FINANCIAL MANAGEMENT706jjijiikikki (1).pptx

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1. FINANCIAL MANAGEMENT ROHIT CHOUDHARY

2. WHAT IS BUSINESS FINANCE ??? MONEY REQUIRED FOR CARRYING OUT BUSINESS IS CALLED BUSINESS FINANCE Finance is required for investment in plant, machinery, land, building etc. Finance is required for day to day operations like production, procurement of raw materials etc. Finance is required for salaries, wages, rent, lease, interest, bills, premiums etc. Finance is required for trademarks, patents, permissions ,

3. WHAT IS FINANCIAL MANAGEMENT??? Financial management is concerned with optimal procurement as well as usage of finance. It aims at reducing the cost of funds procured, keeping the risk under control and achieving effective deployment of such funds.

4. ROLE/FUNCTION OF A FINANCE MANAGER ESTIMATING THE AMOUNT OF CAPITAL REQUIRED D E T E R M I N I N G CAPITAL STRUCTURE CHOICE OF SOURCES OF FUNDS P R O CU R E M E N T OF FUNDS U T I L I S A T IO N OF FUNDS DISPOSAL OF PROFITS OR SURPLUS M A N A G E M E N T OF CASH FINANCIAL C O N T R O L

5. IMPORTANCE OF FINANCIAL MANAGEMENT The role of financial management cannot be overemphasized, since it has direct bearing on the financial health of a business. Almost all items of financial statements are affected by them. Examples: The size and composition of business assets (fixed) Quantum of current assets The amount of long term and short term assets to be used Break-up of long term assets into debt and equity All items of profit and loss account

6. OBJECTIVES OF FINANCIAL MANAGEMENT PRIMARY MAXIMIZE SHAREHOLDERS’ WEALTH SECONDARY PROFIT MAXIMIZATION/ EFFECTIVE UTILISATION OF FUNDS AVAILABILITY OF FUNDS AT REASONABLE COSTS MAINTAINING ADEQUATE LIQUIDITY ENSURE SAFETY OF FUNDS AVOID IDLE FINANCE

7. FINANCIAL DECISIONS FINANCIAL DECISION: BY FINANCE MANAGER INVESMENT DECISION CAPTIAL BUDGETING DECSION WORKING CAPITAL DECISION FINANCING DECISION DEBT EQUITY DIVIDEND DECISION RETAINED EARNINGS DIVIDENDS

8. WHAT IS EQUITY???? In the most general sense, equity is assets minus liabilities. An owner’s equity is typically explained in terms of the percentage of stock a person has ownership interest in the company. The owners of the stock are known as shareholders.

9. WHAT IS DEBT??? General name for money, notes, BONDS, goods or services which represent amounts owed.

10. INVESTMENT DECISION This decision involves careful selection of assets, in which funds are to be invested. Investment decision can be long term( capital budgeting ) or short term ( working capital )

11. INVESTMENT DECISION: LONG TERM

12. FINANCING DECISION This decision relates to the relative proportion of various sources of finance This decision determines the overall cost of capital and financial risk of the enterprise (Debt Vs. Equity)

13. FINANCING DECISION FACTORS AFFECTING F I N A N C I N G DECISION COST RISK FLOATION COST CASH FLOW POSITION OF THE COMPANY FIXED OPERATING COST CONTROL CONSIDERATION STATE OF CAPITAL MARKET RETURN ON INVESTMENT TAX RATE FLEXIBILITY REGULATORY FRAMEWORK

14. DIVIDEND DECISION The third important decision every finance manager has to take, relates to distribution of dividend. Dividend is that portion of profit, which is distributed to the shareholders. This decision is concerned with ascertaining , how much profit to distribute and how much to be retained in the business.

15. DIVIDEND DECISION

16. DIVIDEND DECISION FACTORS A FF E C T I N G DIVIDEND DECISION AMOUNT OF EARNINGS STABILITY IN EARNINGS STABILITY OF DIVIDENDS GROWTH OPPORTUNITIES CASH FLOW POSITIONS SHAREHOLDERS’ PREFERENCES TAXATION POLICY STOCK MARKET REACTION ACCESS TO CAPITAL MARKET LEGAL CONSTRAINTS CONTRACTUAL CONSTRAINTS

17. CONCEPT OF CAPITAL STRUCTURE COMPONENTS OF CAPITAL STRUCTURE DEBT EQUITY CALCULATION OF CAPITAL STRUCTURE AS DEBT EQUITY RATIO

18. CONCEPT OF CAPITAL STRUCTURE An optimal capital structure will be attained, when the proportion of debt and equity is such that, it results in an increase in the value of equity shares, i.e. increase in shareholders wealth.

