Definition Scope and sources of finance:-
As we all know managing finance is a huge task for every entity around the world. It is the basic, top oriented, and organic function of any business. It is the top level of management in the hierarchy table. Every business needs finance at the beginning of the business. Before the incorporation of the company, they need to allocate finance or raise up capital finance.
The company raises finance for opting for physical assets, to carry on the production process and other business activities. It also needs working capital at the start of the business. The business also pays brokerage or we can use the word compensation to the suppliers etc.
There are many theories around financial management:-
1) Some people have faith that financial management is all about giving funds needed by business organizations on terms that are most favorable; business finance includes instruments, institution, and trade practices to raise funds It also takes the legal aspect and accounting relationship between both the enterprise and its source of funds
2) Many other people also think that financing is all about cash in hand
Since we see all business transactions and procedures involve cash into it directly or indirectly, finance has undertaken everything done by the business
3) The third more widely accepted point in financing is using the finance very effectively and minimize the loss. E.g; In the case of a production company, financial management must ensure all the funds are available for the installation of plants and machinery and all equipment. Further, the business must ensure that it deals with task management like keeping the availability of fund, allocating them at the right time at the right place, managing it properly, investing money, controlling cost, forecasting financial requirements, planning to earn profits, estimating the return on the investment done, assuming working capital which is used day to day, etc.
☆Core financial management decisions:-
In every organization, managers take every effort to minimize the costs of financing and to use it in the most profitable manner
For doing this take up the following decisions:-
- Financing Decision
- Investment Decision
- Dividend Decision
The investment decision is of two types:-
- Long term investment decision
- Short term investment decision
> Long-term investment decisions or in other words capital budgeting means committing funds for a longer period of time it’s like fixed assets. These decisions are non-reversible and mostly includes heavy financing or maybe replacing the old one
> Short term investment decision or working capital means committing funds for a shorter period of time like a current asset. This involves financing in inventory cash/ cash/ bank deposits/ and other short period investment
The management can also come up with the decision pertaining to raise capital from long term sources ( named capital structure ) and short term sources (called working capital)
They are of two types:-
The primary objective of financial planning is to plan and ensure that the funds are available and when there is a demand or requirement arises.
Capital structure decisions involve knowing the sources of funds. They also involve the decision to choose external sources to like to issue shares, bonds, lending from banks, like retained earnings for raising of funds.
These involve decisions related to the part of the profit that will be distributed as dividends. Sometimes shareholder demands a higher dividend, but it is not possible for both the shareholders. The equity shareholders are the owner of the company’s so they can wait for three dividend parts.
Lease financing is an impact aspect for giving or providing medium or long-term financing where the owner gives his/her rights and possession to another person to use his/her asset against periodical payments. The owner of the asset is known as the lessor while the user is called the lessee.
The payment for an asset using for the decided time given by the lessee to the lessor is known as lease rental. While transferring the rights for a given period of time the ownership lies with the lessor itself
Different types of leases:-
It is the lease where the lessor transfers substantially all the risk and rewards of ownership of assets to the lessee in the same position and situation where if the lessor can think he/she would be if the same situation comes on him/her. While the period gets started there is no way back to come till the period gets over. The cancellation is impossible before the time period gets over.
Feature of finance lease:-
The following are the features of a finance lease:-
- For a decided period the lessee has the right to use an asset.
- The rental charge in lease finance is sufficient enough to recover his/her investment done in an asset
- For maintaining the asset, it is the lessee’s responsibility towards the asset
- Any kind of risk and reward is not taken by the lessor at the ongoing period of rental time
Other than a finance lease any other lease is called an operating lease. Here any risk happens or any damage is made by the lessee to the asset it is the lessor’s responsibility to handle the damage factor and recover it
Features of an operating lease:-
Following are the features of an operating lease:-
- The rental lease term is much lower than the economic life of the asset
- All the risk-bearing factor and damages lie in the hand of the owner i.e lessor
- The lessor gives all technical related issues and all terms and conditions to be used at the time of using the asset
Capital budgeting is the process of making investment decisions in capital expenditures. Capital expenditure is an expenditure that benefits of which are expected to be received over a period of time exceeding one(1) year. The procedure in capital budgeting is making a decision whether or not to commit resources to a particularly long term period project whose benefits are to be raised over a certain period of time longer than one(1) year
Features of capital budgeting:-
- A)The future containing benefits are expected to be raised over a period of time
- B)They mostly involve bulky funds
- C)There are no reversible decisions
- D)They take up with the idea of getting a large sum of money
- E)They take a long term effect on profit
Working capital management:-
Capital involved in the business are classified under two main categories:-
- 1)Fixed capital
- 2)working capital
Every business needs funds for two purposes for its incorporation i.e while starting and to carry out its day-to-day operations. Long term funds are required to create a production to manufacture and purchase fixed assets such as plant and machinery, land, buildings, furniture, equipment, etc. These investments are known as a fixed capital investment because the money involved is for long term use and it is the permanent financing on any asset or production purpose. Funds are also needed for short term purposes for the purchase of raw material, payment of wages to the labor, and another day to day expenses. Working capital in general practice refers to the excess current asset over current liability
Concept of working capital:-
There are two concepts of working capital:-
- 1)Gross working capital
- 2) Net working capital
In an open sense, the word working capital refers to the gross working capital and represents the number of funds invested in the current assets is that asset which can be converted into cash at the time of need arises within a short period or one accounting year.
E.g; the current asset is given as under:-
Constituents of current asset:-
- 1)Bill receivables
- 2) sundry debtors ( excluding bad debts)
- 3)cash in hand
- 4)cash at bank
- 5) short term loans and advances
- 6) inventories:- a)Raw material, b)work in progress, c)stores and spares ,d)finished goods
- 7)prepaid expenditure
- 8)accrued incomes
Net Working = Current Current
Capital Asset Liability
Constituents of current liability:-
- 1)Bills payable
- 2)Sundry creditor
- 3)Outstanding expenses
- 4)Short term loans and advances
- 5)Dividend payable
- 6)Bank Overdraft
- 7)Taxation provision
The word divided refers to that part of the profit of the company which is distributed by the company among both the shareholders i.e equity shareholder and preference shareholder. It is the kind of reward given back to them in the way of the dividend the faith which they have shown in the company. The shareholder always procures huge interest in earning the maximum return on their investment and to maximize the wealth. The policy of giving dividend is the hard-earned profit of the company’s distributed as dividend and the remaining amount is kept as a general reserve
Types of dividend policy:-
- 1)Regular Dividend Policy
- 2)Stable Dividend Policy
- 3)Irregular Dividend Policy
- 4)No Dividend Policy
☆Regular Dividend Policy:-
Making payment of dividends at the agreed rate is termed as a regular dividend. The retired person, Widow, and other investors who are the weaker person in the economy mostly prefer regular dividend
☆Stable Dividend Policy:-
The term stability of dividend means consistency or lacking variability in the stream of dividend payments It can be formed in three forms:-
#constant dividend per share:-
Some company already fixes the amount of dividend rather than having a large profit done by the company.
#constant payout ratio:-
It means payment is made of a fixed percentage of net earnings as dividends every year.
#Stable rupee dividend pay an extra dividend:-
some company follows a policy of paying constant low dividend per share plus an extra dividend in the year of high profits.
☆Irregular Dividend Policy:-
Some companies follow irregular dividend payments on account of the following:-
*uncertainty of earnings
*unsuccessful business operations
*lack of liquid resources
☆No Dividend Policy:-
A company follows a policy of paying no dividends at present because of its unfavorable working capital position or an account of the requirement of funds for future expansion and growth