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Topic 5.Financial Management

Presented ByMr. J.B.Shirote

Lecturer in Mechanical Engineering DepartmentLatthe Education Society’s Polytechnic

P-41,M.I.D.C.,Kupwad,Sangli.

Financial Management

Finance is the effective procurement (to get by means of some action)of funds and their effective utilization

concept

Financial management is the study of relationship between the raising the finance and deployment of finance.

a. Raising the finance b. Effective utilizationc. management of assets

Objectives

To finalize method of financingTo decide investment policiesTo take correct decisions about

dividendsTo maximize the value of the businessTo ensure regular and sufficient flow

of funds to the businessTo take care of safety on investment

Functions

Conducting financial analysis to identify strength and weakness of organization

Identification of threats and strengthDeciding and planning the financial

strategiesEstimation of funds requirement in

proper manner

Functions

Conducting profit loss and cost analysis

Declaration of dividendsProviding realistic data for top level

management for decision makingTaking care of accounting and

budgetingDisposal of surplus funds

Capital

Capital is the measure of the amount of resources of an enterprise.

It is necessary of an enterprise all the time

It includes cash in hand, land, building, structures, machinery, materials

Types of capital

Fixed capitalWorking capital1.Permenant working capital2.Seasonal working capital

Fixed capital

Block capitalRequired at the starting phase of the

org.Large amount is invested in land, plant

set up, equipment, building construction, machinery purchase, internal roads, furniture, patents

Once it is invested it becomes permanent assets

Working capital

Day to day functioning of an enterprise is possible through availability of working capital

It involves short term funds in business

It is also called as circulating business

Working capital

It includes1. Material purchasing2. Payment/salary3. Maintenance cost4. Selling cost5. Advertisement cost6. Transportation cost

Permanent Working capital

Its nature is permanent.ie after certain period it is repeated

Seasonal Working capital

This is the expenditure due to seasonal happening

Sources Of Raising Capital

Internal sources:-1. Inherited personal funds2. Depreciation provisions3. Retained equity earnings4. Deferred taxation

Inherited personal funds

Own investment is initially doneAll or part of a person's estate/assets

that is given to an heir once the person is deceased(death)

Depreciation provisions

Its provision against ageing of the machinery

Capital is kept aside from the starting phase

Provision for depreciation is an advance calculation for depreciation, while depreciation is the actual amount which is lost the Asset.

Retained equity earningsReinvestment of Profits

Reinvestment of earnings of shareholders

Deferred taxation

Because of accrual(revenues that have been earned but are not yet recorded) accounting rules, a company may be able to defer taxes on some of its income. 

External sources

Short term (for working capital)1. Trade credit2. Bank credit3. Customer advance

Trade credit:Trade credit is the credit extended to you by suppliers who let you buy now and pay later. Bank credit:Bank credit is an amount of funds that a person or business can borrow from a bankCustomer advance:The term advances from customers refers to money collected by a company prior to providing a product or service.

External sources

Medium term(working capital)1. Loans2. Hire purchase3. Equipment lease4. Public deposits (long term)

1. Hire purchase:A hire purchase is a method of buying goods

through making installment payments over time.

Under a hire purchase contract, the buyer is leasing the goods and does not obtain ownership until the full amount of the contract is paid.

The cost of financing through hire purchase is very high.

Equipment lease:The term “lease” refers to the contractual agreement between the lessor (owner) and the lessee (hirer) wherein the lessor grants right to the lessee to use the equipment in exchange for the periodical rent payments.

Public deposits:A company can accept deposits from the public to finance its medium- and short-term requirements of funds.

External sources

Long term(for fixed capital)1. Loans2. Shares3. Debentures4. Savings5. Corporate bonds

Share:one of the equal parts into which a company's capital is divided, entitling the holder to a proportion of the profits.Debenturesa long-term security yielding a fixed rate of interest, issued by a company and secured against assets.

Corporate bonds:A corporate bond is a debt security issued

by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations.

In some cases, the company's physical assets may be used as collateral for bonds.

External sources

Financial institutions1. Industrial development banks2. Industrial finance corporation(medium and

long)3. Insurance companies4. State financial corporation(medium and

short)

Share market

Stock market or equity marketShare is the investment in joint stock

companiese.g.1.BSE-Bombay Stock Exchange, Mumbai2.NSE-National Stock Exchange, Mumbai

Types of shares

Preference shareOrdinary shareBonus shareRights share

Preference share

Preference shares, more commonly referred to as preferred stock, are shares of a company's stock with fixed dividends that are paid out to shareholders before common stock dividends are issued.

If the company enters bankruptcy, the shareholders with preferred stock are entitled to be paid from company assets first.

Ordinary share

Equity sharesOrdinary shareholders have one vote for a

share they are holdingThe dividends are not fixedThe dividend is fluctuating with profit and

policy of organization directors

Bonus share

Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns.

if Investor A holds 200 shares of a company and a company declares 4:1 bonus, that is for every one share, he gets 4 shares for free. That is total 800 shares for free and his total holding will increase to 1000 shares.

Rights share

A rights issue is a dividend of subscription rights to buy additional securities in a company made to the company's existing security holders

With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the issuer at a specified price within a subscription period.

