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Objectives of Financial Management

Objectives of Financial Management
OBJECTIVES OF FINANCIAL #management Before looking into the two main objectives of finance management, let us look at the lighter side of money. Some hilarious quotes that will make your day: “Money is like a sixth sense – and you can’t make use of the other five without it.” – William Somerset Maugham “The safest way to double your money is to fold it over and put it in your pocket.” – Kin Hubbard “Money is the best deodorant.” – Elizabeth Taylor “If you think nobody cares if you’re alive, try missing a couple of car payments.” – Earl Wilson “Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.“ ~Sam Ewing “Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.” – Will Smith  “There’s a way of transferring funds that is even faster than electronic banking. It’s called marriage.” — James Holt McGavran Objectives of Financial Management may be broadly divided into two parts such as: 1. #Profit maximization 2. #Wealth maximization. Profit Maximization The main purpose of any kind of economic activity is earning profit. A business concern operates mainly for the purpose of making profit. Profit has become the yardstick to measure the business efficiency of a concern. Profit maximization is also the out-moded and narrow approach, which aims at, maximizing the profit of the concern. Profit maximization consists of the following important features. Favorable Arguments for Profit Maximization:  The following important points are in support of the profit maximization objectives of the business concern: Main aim is earning profit. Profit is the parameter of the business operation. Profit reduces risk of the business concern. Profit is the main source of finance. ##profitability meets the #social needs also. Unfavorable Arguments for Profit Maximization:  The following important points are against the objectives of profit maximization: Profit maximization leads to exploiting workers and consumers. Profit maximization may lead to unethical practices, unfair trade practice, etc. Profit maximization objectives leads to inequalities among the #stake holders such as #customers, #suppliers, #public #shareholders, etc.  Drawbacks of Profit Maximization:  Profit maximization objective consists of certain drawbacks also: It is vague: Profit is not defined precisely or correctly. It ignores the #time value of money: Profit maximization does not consider the time value of money or the net present value of the cash inflow. It leads to certain differences between the actual cash inflow and net present cash flow during a particular period. It ignores risk: Profit maximization does not consider risk of the business concern. Risks may be internal or external which will affect the overall operation of the business concern.  Wealth Maximization Wealth maximization is one of the modern approaches, which involves latest innovations and improvements in the field of the business concern. The term wealth means shareholder wealth or the wealth of the persons those who are involved in the business concern. Wealth maximization is also known as value maximization or net present worth maximization. This objective is a universally accepted concept in the field of business. Favorable Arguments for Wealth Maximization: Wealth maximization is superior to the profit maximization because the main aim of the business concern under this concept is to improve the value or wealth of the shareholders. Wealth maximization considers the comparison of the value to cost associated with the business concern. Total value detected from the total cost incurred for the business operation. It provides exact value of the business concern. Wealth maximization considers both time and risk of the business concern. Wealth maximization provides efficient distribution of resources. It ensures...
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Why Financial Capability Matters?

Why Financial Capability Matters?
What is Financial Capability? The availability, usage and #management of funds have a bearing on the financial capability of an organization and ability to implement its strategies. A financial manager has to pool, deploy and allocate #financial resources taking into consideration the capital or long term investments, working capital or short-term liabilities and repayment capacities. Factors that influence financial capability of an organization: 1. Factors related to #source of funds: Capital structure, procurement of capital, controllership, financing pattern, working capital availability, borrowing, capital and credit availability, reserves and surplus, and relationship with lenders, banks and #financial institutions. 2. Factors related to #usage of funds: Capital investment, fixed asset acquisition, current assets, loans and advances, dividend distribution and relationship with #shareholders. 3. Factors related to #management of funds: Financial #accounting and #budgeting systems, management control system, state of financial health, cash, inflation, return and #risk management, cost reduction and control, and #tax planning and advantages. Typical Strengths that Support Financial Capability: • Access to financial resources • Amicable relationship with financial institutions • High level of credit worthiness • Efficient capital budgeting system • Low cost of capital as compared to competitors • High level of shareholder’s confidence • Effective management control system • Tax benefits due to various #government policies The examples given below show how strengths and weakness affect the financial capability of organizations: • A company faced many problems due to instability in the top management, an unfavorable public image, unfavorable government relations etc., but it had inherent strengths like a huge amount- to the tune of Rs.1000 crores invested in fixed assets which the company used for funding its diversification plans. Here we see one particular strength over-shadowing all other weaknesses which can be rectified in due course of time. • A scooter company had collected nearly Rs.1150 crores as advance for booking of scooters, but within five years, its cash position deteriorated owing to sudden and unforeseen cancellation of bookings and withdrawal of deposits, resulting in a huge interest burden. Had the company had a strong financial backup, it would have survived the trouble. Matching strengths and weaknesses with #opportunities and threats requires that a firm should direct its strengths towards exploiting opportunities and blocking threats while minimizing exposure of its weaknesses at the same...
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ROI Ratios

