5. Financial Management

1. 5. Financial Management PART I: Objectives & Functions PART II: Capital Management PART III: Budgets and accounts PART IV: Introduction and types of Taxes

2. PART I FINANCIAL MANAGEMENT OBJECTIVES & FUNCTIONS Prof. S.K.Rawat

3. What is Financial Management? • Financial Management is that specialized function of general management, which is related to the procurement of finance and its effective utilization for the achievement of common goal of the organization. • It includes each and every aspect of financial activity in the business. Prof. S.K.Rawat

4. DEFINITION • “Financial Management is the application of the planning and control functions to the finance function.” -Howard and Upton. • “Financial Management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations.” - Joseph and Massie. Prof. S.K.Rawat

5. RESPONSIBILITIES • Financial Planning • Raising of Necessary Funds • Controlling the Use of Funds • Disposition of Profits • Wealth Maximization • Other Responsibilities: • Legal Obligations • Responsibility to owners • Responsibilities of Employees • Responsibilities to Customers Financial Plan Prof. S.K.Rawat

6. Functions of Financial M… • Financial Forecasting • Establishing Asset-Management Policies • Allocation of Net Profit • Cash Flows and Requirements • Deciding upon Borrowing Policy • Negotiations for New outside Financing • Checking upon Financial Performance Negotiation Prof. S.K.Rawat

7. Functions of Financial M… • Some of the important incidental finance functions are:- • Supervision of cash receipts, disbursements and safeguarding of cash balance. • Proper custody and safeguarding of the important and valuable papers, securities and insurance policies. • Taking care of all mechanical details of financing. • Record-keeping and reporting. • Cash planning and credit management. Prof. S.K.Rawat

8. Objectives of Financial M… • Profit Maximization • Return Maximization • Wealth Maximization • Raising of funds • To know the assets & liabilities • To find out the profit & loss in the business • Effective utilization of resources • To know the business transactions for a given period • Maintaining the transparency • Determination and payment of taxes • Investment decisions • Overall appraisal of the organization Prof. S.K.Rawat

9. PART II CAPITAL GENERATION & MANAGEMENT Prof. S.K.Rawat

10. Capital Management • To start any industry it is necessary to have enough Capital. • Capital is wealth which yield income or helps in production of further income. • No industry can be set up without capital. Prof. S.K.Rawat

11. Nature of Capital • It is a life-blood of a business enterprise. • It is physical resources for production, and money when applied to finance. • Capital covers all the element to start a business. • Capital is the measure of amount of resources of an enterprise. • Capital develops products, keeps workers and machines at work, encourages management to make progress & create value. Prof. S.K.Rawat

12. Types of Capital • Capital are classified in two types: • Fixed or Blocking Capital. • Working or Current or Circulating Capital. Prof. S.K.Rawat

13. Fixed Capital • Fixed capital is required for purchasing fixed assets such as land, buildings, machinery, furniture, equipments etc. • Fixed capital is associated with long term assets. • These assets are not fixed in value; in fact, their value may increase or decrease in course of time. • They are fixed in the sense that without them, the business cannot be carried on. Prof. S.K.Rawat

14. Fixed Capital • Fixed capital is used for meeting the permanent or long-term needs. • The total cost of land, building, machinery & plant gives the amount to be invested in fixed assets. • It has to be raised before the company goes into production. • The amount of fixed capital requirements of a concern depends on: (a) nature of the business, and (b) size of the business unit. Prof. S.K.Rawat

15. Working Capital • Working capital means current assets such as cash, accounts receivables and inventory etc. • For management, working capital is as important as fixed capital. • The fate of most of the business very largely depends upon the manner in which their working capital is managed. • The working capital is required for the purchase of raw materials, and for meeting the day-to-day expenditure on salaries, wages, rents, advertising etc. Prof. S.K.Rawat

16. Working Capital • It is also term circulating capital or revolving capital for working capital. • This is because the working capital is invested, recovered and re-invested repeatedly during the life-time of the company. • Working capital requirements can be met with short-term funds. • Main constituents of working capital are current assets & current liabilities. Prof. S.K.Rawat

17. Working Capital • As long as the business continues, the working capital would be needed repeatedly. • This means that at least a part of the working capital can be called 'regular' or 'fixed' working capital. • The remaining part is known as the fluctuating or variable working capital. • This is needed to meet the requirements of a raise in the volume of production during the peak periods of the year. It can, of course, be met with short-term capital. Prof. S.K.Rawat

18. Sources of Finance • Fixed capital & Working capital are required to start and run an industry. • For purchasing fixed asset and also to meet day-to-day operational expenditure of an enterprise, there must be adequate finance. • So to meet these expenditures, one must know the sources of finance. • The different sources of finance may be (a)Internal & (b)External. Prof. S.K.Rawat