Budgets and accounts

Budget is a financial plan for the next year.It is an financial statement of how money will

come and how it will go on business functioning.

It is time bonded.

Budgets

Budgetary control

When budget is used as tool for planning and controlling the production system, it is called as budgetary control.

Types of budget

Based on flexibility

Fixed

Variable

Fixed and variable

If the level of activity is fixed and if the budget is prepared based on the fixed level of activity it is called as fixed budget.

The level of activity is variable for the variable budget.

It is more realistic and practical.

Appropriation,

Congenital budgetApplicable where measurement of the cost is

difficult.In R & D.

Performance

Applicable where performance measure is easy

Annual targets are defined in terms of physical quantity or numbers

Zero Base

It has no previous year recordsHere critical analysis of every activity is done

and based on the realistic situation budget is prepared

The word zero means no history.

Production

It start how many products and producedThen total cost expected in producing this

output is calculated

Variance report

The deviation of the actual from the standard is known as variance

Labor budget

Man hours can be calculated from the production targets.

Work study and motion study, method study are the some techniques used to prepare requirement of labor.

Master Budget- Summarized Budget

Types Of Accounts

Profit and loss accountBalance sheet

Difference

The primary difference between the profit and loss statement and the balance sheet involves their respective treatments of time.

The balance sheet summarizes the financial position of a company for one specific point in time.

The P&L statement shows revenues and expenses during a set period of time.

Profit And Loss Account

It determines net profit and loss It matches revenue and expenses It has two typesStep formAccount form

Step Form

Profit And Loss Account- Account Form

Balance Sheet

A statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period.

Account Form

Taxes

a compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions.

Taxes

Taxes are of two distinct types, direct and indirect taxes.

The difference comes in the way these taxes are implemented.

Some are paid directly by you, such as the dreaded income tax, wealth tax, corporate tax etc.

while others are indirect taxes, such as the value added tax, service tax, sales tax, etc.

Types Of Taxes

Excise tax

Commodity taxIndirect taxIt is levied on production & no connection

with salesExcise duty(expect alcohol)are levied by the

central governmentCBEC-Central Board Of Excise And Customs

Service tax

Service tax is a tax levied by Central Government of India on services provided 

It is indirect taxService tax no is unique 15 digits no which is

allotted to the assesse 12.36% I June 2015App.2% education cessSwach Bharat Cess(0.50%), the Krishi Kalyan

Cess, at 0.5% =15%

Various Services Under Service Tax

Advertisement agencyTelecommunicationAir travel agentsReal estate agentsCABroadcasting servicesPhotographic servicesCourier Security agency

Exemption

Service tax is only liable to be paid in case the total value of the service provided during the financial year is more than 10 lakh

Income Tax

Income Tax

Personal income tax is levied on incomes of individual

Levied by central government of IndiaShared between state govt. and central govt.It is direct taxIncome Tax law starts on the 1st of April and

ends on the 31st of March of the next calendar year.

Salary, business, house property, capital gains

Income Slab Tax Rate

Income up to Rs. 2,50,000* No Tax

Income from Rs. 2,50,000 – Rs. 5,00,000 5%

Income from Rs. 5,00,000 – 10,00,000 20%

Income more than Rs. 10,00,000 30%

Surcharge: 10% of income tax, where total income is between Rs. 50 lakhs and Rs.1 crore. 15% of income tax, where total income exceeds Rs. 1 crore.

Cess: 3% on total of income tax + surcharge

VAT

Value Added TaxIt is indirect taxVAT is a kind of tax levied on sale of goods

and services when these commodities are ultimately sold to the consumer.

Rates:12.5% generalFor liquor, imported ciggarates-20%1%. Gold, silver and other precious stones oil, coffee, medicines etc. is around 4-5% 

VAT is a multi-stage tax which is levied at each step of production of goods and services which involves sale/purchase.

Any person earning an annual turnover of more than Rs.5 lacs by supplying goods and services is liable to register for VAT payment payment.

Value added tax or VAT is levied both on local as well as imported goods

features

Similar goods and services are taxed equally. So a similar television from all brands will be taxed the same

VAT is levied at each stage of production and hence makes the taxation process easier and more transparent

VAT reduces chances of tax evasion and fosters compliance

Encourages transparency in sale of goods and services at the ground level

VAT Example:

Suppose Ram owns a restaurant and spends Rs.50,000 towards obtaining raw materials. Input tax is 10%, so input tax becomes 10% of Rs.50,000 = Rs.5,000

Now after selling the food made by using the purchased raw materials, Ram was able to make Rs.1,00,000. Supposing 10% output tax, output tax becomes Rs.10,000

So, final VAT payable by Ram comes out to be Rs.10,000 – Rs.5,000 = Rs.5,000

Customs Duty

Custom duty is a variant of Indirect Tax and is applicable on all goods imported and a few goods exported out of the country.

Duty rates in India can be rupees per unit.  Duty rates vary from 0% to 150%, with an

average duty rate of 11.9%.  Some goods are not subject to duty (e.g.

laptops and other electronic products). 

Import Duties

Duties levied on import of goods are termed as import duty

Import duties are not levied on a few items including lifesaving drugs/equipment, fertilizers, food grains etc.

Export Duty

Duties levied on exported goods are termed as export duty.