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Scope of Financial Management

Scope of Financial Management
Scope of Financial Management Facebook Buys WhatsApp: Boneheaded or Brilliant? This was the title of a  Forbes Article when Mark Zuckerberg acquired Whatsapp for $19 billion dollars, the price that may exceed the GNP of some of those countries. Mark is said to be an unconventional thinker and the WhatsApp acquisition shows Facebook’s determination to follow the road not yet paved. It is a bold move, yet filled with risks along the way. This is one of the finest examples of the big investment decisions of recent times and the right course of action,  if you measure the number of potential users of the mobile messaging service rather than the cost of acquiring each user and the potential for selling ads to each user today. Financial management is one of the important aspects of overall management, which is directly asscoiated with various functional departments like personnel, marketing and production. Financial management embraces wide area with multidimensional approaches. The following are the important scope of financial management. Some of the major scope of financial management are as follows: 1. Investment Decision 2. Financing Decision 3. Dividend Decision 4. Working Capital Decision. 1. Investment Decision: The investment decision involves Risk Evaluation Measurement of cost of capital and Estimation of expected benefits from a project. Capital budgeting and liquidity are the other two major components of investment decision. Capital budgeting takes care of the distribution of capital and commitment of funds in permanent assets to harvest revenue in future. Capital budgeting is a very focal decision as it impacts the long-term success and growth of a firm. All the same it is a very tough decision because it encompasses the estimation of costs and benefits which are uncertain and unknown. 2. Financing Decision: Financing decision is related to financing mix or financial structure of the firm. The raising of funds requires decisions regarding Methods and sources of finance Relative proportion and choice between alternative sources Time of floatation of securities, etc. In order to meet its investment needs, a firm can raise funds from various sources. Long Term Sources of Finance: Share Capital or Equity Shares Preference Capital or Preference Shares Retained Earnings or Internal Accruals Debenture / Bonds Term Loans from Financial Institutes, Government, and Commercial Banks Venture Funding Asset Securitization International Financing by way of Euro Issue, Foreign Currency Loans, ADR, GDR etc.  Picture Courtesy: Cash & Treasury Management file Medium Term Sources of Finance: Preference Capital or Preference Shares Debenture / Bonds Medium Term Loans from Financial Institutes Government, and Commercial Banks Lease Finance Hire Purchase Finance Short Term Sources of Finance: Trade Credit Short Term Loans like Working Capital Loans from Commercial Banks Fixed Deposits for a period of 1 year or less Advances received from customers Creditors Payables Factoring Services Bill Discounting etc. 3. Dividend Decision: In order to accomplish the goal of wealth maximization, a proper dividend policy must be established. One feature of dividend policy is to decide whether to distribute all the profits in the form of dividends or to plough back the profit into business. While deciding the optimum dividend payout ratio (proportion of net profits to be paid out to shareholders), the finance manager should consider the following: Investment opportunities available to the firm Plans for expansion and growth, Dividend stability Form of dividends, i.e., cash dividends or stock dividends, etc. 4. Working Capital Decision: Working capital decision is related to the FINANCING in current assets and current liabilities. Current assets include cash, receivables, inventory, short-term securities, etc. Current liabilities consist of creditors, bills payable, outstanding expenses, bank overdraft, etc. Current assets are those assets which are convertible into cash within a year. Similarly, current liabilities are those liabilities, which...
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Centralization and De-Centralization

Centralization and De-Centralization
Centralization and De-Centralization Concepts CENTRALIZATION: The term “centralization” has several meanings: Centralization of Performance: Say, if the operations of a company is restricted to a single geographical location, it characterizes centralization of performance. Departmental Centralization: Specialized activities are carried out by a single department, say, maintenance of a whole plant, staff recruitment by HR department etc., Centralization as an aspect of management: This implies restricted delegation and exclusivity of decision-making by the top management. According to Allen, “Centralization is the systematic and consistent reservation of authority at central point in an organization.” According to Weihrich and Koontz, “Centralization (as an aspect of management) is the tendency to restrict delegation of decision-making. What are the special circumstances that force the managers to reserve authority and centralize decision making powers? 1.       To facilitate personal leadership 2.       To provide for integration 3.       To handle emergencies 4.       To utilize resources effectively and instantaneously. DECENTRALISATION: It is the tendency to disperse decision making authority in a structured and organized manner. It can be viewed as a philosophy rather than a principle where-in “discretion” plays a major role in deciding which decisions to push down into the organization structure and which to hold near the top. Capital expenditure, Investment analysis and major policy decisions have to be dealt with, by the top management. It is the systematic effort to delegate to the lowest levels of authority except that which can be exercised at central points. TYPES OF DECENTRALIZATION: Three approaches to the concept are: 1.       PROFIT CENTRES 2.       COST EXPENSE CENTRES 3.       INVESTMENT CENTRES Profit Centre: Here the organization is split into divisions on a “product basis” and is given full authority to handle its own scheduled operations, right from placing orders to negotiating the sale of its finished products. Cost Expense Centre: Whenever it is easy to determine the cost of operations, cost centres are established. Cost centres run on “budgets” which acts as a control tool to run the units within the specified budgetary limits. Investment Centre: Useful in the case of big multi-product enterprises where product performance is measured by decentralizing the investment aspect. Each strategic business unit is responsible for the acquisition, use and disposition of fixed resources. Advantages of Decentralization: Managers and executives are relieved form excessive work pressure Even low level employees are involved in decision making thus bringing the decision making process closer to the scene of action. It facilitates product-diversification Creates an opportunity for learning Ensures effective control When a big organization is divided into relatively smaller units, it becomes flexible and also effects close control. Disadvantages of Decentralization:  ·         Conflict arises between people belonging to different levels of the organization ·         Rising cost ·         Lack of co-ordination between production and marketing departments ·         No defined leadership Contingency Factors in Decentralizing: 1.       Organizational goals 2.       Organizational size 3.       Geographical dispersion 4.       Technical complexity of tasks 5.       Time frame of discussions and decisions 6.       Subordinates’ take on issues 7.       Planning and control procedures 8.       Environmental factors 9.       Knowledge and experience of managers Effective Decentralization can be accomplished by ·         Establishing appropriate centralization ·         Developing efficient managers ·         Proper provision for communication and co-ordination ·         Establishing adequate controls Top management must be willing to delegate authority towards decision making; Middle management must be willing to accept responsibility that is being delegated. Only then effective decentralization is...
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