19. Internal Sources of Finance • Retained equity earning. • Personal funds by promoter. • Deferred Taxation. • Depreciation provision. Prof. S.K.Rawat

20. External Sources (Long Term) • Issues of Shares. • Preference Shares. • Ordinary or Equity Shares. • Deferred Shares. • Issue of debentures. • Loans from financial institution: • IFCI, IDFC. • LIC, UTI,etc • Corporate Bonds. Prof. S.K.Rawat

21. External Sources (Medium Term) • Bank Loan. • Public Deposits. • Sale & Lease back. • Profit plough back. • Special Financial Institutions. Public Deposits Financial Institutes Prof. S.K.Rawat

22. External Sources (Short Term) • Bank Credit. • Trade Credit. • Customer Advances. • Money Market. • Instruments. Prof. S.K.Rawat

23. PART III BUDGETS & ACCOUNTING Prof. S.K.Rawat

24. BUDGETS • A budget is a financial or quantitative statement, prepared and approved prior to a period to attain the objectives of organization. • It is a written plan of action for a specific period. • It is used as cost control instrument. • It represents the financial requirement of different department of organization. • It is based on past statistical data & predicts the future requirements. Prof. S.K.Rawat

25. Objectives of Budgets • It helps the management to determine policies. • To provide a method, to check the achievements of organization. • To provide check over expenditure in the various departments. • To help in planning the expansion, development and diversification of organization. • To provide a measure for determining the efficiency of the business. • It provides the basis for expenditure of funds. Prof. S.K.Rawat

26. Budgetary Control • Budgetary control is the tool used to control and plan all the aspects of budget of an organization. • It compares actual performance and the predicted performance of business. • It enables all levels of management to know whether their departments are moving towards the achievements or objectives of the company. • Budgetary control attempts to bring actual performance at par with the predicted performance; and by taking corrective actions if necessary. Prof. S.K.Rawat

27. Types of Budget • Fixed Budget. • Variable Budget. • Functional Budget and • Master Budget. Prof. S.K.Rawat

28. Fixed Budget • It assumes that prediction or forecasting will prove correct in the future. • So no provision is made for any changes that may occur during the budget period. • Budget for R&D department, hospitals and budget of schools & colleges are examples of fixed budget; where a certain fixed amount is set for expenditure. Prof. S.K.Rawat

29. Variable Budget • It deals with unreliability of income or sales prediction. • It makes the provision in advance if any change may occur during the budget period. • Budget for manufacturing of soft drink bottles. • Budget of sugar mill. Prof. S.K.Rawat

30. Contents of Budget Fixed Budget/ Variable Budget Year: 2011 ABC Ltd, Mumbai-71 Date: 3/01/11 Particulars Amount (Rs) Schedule Details • Sales 50,000/- Product A upto 30/11/10 Product B upto 31/12/10 • Expenses • Direct expenses 20,000/- • Indirect expenses 6,500/- • Other expenses 1,700/- Product A upto 30/11/10 Product B upto 31/12/10 Product A & B upto 31/12/10 28,200/- 3. Profit (1-2) 21,800/- Product A & B by 31/12/10 Prof. S.K.Rawat

31. Functional Budget • Sales Budget. • Capital Expenditure Budget. • Materials & Purchase Budget. • Cash Budget. • Production Budget. • Labour Budget. • Master Budget. Prof. S.K.Rawat

32. Accounting • Accounting is making record of assets, liabilities, capital invested, cash inflows/outflows & profit gained. It is also referred as Books of Account. • It is recorded in form of statement such as petty cash book, trial balance, profit & loss accounts & balance sheet. • It is based on a double entry system. For every debit, there is a credit. • The net effect of accounting is zero, which results in balancing of books. Prof. S.K.Rawat

33. Purpose of Accounts Prof. S.K.Rawat

34. Purpose of Accounts • Provide information for stakeholders – customers, shareholders, suppliers, etc. • Provides the opportunity for the business to monitor its own activities • Provides transparency to enable the firm to attract investment • Reduces the chance for fraud – not 100% successful!! Prof. S.K.Rawat

35. Profit and Loss Account Prof. S.K.Rawat

36. Profit and Loss Account • Shows the flow of sales and costs over a period • Shows the level of profit or loss made during the period • Shows what has been done with the profit or loss Prof. S.K.Rawat

