TO MEET NEW MARKET DEMANDS
• CONTROL– THE STRUCTURE SHOULD NOT GIVE AWAY CONTROL OF THE COMPANY. SO, CAUTION SHOULD BE
TAKEN NOT TO GIVE TOO MUCH AWAY THAT OWNERS LOSE THEIR CONTROLLING STAKE.
CAPITAL BUDGETING:
THE WORD CAPITAL REFERS TO BE THE TOTAL INVESTMENT OF A COMPANY OF FIRM IN MONEY, TANGIBLE AND
INTANGIBLE ASSETS. WHEREAS BUDGETING DEFINED BY THE “ROWLAND AND WILLIAM” IT MAY BE SAID TO BE THE
ART OF BUILDING BUDGETS. BUDGETS ARE A BLUE PRINT OF A PLAN AND ACTION EXPRESSED IN QUANTITIES AND
MANNERS.
THE EXAMPLES OF CAPITAL EXPENDITURE:
1. PURCHASE OF FIXED ASSETS SUCH AS LAND AND BUILDING, PLANT AND MACHINERY, GOOD WILL, ETC.
2. THE EXPENDITURE RELATING TO ADDITION, EXPANSION, IMPROVEMENT AND ALTERATION TO THE FIXED ASSETS.
3. THE REPLACEMENT OF FIXED ASSETS.
4. RESEARCH AND DEVELOPMENT PROJECT.
DEFINITIONS
ACCORDING TO THE DEFINITION OF CHARLES T. HRONGREEN, “CAPITAL BUDGETING IS A LONG-TERMPLANNING FOR
MAKING AND FINANCING PROPOSED CAPITAL OUT LAYS. IT IS CLEARLY EXPLAINED IN THE ABOVE DEFINITIONS THAT A
FIRM’S SCARCE FINANCIAL RESOURCES ARE UTILIZING THE AVAILABLE OPPORTUNITIES. THE OVERALL OBJECTIVES OF
THE COMPANY FROM IS TO MAXIMIZE THE PROFITS AND MINIMIZE THE EXPENDITURE OF COST.
NEED AND IMPORTANCE OF CAPITAL BUDGETING
1. HUGE INVESTMENTS: CAPITAL BUDGETING REQUIRES HUGE INVESTMENTS OF FUNDS, BUT
THE AVAILABLE FUNDS ARE LIMITED, THEREFORE THE FIRM BEFORE INVESTING PROJECTS, PLAN ARE CONTROL ITS
CAPITAL EXPENDITURE.
2. LONG-TERM: CAPITAL EXPENDITURE IS LONG-TERM IN NATURE OR PERMANENT IN NATURE.

9. THEREFORE FINANCIAL RISKS INVOLVED IN THE INVESTMENT DECISION ARE MORE. IF HIGHER RISKS ARE INVOLVED, IT
NEEDS CAREFUL PLANNING OF CAPITAL BUDGETING.
3. IRREVERSIBLE: THE CAPITAL INVESTMENT DECISIONS ARE IRREVERSIBLE, ARE NOT CHANGED
BACK. ONCE THE DECISION IS TAKEN FOR PURCHASING A PERMANENT ASSET, IT IS VERY DIFFICULT TO DISPOSE OFF
THOSE ASSETS WITHOUT INVOLVING HUGE LOSSES.
4. LONG-TERM EFFECT: CAPITAL BUDGETING NOT ONLY REDUCES THE COST BUT ALSO INCREASES
THE REVENUE IN LONG-TERM AND WILL BRING SIGNIFICANT CHANGES IN THE PROFIT OF THE COMPANY BY AVOIDING
OVER OR MORE INVESTMENT OR UNDER INVESTMENT. OVER INVESTMENTS LEADS TO BE UNABLE TO UTILIZE ASSETS
OR OVER UTILIZATION OF FIXED ASSETS.