ROI Ratios
ROI – Return on Investment Ratios PROFITABILITY IN RELATION TO INVESTMENTS Return on gross investment or gross capital employed Return on net investment or net capital employed Return on shareholder’s investment or shareholder’s capital employed. Return on equity shareholder investment or equity shareholder capital employed. 1.  RETURN ON GROSS CAPITAL EMPLOYED This ratio establishes the relationship between net profit and the gross capital employed.  The term gross capital employed refers to the total investment made in business.  The conventional approach is to divide Earnings After Tax (EAT) by gross capital employed.  Return on gross capital employed = Earnings After Tax (EAT) X 100 / Gross capital employed 2.  RETURN ON NET CAPITAL EMPLOYED It is calculated by dividing Earnings Before Interest & Tax (EBIT) by the net capital employed.  The term net capital employed in the gross capital in the business minus current liabilities.  Thus it represents the long-term funds supplied by creditors and owners of the firm.  Return on net capital employed = Earnings Before Interest & Tax (EBIT) X 100 / Net capital employed  3.  RETURN ON SHARE CAPITAL EMPLOYED This ratio establishes the relationship between earnings after taxes and the shareholder investment in the business.  This ratio reveals how profitability the owners’ funds have been utilized by the firm.  It is calculated by dividing Earnings after tax (EAT) by shareholder capital employed. Return on share capital employed = Earnings after tax (EAT) X 100 / Shareholder capital employed 4.  RETURN ON EQUITY SHARE CAPITAL EMPLOYED Equity shareholders are entitled to all the profits remaining after the all outside claims including dividends on preference share capital are paid in full. The earnings may be distributed to them or retained in the business.  Return on equity share capital investments or capital employed establishes the relationship between earnings after tax and preference dividend and equity shareholder investment or capital employed or net worth.  It is calculated by dividing earnings after tax and preference dividend by equity shareholder’s capital employed. Return on equity share capital employed = Earnings after tax (EAT), preference dividends X 100 / Equity share capital employed. The following are some of the important and basic concepts to be understood in management accounting: EARNINGS PER SHARE IT measures the profit available to the equity shareholders on a per share basis.  It is computed by dividing earnings available to the equity shareholders by the total number of equity share outstanding. Earnings per share = Earnings after tax – Preferred dividends (if any) / Equity shares outstanding DIVIDEND PER SHARE The dividends paid to the shareholders on a per share basis in dividend per share.  Thus dividend per share is the earnings distributed to the ordinary shareholders divided by the number of ordinary shares outstanding. Dividend per share = Earnings paid to the ordinary shareholders / Number of ordinary shares outstanding DIVIDENDS PAY OUT RATIO (PAY OUT RATIO) It measures the relationship between the earnings belonging to the equity shareholders and the dividends paid to them.  It shows what percentage shares of the earnings are available for the ordinary shareholders are paid out as dividend to the ordinary shareholders.  It can be calculated by dividing the total dividend paid to the equity shareholders by the total earnings available to them or alternatively by dividing dividend per share by earnings per share. Dividend pay our ratio (Pay our ratio) = Total dividend paid to equity share holders / Total earnings available to equity share holders Or Dividend per share / Earnings per share DIVIDEND AND EARNINGS YIELD While the earnings per share and dividend per share are based on the book value per share, the yield is expressed in terms...
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Management vs. Financial Accounting