19. WHAT IS FINANCIAL LEVERAGE The amount of total debt in overall capital is called financial leverage When financial leverage(i.e. Debt) increases, the cost of funds decline but risk increases. Calculation of financial leverage

20. WHAT IS EARNINGS PER SHARE(EPS) Earnings per share (EPS) is calculated as a company's profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company's profitability. KEY TAKEAWAYS Earnings per share (EPS) is a company's net profit divided by the number of common shares it has outstanding. EPS indicates how much money a company makes for each share of its stock and is a widely used metric for corporate profits. A higher EPS indicates more value because investors will pay more for a company with higher profits. EPS can be arrived at in several forms, such as excluding extraordinary items or discontinued operations, or on a diluted basis.

21. CASE OF FAVOURABLE FINANCIAL LEVERAGE The company earns Rs. 0.93 per share if it is unlevered. With debt of Rs. 10 lakh its EPS is Rs. 1.05. With a still higher debt of Rs. 20 lakh, its, EPS rises to Rs. 1.40. Why is the EPS rising with higher debt? It is because the cost of debt is lower than the return that company is earning on funds employed. The company is earning a return on investment (RoI) of 13.33% This is higher than the 10% interest it is paying on debt funds. With higher use of debt, this difference between RoI and cost of debt increases the EPS. This is a situation of favourable financial. In such cases, companies often employ more of cheaper debt to enhance the EPS. Such practice is called Trading on Equity

22. CASE OF UNFAVOURABLE FINANCIAL LEVERAGE Now consider the following case of Company Y. All details are the same except that the company is earning a profit before interest and taxes of Rs. 2 lakh. In this example, the EPS of the company is falling with increased use of debt. It is because the Company’s rate of return on investment (RoI) is less than the cost of debt. The RoI for company Y is whereas the interest rate on debt is 10%. In such cases, the use of debt reduces the EPS. This is a situation of unfavourable financial leverage. Trading on Equity is clearly unadvisable in such a situation.

23. FACTORS AFFECTING CAPITAL STRUCTURE(MIX OF DEBT AND EQUITY) COST OF DEBT COST OF EQUITY INTEREST COVERAGE RATIO: Refers to the no. of times earning before interest and tax covers the interest obligation. Higher the ICR, the company can borrow more funds and vice –versa. DEBT SERVICE COVERAGE RATIO: Refers to the ratio that takes care of deficiencies in the ICR. A higher DSCR indicates better ability of a company to meet its cash commitments and borrow more funds CASH FLOW POSITION RETURN ON INVESTMENT TAX RATE FLOATATION COST OPERATING COSTS FLEXIBILITY CONTROL CONSIDERATION STOCK MARKET CONDITIONS REGULATORY FRAMEWORK SAME AS FACTORS AFFECTING FINANCING DECISION

24. ICR AND DSCR EXPLAINED Interest + Principal

25. FIXED CAPITAL MANAGEMENT Fixed capital involves allocation of firm’s capital to long term assets or projects It provides the base for the foundation of a business and absorbs the shocks of business. Fixed assets should always be financed through long term sources of finance. Fixed capital management is important for the following reasons LONG TERM GROWTH LARGE AMOUNT OF FUNDS INVOLVED RISK INVOLVED IRREVERSIBLE DECISIONS

26. WORKING CAPITAL MANAGEMENT Working capital means the portion of capital which is invested in current assets The term working capital may mean Gross working capital or Net working capital GROSS WORKING CAPITAL: means current assets NET WORKING CAPITAL: means current assets minus/less current liabilities CURRENT ASSETS: refer to those assets held in a business which can be converted in the form of cash within a period of one year. These assets are more liquid but less profitable. Examples: cash in hand/bank, marketable securities, bills receivables, debtors , finished goods etc. CURRENT LABILITIES: refer to those liabilities which are to be paid off during the time span of one year. Examples: sundry creditors, bills payable, bank overdraft, prepaid expenses etc.

27. FACTORS AFFECTING NATURE OF BUSINESS SCALE OF OPERATIONS CHOICE OF TECHNIQUE TECHNOLOGY UPGRADATION GROWTH PROSPECTS DIVERSIFICATION FINANCING ALTERNATIVES THE REQUIREMENT OF WORKING CAPITAL THE REQUIREMENT OF FIXED CAPITAL NATURE OF BUSINESS SCALE OF OPERATIONS BUSINESS CYCLE SEASONAL FACTORS PRODUCTION CYCLE/OPERATING CYCLE CREDIT ALLOWED/ CREDIT AVAILED AVAILABILITY OF RAW MATERIALS TIME LAG