THEREFORE BEFORE MAKING THE INVESTMENT, IT IS REQUIRED CAREFULLY PLANNING AND
ANALYSIS OF THE PROJECT THOROUGHLY.
CAPITAL BUDGETING PROCESS
CAPITAL BUDGETING IS A DIFFICULT PROCESS TO THE INVESTMENT OF AVAILABLE FUNDS. THE BENEFIT WILL
ATTAINED ONLY IN THE NEAR FUTURE BUT, THE FUTURE IS UNCERTAIN. HOWEVER, THE FOLLOWING STEPS
FOLLOWED FOR CAPITAL BUDGETING, THEN THE PROCESS MAY BE EASIER ARE.

10. 1. IDENTIFICATION OF VARIOUS INVESTMENTS PROPOSALS: THE CAPITAL BUDGETING MAY HAVE VARIOUS
INVESTMENT PROPOSALS. THE PROPOSAL FOR THE INVESTMENT OPPORTUNITIES MAY BE DEFINED FROM THE TOP
MANAGEMENT OR MAY BE EVEN FROM THE LOWER RANK. THE HEADS OF VARIOUS DEPARTMENT ANALYSE THE
VARIOUS INVESTMENT DECISIONS, AND WILL SELECT PROPOSALS SUBMITTED TO THE PLANNING COMMITTEE OF
COMPETENT AUTHORITY.
2. SCREENING OR MATCHING THE PROPOSALS: THE PLANNING COMMITTEE WILL ANALYSE THE VARIOUS PROPOSALS
AND SCREENINGS. THE SELECTED PROPOSALS ARE CONSIDERED WITH THE AVAILABLE RESOURCES OF THE CONCERN.
HERE RESOURCES REFERRED AS THE FINANCIAL PART OF THE PROPOSAL. THIS REDUCES THE GAP BETWEEN THE
RESOURCES AND THE INVESTMENT COST.
3. EVALUATION: AFTER SCREENING, THE PROPOSALS ARE EVALUATED WITH THE HELP OF VARIOUS METHODS, SUCH
AS PAY BACK PERIOD PROPOSAL, NET DISCOVERED PRESENT VALUE METHOD, ACCOUNTING RATE OF RETURN AND RISK
ANALYSIS. EACH METHOD OF EVALUATION USED IN DETAIL IN THE LATER PART OF THIS CHAPTER.
4. FIXING PROPERTY: AFTER THE EVOLUTION, THE PLANNING COMMITTEE WILL PREDICT WHICH PROPOSALS WILL
GIVE MORE PROFIT OR ECONOMIC CONSIDERATION. IF THE PROJECTS OR PROPOSALS ARE NOT SUITABLE FOR THE
CONCERN’S FINANCIAL CONDITION, THE PROJECTS ARE REJECTED WITHOUT CONSIDERING OTHER NATURE OF THE
PROPOSALS.
5. FINAL APPROVAL: THE PLANNING COMMITTEE APPROVES THE FINAL PROPOSALS, WITH THE HELP OF THE
FOLLOWING:
(A) PROFITABILITY
(B) ECONOMIC CONSTITUENTS
(C) FINANCIAL VIOLABILITY
(D) MARKET CONDITIONS.
THE PLANNING COMMITTEE PREPARES THE COST ESTIMATION AND SUBMITS TO THE MANAGEMENT.
6. IMPLEMENTING: THE COMPETENT AUTHERITY SPENDS THE MONEY AND IMPLEMENTS THE PROPOSALS. WHILE
IMPLEMENTING THE PROPOSALS, ASSIGN RESPONSIBILITIES TO THE PROPOSALS, ASSIGN RESPONSIBILITIES FOR
COMPLETING IT, WITHIN THE TIME ALLOTTED AND REDUCE THE COST FOR THIS PURPOSE. THE NETWORK TECHNIQUES
USED SUCH AS PERT AND CPM. IT HELPS THE MANAGEMENT FOR MONITORING AND CONTAINING THE
IMPLEMENTATION OF THE PROPOSALS.
