Scope of Financial Management Financial Management involves the application of general management principles to particular financial operation

Objectives of Financial Management  Maximization of shareholders wealth

Financial Management Decisions  Financing  Investment  Dividend  Working capital management

Difficulties  Measurement problems  Uncertainty  Temporal spread

Investment decisions-Capital Expenditure decisions Importance  Long term effects  Irreversibility  Substantial outlays

Investment decisions-Capital Expenditure decisions Difficulties  Measurement problems  Uncertainty  Temporal spread

Phases of capital budgeting  Planning  Analysis  Selection  Implementation  Review

SELECTION CriterionAccept when Pay back period (PBP)PBP < target period Accounting rate of return(ARR) ARR > target rate Net present value (NPV)NPV > 0 Internal Rate of Return(IRR) IRR > cost of capital Benefit cost ratio (BCR) /Profitability Index BCR > 1

Various facets of project Analysis  Market analysis  Technical analysis  Financial analysis  Economic analysis  Ecological analysis

Sources of finance Permanent sources  Share capital  Retained profits Long term sources  Redeemable preference shares  Debentures  Long term loans  Seed capital / venture capital

Sources of finance Medium term sources  Medium term loans  Deferred credit  Public deposits  Working capital term loans

Sources of finance Short term sources  Cash credit  Overdraft  Bills discounting  Commercial paper  Trade credit

Study of financial Statements:  Financial Statements means Balance Sheet, P & L A/c and sources and uses of funds statement

Basic concepts underlying financial Accounting  Entity concept  Money measurement concept  Stable monetary unit concept  Going concern concept  Cost concept  Conservatism concept  Dual aspect concept

Finance topics- Balance Sheet Share capital Equity/preference Reserves & Surplus Secured Loans Debentures Capital Structure Cost of capital Loans & Advances Unsecured loans Current Lia/provisions Trade creditors Provisions Working capital financial policy

Finance topics- Balance Sheet Fixed Assets (Net)Capital budgeting decisions InvestmentsSecurity Analysis Cash & BankCash Management ReceivablesCredit Management InventoriesInventory Management

Basics of Financial Statement analysis  Horizontal analysis- analysis involves the computation of amount changes and percentage changes  Vertical Analysis- uses percentages to show the relationship of the different items to the total in a single statement. Sets a total figure equal to 100 % and compute the percentage of each component of that figure

Basics of Financial Statement analysis  Trend Analysis :Percentage changes are calculated for several successive years instead of between two years.  Ratio Analysis: Represent meaningful relationship between two numbers

Common size statements  The numbers are brought to common base i.e. per cent.  Make comparisons of business enterprises of different sizes more meaningful  It can be prepared in vertical analysis format or horizontal analysis format

A CASH FLOW EXAMPLE