Financial & Management
Accounting
BY PROF.
BHOOMIKA TALREJA
Meaning of Finance
Finance may be defined as the art and science of managing money.
In general, Finance may be defined as the provision of money at the time
it is wanted.
Finance is needed in each and every business.
Whether business is partnership, Government firm or any company need
finance to mange the business.
Important terms
Money vs. Finance – money is used in business to get money. Finance is
the activity which makes it possible. Thus, finance means arranging for
money and utilising it for the stated purpose.
Funds vs. Finance – fund is a separate pool of monetary and other
resources to support designated activity. Eg. Workmen compensation
fund, provident fund, etc.
Business Finance
Business finance refers to funds availed by business owners to meet
their needs that may include commencing a business, obtaining top-
up funds to finance business operations, obtaining finance to purchase
capital assets for the business, or to deal with a sudden cash crunch faced
by the business.
Finance Function
It is defined as procurement of the needed funds and their effective
utilisation. There are two sides to the finance function.
1. Acquisition of the funds – Ownership funds and Borrowed funds
2. Utilisation of the funds – purchasing of assets & investments
Finance Function
Finance function is related with the two side of balance sheet of a firm,
Liabilities and Assets as shown below:
Liabilities Amt. Assets Amt. (Rs.)
(Rs.)
Share capital xx Fixed Assets xx
R&S xx Investment xx
Secured Loans xx Current Assets xx
Current Liabilities & xx Loans & Advances xx
Provisions
Miscellaneous Expenses xx
Total xx xx
Financial Management
It is the effective management of the finance of the firm. It is defined as “Financial
Management is concerned with the efficient use of important economic resources namely
capital funds”.
Features of financial management:
1. Managerial Activity
2. Investment
3. Cost vs. Revenue
4. Size and growth
5. Forms of assets – correct mix of fixed and current assets
6. Combination of liabilities
7. Profit planning
8. Report to Management
Scope & Approaches to Financial Management
Traditional Approach
It was used earlier to manage certain important events of the company:
Promotion of the company
Changes in the capital mix
Expansion of firm
Diversification of firm
Acquisition and mergers
The duty of financial manager was to determine the required finance and
acquire the finance for the company.
Scope & Approaches to Financial Management
Traditional approach evolved during 1920s and continued till 1940s.
It included the following activities:
Arrangement of funds
Legal requirements
The functions of the financial manager:
to keep accurate financial records
Prepare reports of performance and status of company
Limitations of Traditional Approach
The approach restricted only to the raising of funds and administration. It
did not consider the internal sources of finance and issue of bonus shares ,
the dividend decision.
Credit to be allowed, dividend decisions, credit from suppliers, selection of
best machinery, when to place order for stores and materials, whether to buy
or produce and so on.
The approach ignored the non –corporate enterprises such as sole trading
and partnership.
Allocation of funds was not given focus.
The method ignored capital budgeting and determination of cost of capital.
Modern Approach
Investment Decision
Fixed assets
Current assets
1. Capital budgeting decision
Determining cash outflow and future expected cash inflow
Determination of the discounting rate
Comparison of the discounted cash inflow and outflow to determine the appropriate
investment plan.
2. Working Capital
3. Financing Decisions
4. Dividend Decision
Modern Approach
Investment Decision
Financing Decision
Dividend Decision
Objectives of Financial Management
1. Maximisation of profit
2. Maximisation of EPS
3. Wealth Maximisation
Role of a Finance Manager
Financial Forecasting
Planning and Preparation of Financial Reports
Raising of Funds
Allocation of Funds
Financial Statement Analysis
Financial statement analysis is the process of analyzing a company's financial statements
for decision-making purposes. External stakeholders use it to understand the overall health
of an organization as well as to evaluate financial performance and business value. Internal
constituents use it as a monitoring tool for managing the finances.
The financial statements of a company record important financial data on every aspect of a
business’s activities. As such they can be evaluated on the basis of past, current, and
projected performance.
There are three main financial statements that every company creates and monitors: the
balance sheet, income statement, and cash flow statement. Companies use these financial
statements to manage the operations of their business and also to provide reporting
transparency to their stakeholders.
Techniques of Financial Analysis
Three of the most important techniques include horizontal analysis, vertical analysis, and
ratio analysis.
Horizontal analysis compares data horizontally, by analyzing values of line items
across two or more years.
Vertical analysis looks at the vertical affects line items have on other parts of the
business and also the business’s proportions. Vertical analysis makes it easier to
understand the correlation between single items on a balance sheet and the bottom line,
expressed in a percentage.