7. PERFORMANCE REVIEW OF FEEDBACK: THE FINAL STAGE OF CAPITAL BUDGETING IS ACTUAL RESULTS COMPARED
WITH THE STANDARD RESULTS. THE ADVERSE OR UNFAVOURABLE RESULTS IDENTIFIED AND REMOVING THE VARIOUS
DIFFICULTIES OF THE PROJECT. THIS IS HELPFUL FOR THE FUTURE OF THE PROPOSALS.

11. KINDS OF CAPITAL BUDGETING DECISIONS
THE OVERALL OBJECTIVE OF CAPITAL BUDGETING IS TO MAXIMIZE THE PROFITABILITY. IF A FIRM
CONCENTRATES RETURN ON INVESTMENT, THIS OBJECTIVE CAN BE ACHIEVED EITHER BY INCREASING THE REVENUES
OR REDUCING THE COSTS. THE INCREASING REVENUES CAN BE ACHIEVED BY EXPANSION OR THE SIZE OF OPERATIONS
BY ADDING A NEW PRODUCT LINE. REDUCING COSTS MEAN REPRESENTING OBSOLETE RETURN ON ASSETS.
METHODS OF CAPITAL BUDGETING OF EVALUATION
BY MATCHING THE AVAILABLE RESOURCES AND PROJECTS IT CAN BE INVESTED. THE FUNDS AVAILABLE
ARE ALWAYS LIVING FUNDS. THERE ARE MANY CONSIDERATIONS TAKEN FOR INVESTMENT DECISION PROCESS SUCH AS
ENVIRONMENT AND ECONOMIC CONDITIONS. THE METHODS OF EVALUATIONS ARE CLASSIFIED AS FOLLOWS:
(A) TRADITIONAL METHODS (OR NON-DISCOUNT METHODS)
(I) PAY-BACK PERIOD METHODS
(II) POST PAY-BACK METHODS
(III) ACCOUNTS RATE OF RETURN
(B) MODERN METHODS (OR DISCOUNT METHODS)
(I) NET PRESENT VALUE METHOD
(II) INTERNAL RATE OF RETURN METHOD
(III) PROFITABILITY INDEX METHOD
DIVIDEND:
A DIVIDEND IS THE DISTRIBUTION OF REWARD FROM A PORTION OF COMPANY'S EARNINGS AND IS PAID TO A CLASS OF
ITS SHAREHOLDERS. DIVIDENDS ARE DECIDED AND MANAGED BY THE COMPANY’S BOARD OF DIRECTORS, THOUGH
THEY MUST BE APPROVED BY THE SHAREHOLDERS THROUGH THEIR VOTING RIGHTS.
DIVIDEND IS A TOKEN REWARD PAID TO THE SHAREHOLDERS FOR THEIR INVESTMENT IN A COMPANY’S EQUITY, AND IT
USUALLY ORIGINATES FROM THE COMPANY'S NET PROFITS.

12. STEPS OF HOW IT WORKS:
1. THE COMPANY GENERATES PROFITS AND RETAINED EARNINGS
2. THE MANAGEMENT TEAM DECIDES SOME EXCESS PROFITS SHOULD BE PAID OUT TO SHAREHOLDERS (INSTEAD
OF BEING REINVESTED)
3. THE BOARD APPROVES THE PLANNED DIVIDEND
4. THE COMPANY ANNOUNCES THE DIVIDED (THE VALUE PER SHARE, THE DATE IT WILL BE PAID, THE RECORD
DATE, ETC.)
5. THE DIVIDEND IS PAID TO SHAREHOLDERS
TYPES OF DIVIDENDS
THERE ARE VARIOUS TYPES OF DIVIDENDS A COMPANY CAN PAY TO ITS SHAREHOLDERS. BELOW IS A LIST AND A BRIEF
DESCRIPTION OF THE MOST COMMON TYPES SHAREHOLDERS RECEIVE.
