Nature of Funds Management RIMS Annamalai : 2012 - 13
Balaji T V
Syllabus
Unit 1
UNIT 6
Planning & importance of funds Benefits of effective allocn of funds Drawbacks of misallocation Orgn of funds mgt and its relationship with functional areas of enterprise Role of Finance as a barometer of Biz
Unit II
Mgt of FA and Cap bdgt Techniques Meaning & Importance of cap Budgeting Capital budgeting techniques - Payback, ARR, IRR, NPV, Excess PV Divisional budgets : implementing procedure HR accounting for effective us of HR Rewarding mgt on the basis of ROI Dupont system
Planning and control. Allocation of funds to most profitable Opportunities Evaluating them with the help of basics Measuring Rate of return as a criterion for allocating funds Methods of incorporating Risk Risk adjusted Return & certainty equivalent approach. Sensitivity analysis Profitability analysis and Dec making wrt Capital rationing
Unit 3
Term financing and Evaluation Sources of LT financing Equity Pref shares, Bonds, debentures Funds from Non banking private sources Adoption of fin concepts in large orgn Term loans and fin Institutions Mkts for L/T securities in India with sepcific ref to S/Exchanges
Unit 5
Unit 4
Mgt of W/capital. Need for W/Capital Types of W/Capital. Determinants of W/C permanent and Variable W/Capital Trade off between Profitability & Risk Financing mix of W/C: Different approaches Matching approach, conservative approach and aggressive approach W/c Mgt and Bank financing Forms of Bank finance, WC control and Banking policy
Lease financing- an overview Forms of lease financing Sale and lease back Direct leasing / service leasing Financial leasing. Leveraged leasing. Leasing as a fin decision Leasing decisions/Leasing in India Inventory Mgt. Objectives Determination of optimum Inv Types of Inventory Inventory models
Principles of Collective learning
1. Learning Not by rote but by Logic, based on First principles
5 W 1 H framework Why , What, Where, When, Who and How, till we reach first principles
2. Participation by all. Learning by all (Prof. included)
3. Preference to Depth over width.
4. Preference to substance over form.
5. Biz Mgt Paradigm : Timely Approximation is better than belated
precision
Biz Stakeholders
Global / National Polity /
Global / National Economy
Society Regulator s
Share Holders
Decision Variable
Customers
Lenders
Employees suppliers
What ? Components of Biz analysis
STRICTLY PRIVATE AND CONFIDENTIAL
Enviro & strat. analysis Eco /Industry analysis Strategy analysis
A/ctng analysis
Financial analysis
Prosp. Analysis
Profitability Analysis
Cash flow analysis
Risk Analysis
WACC Est.
Intrinsic value
Balance Sheet
Sources of Funds
1. Equity
Uses
1. Fixed Capital Land & Bldg
a. Promotors / directors b. Public issue c. Private Equity Domestic/ Foreign Institutions d. Venture capital (VC) Domestic / Foreign Inst.
2. 3. 1. 2. 3. 4. 5. 6. 7. 4.
Plant & M/cy
Furn & Fixt Office Eqpts Investments Working Capital Inventory Receivables Cash Loans / advances Gross CA Less Cur Liabilities Net CA Amortizables
2. Preferred stock
a. Promotors/ Directors b. Public c. Institutions (Domestic/Foreign)
3. Debt
a. Fin Institutions (FIs) Domestic / Foreign b. Banks (Domestic/ Foreign) c. Private Corp Body (ICDs) d. Public
Tools of Analysis
1. 7 Analysis Tools i. Comparative Fin statement analysis ii. Common size Fin statement analysis iii. Fin statement sanitization (To remove window-dressing)
[Link] analysis (Profitability, Liquidity, Solvency, ROC, MP perf)
v. Cash Flow Analysis (PB, IRR, NPV, MIRR) vi. Risk analysis vii. Valuation
Business Activities
Production
Marketing Finance
Operations
Quality HR
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Finance Functions
Investment or Long Term Asset Mix Decision
Financing or Capital Mix Decision
Liquidity or Short Term Asset Mix Decision Dividend or Profit Allocation Decision
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Finance Managers Role
Raising of Funds Allocation of Funds Profit Planning Understanding Capital Markets Book keeping, Audit, Regulatory and MIS
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Financial Goals
Profit maximization (profit after tax)
Maximizing Earnings per Share
Shareholders Wealth Maximization
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Profit Maximization
Maximizing the Rupee Income of Firm
Resources are efficiently utilized
Appropriate measure of firm performance
Serves interest of society also
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Objections to Profit Maximization
It Ignores the Timing of Returns
It Ignores Risk
Assumes Perfect Competition (eg. In monoply under Profit
maximization, resources are not efficiently utilised)
In new business environment profit maximization is
regarded as
Unrealistic Difficult Inappropriate Immoral.
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Maximizing EPS
Ignores timing and risk of the expected benefit
MV is not just a function of EPS.
So, maximizing EPS will not result in high Price for Co shares
Maximizing EPS implies that the firm Pays no Div, so
long as funds can be invested at positive rate of return This Policy may not always work
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Shareholders Wealth Maximization - SWM
Maximizes NPV of a course of action to owners.
Accounts for timing and risk of the exp. benefits. Benefits are measured in terms of cash flows.
Fundamental Obj - Maximize MV of firms shares.
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Risk-return Trade-off
Risk and expected return move in tandem;
Greater the risk, the greater the expected return.
Fin decisions of the firm are guided by the risk-return
trade-off.
The return & risk relationship
: Return = Risk-free rate + Risk premium
Risk-free rate is a compensation for time & Risk Prem
for risk.
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Managers Versus Shareholders Goals
Co has stakeholders such as
Employees, Crs, Clients, suppliers, Govt and society.
Mgrs may perceive their role as reconciling conflicting objectives
of stakeholders.
This view of Mgrs role may conflict with the objective of SWM.
Mgrs may pursue their own personal goals at the cost of
shareholders or
Mgrs may play safe and create satisfactory wealth for
shareholders than the maximum.
Mgrs may avoid taking high investment and financing risks that
may otherwise be needed to maximize shareholders wealth.
Such satisfying behaviour of Mgrs may frustrate the obj of SWM
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Fin Goals & Firms Mission & Objectives
Firms primary objective is maximizing the welfare of owners But, in operational terms, they focus on the satisfaction of its customers
through the production of goods and services
Firms state their vision, mission and values in broad terms SWM is more a decision criterion than a stated objective or a goal. Goals/Objectives are missions/Basic purpose of a firms existence
Financial Management, Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd.
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Fin Goals & Firms Mission/ Objectives
SWM is the second-level criterion ensuring that the
decision meets the Min Std of Eco Performance
In the final decision-making, the judgement of Mgt plays
the crucial role.
The wealth maximization criterion would simply indicate
whether an action is economically viable or not.
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Organisation of the Fin Functions
Reason for placing the Fin Fn in top Mgt hands
Fin decisions are crucial for Survival of the firm.
The financial actions determine solvency of the firm
Centralisation of Fin Fn results in scale Economies
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Status and Duties of Fin Executives
Org structure for Fin mgt differs across firms. The financial officer may be known as
Financial manager or The vice-president of finance Director of finance or The Financial controller
Depending upon the Org structure of a given Co
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Role of Treasurer and Controller
2 more officers - Treasurer & controller - May be appointed under the CFO to assist him or her. Treasurers Fn is to raise and manage Co funds
Investment and financing decisions
- Fund Mgt
Controller oversees whether funds are aptly used
Operating decisions, Planning
Fin/Mgt A/ctng, MIS, Auditing, Taxation
Fund mgt
- Other roles
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