37. Consolidated Profit & Loss Account for the year ended 2003 2002 2001 Weeks 52 52 52 Currency Rs Rs Rs Turnover 7688.0 8340.0 9278.0 Cost of sales -7263.0 -8291.0 -8757.0 Gross Profit 425.0 49.0 521.0 Operating Expenses -130.0 -137.0 -77.0 Operating Profit 295.0 -88.0 444.0 Other costs/income 95.0 166.0 -68.0 Profit before interest and taxation 390.0 78.0 376.0 Net interest receivable (payable) -255.0 -278.0 -226.0 Profit on ordinary activities before taxation 135.0 -200.0 150.0 Tax on profit on ordinary activities -50.0 -71.0 -69.0 Profit on ordinary activities after taxation 85.0 -129.0 81.0 Equity minority interests -13.0 -13.0 -14.0 Profit for the financial period 72.0 -142.0 67.0 Dividends 0.0 -193.0 Retained profit 72.0 -142.0 -126.0 Profit and Loss Account Profit and Loss Account for ABC Ltd. Operating Expenses – the fixed costs Gross Profit = turnover – cost of sales Subtract tax due to get profit on ordinary activities after tax Final section called ‘appropriation account’ – shows where the profit/loss is going Dividend – the share of the profit returned to shareholders Retained Profit – the amount kept back for future investment, etc. Operating or Net Profit = Gross profit – operating costs Subtract other costs and expenses incurred to get profit before tax Turnover – the revenue earned over the year Subtract interest payments/receipts to get profit on ordinary activities before tax Cost of Sales – the variable costs, how much it cost the firm to produce what it has sold – not to be confused with sales revenue! Prof. S.K.Rawat

38. Balanced Sheet Prof. S.K.Rawat

39. Balanced Sheet • Balance Sheet is a statement, which shows assets, liabilities and capital invested in the business on a particular date. • Left hand side shows total liabilities. • Right hand side shows total assets of the business. • Balance sheet is not for a specific period, but it shows the health of business from day one to the date when balance sheet is prepared. Prof. S.K.Rawat

40. Format of Balanced Sheet Liabilities & Equity Rs.(Cr) Assets Rs.(Cr) 25.00 5.00 5.00 5.00 5.00 5.00 • Current assets: • Cash in hand • Cash at bank • Bills Receivable • Debtors • Inventory 20.00 5.00 5.00 5.00 5.00 Current liabilities: Creditors expenses Creditors for trade Bills Payable Bank Overdrafts • Long term liabilities: • Long term loan • Mortgage property Investments: 15.00 20.00 10.00 10.00 Fixed assets: Furniture Plant & Machinery Building Land Good will 60.00 10.00 10.00 10.00 15.00 15.00 Owners Equity: Capital 60.00 50.00 Retained Profits 10.00 Total Liabilities 100.00 Total Assets 100.00 Prof. S.K.Rawat

41. PART IV Taxes & Taxes Registration Prof. S.K.Rawat

42. INTRODUCTION TO TAXES • Taxes are the compulsory payment which is given to the government by the public. • Taxes are the important sources of government funds. • It helps the government to distribute the national income equally among the needy people of the country through various schemes. • Tax is the important tool in the hands of government to bring rapid economic development of the country & to facilitate equal distribution of wealth. Prof. S.K.Rawat

43. TYPES OF TAXES DIRECT TAXES • Income tax • Wealth tax • Property tax….etc. INDIRECT TAXES • Service tax • Sales tax • Vat • Excise duty • Custom duty etc.

44. MAIN TAXES & DUTIES • INCOME TAX (except tax on agricultural income, which the State Governments can levy), • VAT(value added taxes) • Central Excise and Sales Tax (CST) • Service Tax(tax levied on service provided )

45. SERVICE TAX What is Service tax? • Service tax is an indirect tax levied under the Finance Act, 1994, as amended from time to time, on specified services. • At present, there are approximately 96 categories (including 15 new services introduced by Budget 2006)of net services taxable under the service tax.

46. EXCISE DUTY • WHAT IS EXCISE DUTY Excise duty is an indirect tax levied and collected on goods manufactures in India.

47. CUSTOM DUTY • Custom Duty Is A Tax Which A State Collects On Goods Imported Or Exported Out Of The Boundaries Of The Country • In India, Custom Duties Are Levied On The Goods And At The Rates Specified In The Schedules To The Custom Tariff Act, 1975

48. OBJECTIVES OF CUSTOM DUTIES • Restricting Imports For Conserving Foreign Exchange • Protecting Indian Industry From Undue Competition • Regulating Exports • Prohibiting Imports And Exports Of Goods For Achieving The Policy Objectives Of The Government • Coordinating Legal Provisions With Other Laws Dealing With Foreign Exchange

49. Types of custom duties • Basic duty • Addition duty • Anti-dumping duty • Export duty • Protective duty

50. SALES TAX • Sales tax is a tax on the supply of goods and certain services ,it is charged at the time of sale and then deposited in the Government treasury.