• CASH – THIS IS THE PAYMENT OF ACTUAL CASH FROM THE COMPANY DIRECTLY TO THE SHAREHOLDERS AND IS
THE MOST COMMON TYPE OF PAYMENT. THE PAYMENT IS USUALLY MADE ELECTRONICALLY (WIRE TRANSFER),
BUT MAY ALSO BE PAID BY CHECK OR CASH.
• STOCK – STOCK DIVIDENDS ARE PAID OUT TO SHAREHOLDERS BY ISSUING NEW SHARES IN THE COMPANY.
THESE ARE PAID OUT PRO RATA, BASED ON THE NUMBER OF SHARES THE INVESTOR OWNS.
• ASSETS – A COMPANY IS NOT LIMITED TO PAYING DISTRIBUTIONS TO ITS SHAREHOLDERS IN THE FORM OF
CASH OR SHARES. A COMPANY MAY ALSO PAY OUT OTHER ASSETS SUCH AS INVESTMENT SECURITIES,
PHYSICAL ASSETS, REAL ESTATE, AND OTHERS.
• SPECIAL – A SPECIAL DIVIDEND IS ONE THAT’S PAID OUTSIDE OF A COMPANY REGULAR POLICY (I.E.,
QUARTERLY, ANNUAL, ETC.). IT IS USUALLY THE RESULT OF AN EXCESS CASH BUILD UP.
• COMMON – THIS REFERS TO THE CLASS OF SHAREHOLDERS (I.E., COMMON SHAREHOLDERS), NOT WHAT’S
ACTUALLY BEING RECEIVED AS PAYMENT.
• PREFERRED – THIS ALSO REFERS TO THE CLASS OF SHAREHOLDER RECEIVING THE PAYMENT.
• OTHER – OTHER, LESS COMMON, TYPES OF FINANCIAL ASSETS CAN BE PAID OUT SUCH AS OPTIONS,
WARRANTS, SHARES IN A NEW SPIN-OUT COMPANY, ETC.

13. FACTORS AFFECTING DIVIDEND POLICY:
1.PROFITABLE POSITION OF THE FIRM
DIVIDEND DECISION DEPENDS ON THE PROFITABLE POSITION OF THE BUSINESS CONCERN. WHEN THE
FIRM EARNS MORE PROFIT, THEY CAN DISTRIBUTE MORE DIVIDENDS TO THE SHAREHOLDERS.
2.UNCERTAINTY OF FUTURE INCOME
FUTURE INCOME IS A VERY IMPORTANT FACTOR, WHICH AFFECTS THE DIVIDEND POLICY. WHEN THE
SHAREHOLDER NEEDS REGULAR INCOME, THE FIRM SHOULD MAINTAIN REGULAR DIVIDEND POLICY.
3.LEGAL CONSTRAINS
THE COMPANIES ACT 1956 HAS PUT SEVERAL RESTRICTIONS REGARDING PAYMENTS AND DECLARATION OF
DIVIDENDS. SIMILARLY, INCOME TAX ACT, 1961 ALSO LAYS DOWN CERTAIN RESTRICTIONS ON PAYMENT OF
DIVIDENDS.
4.LIQUIDITY POSITION
LIQUIDITY POSITION OF THE FIRMS LEADS TO EASY PAYMENTS OF DIVIDEND. IF THE FIRMS HAVE HIGH LIQUIDITY, THE
FIRMS CAN PROVIDE CASH DIVIDEND OTHERWISE, THEY HAVE TO PAY STOCK DIVIDEND.
5.SOURCES OF FINANCE
IF THE FIRM HAS FINANCE SOURCES, IT WILL BE EASY TO MOBILISE LARGE FINANCE. THE FIRM SHALL NOT GO FOR
RETAINED EARNINGS.