Management vs. Financial Accounting
management vs. Financial Accounting Management Accounting : The process of preparing management reports and accounts that provides accurate and timely financial and statistical information to the management Financial Accounting : The purpose of accounting is to provide the information that is needed for sound economic decision making concerned with classifying, measuring and recording the transactions of a business. What is Management Accounting: Management accounting is the updated version of what you call financial accounting and the most circulated term in corporate business arena. Management involves planning, organizing, staffing, leading and controlling the resources available in an organization, namely the physical and human resources. Much importance is given to personnel management as they are the priceless assets of any organisation.But it is equally important for a firm to record all its business transactions for future reference and tax audits. Thus the necessity of accounting comes into the fray. Financial Statements Made Easy Functional Difference: Well, accounting means something to do with finance. So, what is the big difference, if it is financial or management accounting? One difference is in the title, and the other in their function. The rationale behind financial accounting is statutory, done for the benefit of shareholders, customers, government regulatory agencies, other external agencies, potential investors and the like. It records all business transactions that are purely monetary in nature and no further analysis is done. Essential for Management Planning: Management accounting is voluntary and reports are prepared to meet the internal needs of management. We talked about planning, for which interpretation and analysis of such quantitative data and other inputs becomes necessary to plan for future needs of management. The main functions being attention direction and problem solving, management accounting is primarily concerned with providing information relating to the various aspects of a business, like cost or profit associated with some portions of business operations. It employs techniques such as standard costing,budgeting,marginal costing, break- even analysis and so on., Inputs also stem from industry data, competitor data, published reports by public and private agencies and research studies findings, thus widening its scope for improvement in business operations. Financial Accounting: Financial accounting is restricted to deal only with “generally accepted accounting principles” and any deviation is considered to be errors for correction. Though it provides valid and authentic information, it lacks timeliness. The former restricts the accountant to a mere book-keeper while the latter transcends the role of the accountant to that of total business information technologist. Here he becomes an evaluator of different functional areas like marketing, production, purchase and personnel. As modern business is huge in size, complex, diversified and decentralized in terms of operations, financial accounting just does not fill the bill, as information is required as when an event happens at various hierarchical levels of an organisation.Management accounting is inter disciplinary in character and derives inspiration from organizational theory,economics,behavioral sciences, statistics and management. Although the paraphernalia required for management reporting is complex and expensive, it is worth the try, as it tries to compare and contrast the actuals with the standards and bring out variances if any. This is quite useful in determining the cost-effectiveness of a particular project or to be prepared for suitable action. Management accounting is nothing but a management information system where the managers have to be techno-savvy in order to handle the total information resource and project it suitably to the management to take timely actions for the increase in growth, profit and sustainability of the...
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There is no Business Success Without Risk

There is no Business Success Without Risk
There is no Business Success Without Risk What is the Risk of Taking a Chance in a Business Activity? Business is often viewed as a game or a gamble in which success is always at risk. Think about it, risk is present in every sphere and aspect of our lives and even when you are not running a business. So why the fuss? A thorough knowledge and research of the business activity you are about to perform will give you the needed confidence to go about it. A true business man is an entrepreneur who treats risk as an opportunity rather than a challenge. Business organizations are started with a single purpose, to make profit and then more profit. Only when the organizations grow, there comes the awareness and necessity to think about stakeholders’ interest and working towards a social cause. Initial stages definitely pose threats for the very survival of the organization. Risk is an inherent part of a business as you are not sure about the outcome of your business activity. What are the Chances or Probability? We talk more about probability and chance outcomes when you deal with a particular product. Retail segment is one area where the risk of duplication is high and people have to be cautious and careful in order to protect their copyrights and symbols from being replicated. Mild inflations can benefit the market but recessions put you in doldrums especially if you are dependent on a wholesaler or a manufacturer. Risk can aspect itself in the following ways: Economically- Attrition and effects of global economy Legally- Labor laws and enactments Socially- Expectations from the public in general Government rules and regulations- Government policies and export duties Stakeholder expectations- Wealth maximization and assured profits Environmental – Need to comply with changing standards like waste affluent treatment plants Political scenario- Effects due to changing governments Risk and Uncertainty Risk and uncertainty go hand in hand and you need a risk management template or a model for your reference to solve or manage risks. The first and foremost step would be to identify the risks in your sphere of business activity. Risk documentation or creating a risk profile is an inevitable move for a new organization. This prepares the organization mentally to face challenges in a structured manner and reduces disorientation. It is very important to keep in mind the organisation’s objectives while documenting the risk profile to keep your focus unaltered. Risks evolve continuously and it is the responsibility of the top management to be in line with the market economy to manage the adverse conditions that come in the way. How to Manage Risks? Risk management is an ongoing and continuous process and it cannot be looked upon as a distinct area to be managed by a set of individuals. In a small and upcoming organization the responsibility lies on the shoulders of each and every individual to self assess, evaluate and manage risks and find the right kind of solution that will not be detrimental to the core objectives of the organization. Bigger organizations can afford to have expert opinion by commissioning PROFESSIONALS to identify, assess and manage risks. An overall and broad perspective of risk is what has been analysed here. There are numerous possibilities of risks, whether big or small in magnitude, affecting an organization. A thorough study of the field you are about to venture into, the pros and cons of the business activity, time of launch are few things that will help you to analyse what the market niche warrants for and act accordingly. In further segments, let us look into the factors of risk, identifying and...
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