- 286 pages
- English
- ePUB (mobile friendly)
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Financial Management Practices in India
About This Book
Efficient financial management is the essence of business. This book analyses and evaluates core financial management practices of corporate enterprises in India across diverse sectors including realty, FMCG, pharmaceutical, automobile, IT, chemical and BPO sectors. It emphasizes the importance of the integrated process of capital investments, financing policy, working capital management and dividend distribution for shareholders for a developing economy as India. It further highlights the need for financial viability both in totality and segmental performance. The volume also offers a comparative study of the practices of the companies in different sectors to allow a better appreciation of the issues and challenges regarding management of finances.
Rich in case studies, this book will be an indispensable resource for scholars, teachers and students of financial management, business economics as also corporate practitioners.
Frequently asked questions
Information
Introduction
1
Nature of Financial Management
Introduction
What is financial management?
Elements
- Investment decision: It implies the allocation of funds in various assets. The investment in fixed assets is called capital budgeting decision. The investment in current assets is called working capital decision.
- Financing decision: It refers to the process of raising funds from various sources depending on factors, such as the cost of funds, control, liquidity and so forth.
- Dividend decision: It is the decision about distributing net profit. The finance manager decides what percentage of profits would be distributed as dividend to shareholders and how much profits would be kept aside as reserves for future contingencies.
Objectives of financial management
- Profit maximisation: It is the primary objective of financial management. Every business enterprise tries to earn maximum profit, both short term and long term.
- Wealth maximisation: Shareholdersā value maximisation is the key objective of financial management and is preferred over profit maximisation on account of market interest. Wealth maximisation is a combination of regular return to shareholders in the form of dividend and appreciating market returns.
- Liquidity: Liquidity maintenance is one of the most important objectives of financial management. The firm must have a sound cash position for meeting day-to-day expenses; otherwise, there might be a threat to the survival of the firm.
- Solvency: Long-term soundness is a key objective of financial management. The company must be solvent to pay interest and repay loans at regular intervals. Lack of solvency can be a big blow to the firm in this competitive scenario.
Functions of financial management
- Estimating financial requirements: Proper estimation of financial requirements is an important function of financial management. The finance manager must determine accurately how much finance is required for business operations, keeping in view the long-term and short-term requirements.
- Mobilisation of funds: Funds acquisition is another important function of financial management. After estimating the financial requirements, the finance manager must decide on raising the funds from various sources of finance, such as shares, debentures, bank loans and the like. There must be a proper balance between owned funds and debt funds.
- Proper utilisation of finance: The next task of finance manager is to utilise these funds efficiently. Long-term funds should be invested in fixed assets and short-term funds should be used for current assets. The finance manager should not invest the companyās funds in unprofitable projects.
- Distribution of profits: The distribution of net profit has to be decided by the finance manager regarding dividend and reinvestment of earnings. The finance manager must consider the requirements of shareholders and expansion plans of the company.
- Cash management: Finance manager must ensure enough liquidity and should plan out the cash required for various requirements of the firm, such as payment of salaries, bills, meeting current liabilities and the like.
- Financial control: Sound financial control is the prerequisite for the growth of business. The finance manager must exercise proper control with the help of techniques, such as budgetary control, cost analysis, financial forecasting and the like.
Financial management scene in India
- Interest rates. Interest rates are controlled by the Reserve Bank of India (RBI) and other commercial banksā rates are affected from RBIās action. To ascertain cost of debt, one should know this.
- Value of shares. Value of shares now can be determined at premium or discount freely. One should determine its shares value at optimum level because it directly affects the earnings per share (EPS).
- Mergers and acquisitions. As good finance manager, one should keep oneās eye on who is taking over which company. To merge with other company may be sometime profitable than going alone.
Financial management problems
- Due to poor planning, the enterprises do not maintain a desirable combination of sources of funds. This leads to shortage of equity and then they depend too much on borrowed capital. Hence, sound financial planning is required for an optimal financial structure.
- Inadequate combination of assets results in the problem of either underinvestment or overinvestment in total assets. This is more pertinent to current assets, such as inventories and receivables. For a manufacturing undertaking, these problems need an immediate check by adopting appropriate inventory controlling techniques and sound credit and collection policies.
- Inaccurate projection of revenues and costs results in improper investment in inventories, receivables and plant capacity. These factors ultimately result in poor earnings of the enterprises. So, there should be an efficient and effective profit planning for better utilisation of resources and enhanced earnings.
- The enterprises lack a definite and stable dividend policy. There should be an adequate balance between payment of dividends and retention of earnings. Dividend payments should be more regular and consistent in proportion to the paid-up capital.
- The enterprises should be managed by only professionally competent, qualified and experienced personnel for better result orientation.
Discussion questions
- Define financial management. Explain its elements.
- What are the objectives of financial management?
- āShareholdersā wealth maximisation is the key objective of financial managementā. Justify.
- Discuss the function of financial management.
- āThe financial management scenario in India has undergone a sea change of lateā. Elaborate.
- What are the various financial management problems faced by the corporate enterprise? Discuss with solutions.
Note
Part II
Investment Decision
2
Capital Budgeting
Introduction
- replacement of an asset;
- expansion of the production capacity;
- diversification of business;
- modernisation of existing facilities; and
- research and development (R&D) activities.
Capital budgeting process
- Identifying investment needs: The first step is to identify the need or opportunity for a capital investment. This involve...
Table of contents
- Cover Page
- Half Title Page
- Title Page
- Copyright Page
- Contents
- List of Figures
- List of Tables
- Preface
- Part I Introduction
- Part II Investment Decision Capital budgeting
- Part III Financing Decision
- Part IV Investment Decision Working capital management
- V Dividend Decision
- References
- Index