6.GROWTH RATE OF THE FIRM
HIGH GROWTH RATE IMPLIES THAT THE FIRM CAN DISTRIBUTE MORE DIVIDEND TO ITS SHAREHOLDERS.
7.TAX POLICY
TAX POLICY OF THE GOVERNMENT ALSO AFFECTS THE DIVIDEND POLICY OF THE FIRM. WHEN THE GOVERNMENT GIVES
TAX INCENTIVES, THE COMPANY PAYS MORE DIVIDEND.
8.CAPITAL MARKET CONDITIONS
DUE TO THE CAPITAL MARKET CONDITIONS, DIVIDEND POLICY MAY BE AFFECTED. IF THE CAPITAL MARKET IS PREFECT,
IT LEADS TO IMPROVE THE HIGHER DIVIDEND.

14. DIVIDEND POLICY:
DIVIDEND POLICY DEPENDS UPON THE NATURE OF THE FIRM, TYPE OF SHAREHOLDER AND PROFITABLE POSITION. ON
THE BASIS OF THE DIVIDEND DECLARATION BY THE FIRM, THE DIVIDEND POLICY MAY BE CLASSIFIED UNDER THE
FOLLOWING TYPES:
1. REGULAR DIVIDEND POLICY
DIVIDEND PAYABLE AT THE USUAL RATE IS CALLED AS REGULAR DIVIDEND POLICY. THIS TYPE OF POLICY IS SUITABLE TO
THE SMALL INVESTORS, RETIRED PERSONS AND OTHERS.
2. STABLE DIVIDEND POLICY
STABLE DIVIDEND POLICY MEANS PAYMENT OF CERTAIN MINIMUM AMOUNT OF DIVIDEND REGULARLY. THIS DIVIDEND
POLICY CONSISTS OF THE FOLLOWING THREE IMPORTANT FORMS:
• CONSTANT DIVIDEND PER SHARE
• CONSTANT PAYOUT RATIO
• STABLE RUPEE DIVIDEND PLUS EXTRA DIVIDEND.
3. IRREGULAR DIVIDEND POLICY
WHEN THE COMPANIES ARE FACING CONSTRAINTS OF EARNINGS AND UNSUCCESSFUL BUSINESS OPERATION, THEY
MAY FOLLOW IRREGULAR DIVIDEND POLICY. IT IS ONE OF THE TEMPORARY ARRANGEMENTS TO MEET THE FINANCIAL
PROBLEMS. THESE TYPES ARE HAVING ADEQUATE PROFIT. FOR OTHERS NO DIVIDEND IS DISTRIBUTED.
4. NO DIVIDEND POLICY
SOMETIMES THE COMPANY MAY FOLLOW NO DIVIDEND POLICY BECAUSE OF ITS UNFAVOURABLE WORKING CAPITAL
POSITION OF THE AMOUNT REQUIRED FOR FUTURE GROWTH OF THE CONCERNS.
WORKING CAPITAL:
WORKING CAPITAL IS BASICALLY AN INDICATOR OF THE SHORT-TERM FINANCIAL POSITION OF AN ORGANIZATION AND
IS ALSO A MEASURE OF ITS OVERALL EFFICIENCY. WORKING CAPITAL IS OBTAINED BY SUBTRACTING THE CURRENT
LIABILITIES FROM THE CURRENT ASSETS. THIS RATIO INDICATES WHETHER THE COMPANY POSSESSES SUFFICIENT
ASSETS TO COVER ITS SHORT-TERM DEBT.
WORKING CAPITAL INDICATES THE LIQUIDITY LEVELS OF COMPANIES FOR MANAGING DAY-TO-DAY EXPENSES AND
COVERS INVENTORY, CASH, ACCOUNTS PAYABLE, ACCOUNTS RECEIVABLE AND SHORT-TERM DEBT THAT IS DUE.