Ratio analysis uses important ratio metrics to calculate statistical relationships.
Ratio Analysis
Ratio Analysis is done to analyze the Company’s financial and trend of the company’s
results over a period of years where there are mainly five broad categories of ratios like
liquidity ratios, solvency ratios, profitability ratios, efficiency ratio, coverage ratio which
indicates the company’s performance and various examples of these ratios include current
ratio, return on equity, debt-equity ratio, dividend payout ratio, and the price-earnings ratio.
The numerator and denominator of the ratio to be calculated are taken from the financial
statements, thereby expressing a relationship with each other.
It is a fundamental tool that is used by every company to ascertain the financial liquidity,
the debt burden, and the profitability of the company and how well it is placed in the
market as compared to the peers.
Ratio Analysis – Important Ratios
Current Ratio = The higher the working capital ratio/current ratio, the easier it will be for a
business to pay off debts using its current assets. If the ratio is 1:1 it is considered good.
Formula - Current Assets / Current Liabilities
Quick Ratio = It indicates the business liquidity. This shows you how easily a business’s short-
term debts will be covered by its existing liquid assets, or cash. If the quick ratio is greater than
one, the business is in a good financial position. Formula - (Current Assets – Inventory) /
Current Liabilities.
Debt to equity Ratio = this ratio measures the degree to which the business’s operations are
funded by debt. When this ratio is greater than one, the company holds more debt. If the value
is below one, it indicates that the company holds less debt. Formula = Total Liabilities /
Shareholders Equity
Ratio Analysis – Important Ratios
Price to earnings ratio - it measures the amount an investor would pay
for each rupee/dollar earned. This gives us a quick idea if a stock is under
or overvalued. Because share prices vary by industry and market
conditions, there isn’t a universal rule for what constitutes a “good” P/E.
However, we can compare the company’s P/E to similar stock prices for
comparison. Formula - Share Price / Earnings per Share
Earnings per share - Earnings per share measures the net income we will
receive for each share of a company’s stock. Formula - Net Income /
Outstanding Shares
Ratio Analysis – Important Ratios
Return on equity ratio - This is one of the most important financial
ratios for calculating profit. The result tells us about a company’s overall
profitability, and can also be referred to as return on net worth. Formula -
(Earnings – Dividends) / Shareholders Equity
Profit margin - This shows you how efficiently a company is managing
its overall costs, or how well it converts revenue into profit. The higher the
profit margin, the more efficient the company is in converting sales to
profits. Formula - Profit / Revenue * 100
Meaning of Capital
Capital refers to the money or money’s worth contributed by the
proprietors of a business and money contribution obtained from lenders
for investing into business activities.
The contribution of the owners is called owned capital and the
borrowings are called the borrowed capital.
In case of joint stock company, owner’s contribution is called share capital
and the borrowings are called debt capital.
Meaning of Capital
Capital of Joint Stock Company may consist of the following :
1. Share capital
Ordinary shares/ Equity share capital
preference shares capital
2. Reserves and Surplus
Share premium
General Reserve
Profit & Loss Account Balance
Capital Reserves etc.
3. Secured Loans
Debentures
Term Loans
Capital Structure
The debt-equity mix of the firm is called capital structure. It also refers to the long term
financing mix of a company.
A company may have any of the following capital structure:
i) Capital structure consisting of equity shares only;
ii) Equity share capital and preference share capital;
iii) Equity share capital and debentures;
iv) Equity share capital, Preference share capital and Debentures;
v) Equity share capital, R&S, Preference share capital and Debentures;
vi) Equity share capital, R&S, Term Loans and Debentures;
vii) Equity share capital, Preference share capital and R&S.
Company can plan its capital structure, it has a great impact on the overall earnings and
earning per share of the company. It influences liquidity and solvency of a company.
Working Capital
Working capital, also known as net working capital (NWC), is the
difference between a company's current assets, such as cash, accounts
receivable (customers' unpaid bills), and inventories of raw materials and
finished goods, and its current liabilities, such as accounts payable.
The primary purpose of working capital management is to enable the
company to maintain sufficient cash flow to meet its short-term operating
costs and short-term debt obligations.
Working Capital Management
Working capital management is a business tool that helps companies
effectively make use of current assets, helping companies to maintain
sufficient cash flow to meet short term goals and obligations. This is
achieved by the effective management of accounts payable, accounts
receivable, inventory and cash.
THANK YOU