WORKING CAPITAL IS DERIVED FROM SEVERAL COMPANY OPERATIONS SUCH AS DEBT AND INVENTORY
MANAGEMENT, SUPPLIER PAYMENTS AND COLLECTION OF REVENUES.

15. ILLUSTRATION TO CALCULATE WORKING CAPITAL:
COMPONENTS OF THE BALANCE SHEET: (RS)
CURRENT ASSETS CURRENT LIABILITIES
CASH 1500 ACCOUNTS PAYABLE 1500
MARKETABLE SECURITIES 500 ACCRUED EXPENSES 1000
ACCOUNTS RECEIVABLES 2000 NOTES PAYABLE 500
INVENTORY 2500
CURRENT PORTION- LONG TERM
DEBT 1500
TOTAL CURRENT ASSETS 6500 TOTAL CURRENT LIABILITIES 4500
WC = CA- CL =6500-4500 =2000
NET WORKING CAPITAL:
NET WORKING CAPITAL IS DEFINED AS THE EXCESS OF CURRENT ASSETS OVER CURRENT LIABILITIES. WORKING
CAPITAL MENTIONED IN THE BALANCE SHEET IS AN INDICATION OF THE COMPANY’S CURRENT SOLVENCY IN REPAYING
ITS CREDITORS. THAT IS WHY WHEN COMPANIES INDICATE SHORTAGE OF WORKING CAPITAL THEY IN FACT IMPLY
SCARCITY OF CASH RESOURCES.
FACTORS EFFECTING WORKING CAPITAL:
• NATURE OF BUSINESS: GENERALLY WORKING CAPITAL IS HIGHER IN MANUFACTURING COMPARED TO SERVICE
BASED ORGANIZATIONS
• VOLUME OF SALES: HIGHER THE SALE, HIGHER THE WORKING CAPITAL REQUIRED
• SEASONALITY: PEAK SEASONS FOR SALES NEED MORE WORKING CAPITAL
• LENGTH OF OPERATING AND CASH CYCLE: LONGER THE OPERATING AND CASH CYCLE, MORE IS THE REQUIREMENT
OF WORKING CAPITAL.

16. WORKING CAPITAL CYCLE
THE WORKING CAPITAL CYCLE OR WCC MEANS THE TIME PERIOD THAT IS TAKEN TO CONVERT NET CURRENT
LIABILITIES AND ASSETS INTO CASH BY ANY ORGANIZATION. THIS IS AN INDICATOR OF THE ORGANIZATIONAL
EFFICIENCY IN TERMS OF EFFECTIVELY MANAGING LIQUIDITY POSITION IN THE SHORT-TERM AND THE CYCLE, WHICH IS
CALCULATED IN DAYS, IS BASICALLY THE TIME PERIOD BETWEEN THE GENERATION OF REVENUE THROUGH CASH BY
SELLING PRODUCTS AND THE BUYING OF MATERIALS FOR PRODUCING THESE PRODUCTS.
COMPONENTS ASSOCIATED WITH WCM:
OFTEN THE INTERRELATIONSHIPS AMONG THE WORKING CAPITAL COMPONENTS CREATE REAL CHALLENGES FOR THE
FINANCIAL MANAGERS. INVENTORY IS PURCHASED FROM SUPPLIERS, SALE OF WHICH GENERATES ACCOUNTS
RECEIVABLE AND COLLECTED IN CASH FROM CUSTOMERS TO PAY OFF THOSE SUPPLIERS. WORKING CAPITAL HAS TO BE
MANAGED BECAUSE THE FIRM CANNOT ALWAYS CONTROL HOW QUICKLY THE CUSTOMERS WILL BUY, AND ONCE THEY
HAVE MADE PURCHASES, EXACTLY WHEN THEY WILL PAY. THAT IS WHY; CONTROLLING THE “CASH-TO-CASH” CYCLE IS
PARAMOUNT.
THE DIFFERENT COMPONENTS OF WORKING CAPITAL MANAGEMENT OF ANY ORGANIZATION ARE:
• CASH AND CASH EQUIVALENTS
• INVENTORY
• DEBTORS / ACCOUNTS RECEIVABLES
• CREDITORS / ACCOUNTS PAYABLE
A) CASH AND CASH EQUIVALENTS:
ONE OF THE MOST IMPORTANT WORKING CAPITAL COMPONENTS TO BE MANAGED BY ALL ORGANIZATIONS IS CASH
AND CASH EQUIVALENTS. CASH MANAGEMENT HELPS IN DETERMINING THE OPTIMAL SIZE OF THE FIRM’S LIQUID
ASSET BALANCE. IT INDICATES THE APPROPRIATE TYPES AND AMOUNTS OF SHORT-TERM INVESTMENTS ALONG WITH
EFFICIENT WAYS OF CONTROLLING COLLECTION AND PAYOUT OF CASH. GOOD CASH MANAGEMENT IMPLIES THE CO-
RELATION BETWEEN MAINTAINING ADEQUATE LIQUIDITY WITH MINIMUM CASH IN BANK. ALL COMPANIES STRONGLY
EMPHASIZE CASH MANAGEMENT AS IT IS THE KEY TO MAINTAIN THE FIRM’S CREDIT RATING, MINIMIZE INTEREST COST
AND AVOID INSOLVENCY.

17. B) MANAGEMENT OF INVENTORIES:
INVENTORIES INCLUDE RAW MATERIAL, WIP (WORK IN PROGRESS) AND FINISHED GOODS. WHERE EXCESSIVE STOCKS
CAN PLACE A HEAVY BURDEN ON THE CASH RESOURCES OF A BUSINESS, INSUFFICIENT STOCKS CAN RESULT IN
REDUCED SALES, DELAYS FOR CUSTOMERS ETC. INVENTORY MANAGEMENT INVOLVES THE CONTROL OF ASSETS THAT
ARE PRODUCED TO BE SOLD IN THE NORMAL COURSE OF BUSINESS.
FOR BETTER STOCK/INVENTORY CONTROL:
• REGULARLY REVIEW THE EFFECTIVENESS OF EXISTING PURCHASE AND INVENTORY SYSTEMS
• KEEP A TRACK OF STOCKS FOR ALL MAJOR ITEMS OF INVENTORY
• SLOW MOVING STOCK NEEDS TO BE DISPOSED AS IT BECOMES DIFFICULT TO SELL IF KEPT FOR LONG
• OUTSOURCING SHOULD ALSO BE A PART OF THE STRATEGY WHERE PART OF THE PRODUCTION CAN BE DONE
THROUGH ANOTHER MANUFACTURER
• A CLOSE CHECK NEEDS TO BE KEPT ON THE SECURITY PROCEDURES AS WELL
C) MANAGEMENT OF RECEIVABLES:
RECEIVABLES CONTRIBUTE TO A SIGNIFICANT PORTION OF THE CURRENT ASSETS. FOR INVESTMENTS INTO
RECEIVABLES, THERE ARE CERTAIN COSTS (OPPORTUNITY COST AND TIME VALUE) THAT ANY COMPANY HAS TO BEAR,
ALONGWITH THE RISK OF BAD DEBTS ASSOCIATED TO IT. IT IS, THEREFORE NECESSARY TO HAVE PROPER CONTROL AND
MANAGEMENT OF RECEIVABLES WHICH HELPS IN TAKING SOUND INVESTMENT DECISIONS IN DEBTORS. THEREBY, FOR
EFFECTIVE RECEIVABLES MANAGEMENT ONE NEEDS TO HAVE CONTROL OF THE CREDITS AND MAKE SURE CLEAR CREDIT
PRACTICES ARE A PART OF THE COMPANY POLICY, WHICH IS ADOPTED BY ALL OTHERS ASSOCIATED WITH THE
ORGANIZATION. ONE HAS TO BE VIGILANT ENOUGH WHEN ACCEPTING NEW ACCOUNTS, ESPECIALLY LARGER ONES.
THEREBY, THE PRINCIPLE LIES IN ESTABLISHING APPROPRIATE CREDIT LIMITS FOR EVERY CUSTOMER AND STICK TO
THEM.
EFFECTIVELY MANAGING ACCOUNTS RECEIVABLES:
• PROCESS AND MAINTAIN RECORDS EFFICIENTLY BY REGULARLY COORDINATING AND COMMUNICATING WITH
CREDIT MANAGERS’ AND TREASURY IN-CHARGES
• PREPARE PERFORMANCE MEASUREMENT REPORTS
• CONTROL ACCURACY AND SECURITY OF ACCOUNTS RECEIVABLE RECORDS.
• CAPTIVE FINANCE SUBSIDIARY CAN BE USED TO CENTRALIZE ACCOUNTS RECEIVABLE FUNCTIONS AND PROVIDE
FINANCING FOR COMPANY’S SALES

18. D) MANAGEMENT OF ACCOUNTS PAYABLE:
CREDITORS ARE A VITAL PART OF EFFECTIVE CASH MANAGEMENT AND HAVE TO BE MANAGED CAREFULLY TO
ENHANCE THE CASH POSITION OF THE BUSINESS. ONE HAS TO KEEP IN MIND THAT PURCHASING INITIATES CASH
OUTFLOWS AND AN UNDEFINED PURCHASING FUNCTION CAN CREATE LIQUIDITY PROBLEMS FOR THE COMPANY. THE
TRADE CREDIT TERMS ARE TO BE DEFINED BY COMPANIES AS THEY VARY ACROSS INDUSTRIES AND ALSO AMONG
COMPANIES.
FACTORS TO CONSIDER:
• TRADE CREDIT AND THE COST OF ALTERNATIVE FORMS OF SHORT-TERM FINANCING ARE TO BE DEFINED
• THE DISBURSEMENT FLOAT WHICH IS THE AMOUNT PAID BUT NOT CREDITED TO THE PAYERS ACCOUNT NEEDS
TO BE CONTROLLED
• INVENTORY MANAGEMENT SYSTEM SHOULD BE IN PLACE
• APPROPRIATE METHODS NEED TO BE ADOPTED FOR CUSTOMER-TO-BUSINESS PAYMENT THROUGH E-
COMMERCE
• COMPANY HAS TO CENTRALIZE THE FINANCIAL FUNCTION WITH REGARDS TO THE NUMBER, SIZE AND
LOCATION OF VENDORS
TIME AND MONEY CONCEPT IN WORKING CAPITAL:
EVERY COMPONENT OF WORKING CAPITAL (NAMELY INVENTORY, RECEIVABLES AND PAYABLES) HAS TWO
DIMENSIONS TIME AND MONEY, IN MANAGING WORKING CAPITAL. BY MAKING THE MONEY MOVE FASTER
AROUND THE CYCLE, ONE CAN REDUCE THE AMOUNT OF MONEY TIED UP. THIS HELPS THE BUSINESS GENERATE MORE
CASH OR IT WILL NEED TO BORROW LESS MONEY TO FUND ITS WORKING CAPITAL. CONSEQUENTLY, IT WOULD EITHER
REDUCE THE COST OF INTEREST OR HAVE FREE FUNDS TO SUPPORT ADDITIONAL SALES GROWTH OR INVESTMENTS OF
THE COMPANY. SIMILARLY, IF ONE CAN NEGOTIATE ON BETTER TERMS WITH SUPPLIERS I.E. GET AN INCREASED CREDIT
LIMIT OR LONGER CREDIT; IT WILL EFFECTIVELY CREATE ADDITIONAL CASH TO HELP FUND FUTURE SALES.