KALYAN CITY BLOG

Objectives of Financial Management The objectives of financial management are depicted and discussed below. Image Credits © Sameer Akrani. The main objectives of financial management are:- Profit maximization : The main objective of financial management is profit maximization. The finance manager tries to earn maximum profits for the company in the short-term and the long-term. He cannot guarantee profits in the long term because of business uncertainties. However, a company can earn maximum profits even in the long-term, if:- The Finance manager takes proper financial decisions. He uses the finance of the company properly. Wealth maximization : Wealth maximization (shareholders' value maximization) is also a main objective of financial management. Wealth maximization means to earn maximum wealth for the shareholders. So, the finance manager tries to give a maximum dividend to the shareholders. He also tries to increase the market value of the shares. The market value of the ...

Functions of financial management Functions of financial management can be broadly divided into two groups: management , and Routine functions of financial management. Following image depicts eight executive functions of financial management. capital requirements, Determining capital structure, Estimating cash flow, Investment decisions, Allocation of surplus, Deciding additional finance , Negotiating for additional finance and Checking the financial performance. These executive functions of financial management (FM) are explained below. Estimating capital requirements : The company must estimate its capital requirements (needs) very carefully. This must be done at the promotion stage. The company must estimate its fixed capital needs and working capital need. If not, the company will become over-capitalized or under-capitalized. Determining capital structure : Capital structure is the ratio between owned capital and borrowed capital. There ...

What is Financial Management? Meaning The financial management means: To collect finance for the company at a low cost and To use this collected finance for earning maximum profits. Thus, financial management means to plan and control the finance of the company. It is done to achieve the objectives of the company. Image credits © Shyam . Definition of Financial Management According to Dr. S. N. Maheshwari , "Financial management is concerned with raising financial resources and their effective utilisation towards achieving the organisational goals." According to Richard A. Brealey , "Financial management is the process of putting the available funds to the best advantage from the long term point of view of business objectives ." Scope of Financial Management Financial management has a wide scope. According to Dr. S. C. Saxena , the scope of financial management includes the following five A's. Anticipation : Financial management estimates the finan...

Need of Corporate Finance Finance is the life blood of business . It is required by all types of companies. It is required for starting a company. It is required for running a company. It is required for the survival, stability and growth of a company. It is required for expansion and diversification of a business. Finance is also required for closing down the company. So, a company cannot survive without finance. It requires promotional finance to start the company. It requires long-term finance to purchase fixed assets. It requires development finance for growth, expansion and diversification of business. Importance of Corporate Finance The following points bring out the importance of corporate finance . Image Credits © Sameer Akrani. Research and Development : Corporate Finance is needed for Research and Development. Today, a company cannot survive without continuous research and development. The company has to go on making changes in its old products. It must also invent ...

Characteristics or Features of Corporate Finance The points below discuss the characteristics or features of corporate finance . Image Credits © Sameer Akrani. Financial Activity : Corporate finance is a financial activity. It includes planning, raising, investing and monitoring the finance of the company. In short, it includes all the financial aspects of the company. This work is done by the financial department headed by the finance manager. Raising the finance : Corporate finance includes raising (collecting) finance for the company. Finance can be collected through shares, debentures, bank loans, etc. It is very difficult for new companies to collect finance because the investors do not have confidence in new companies. However, it is very easy for reputed companies to collect finance due to their well-established goodwill in the market. Investing the finance : Corporate finance also includes investing (using) the finance. The finance is used to achieve the objectives o...

What is Corporate Finance? Meaning Corporate finance means only the finance of joint-stock companies. It is a narrow term. Corporate finance is different from business finance. Business finance refers to the finance of all types of business, i.e. sole traders, partnership firms, joint-stock companies, etc. It is a broad term. What Corporate Finance Includes? Corporate finance includes planning, raising, investing and monitoring of finance in order to achieve the financial objectives of the company. The followings are included in corporate finance. Planning the finance : The finance manager plans the finance of the company. He takes decisions on questions like:- How much finance is required by the company? What are the sources of finance? How to use the finance profitably? Raising the finance : The finance manager raise (collects) finance for the company. Finance can be collected from many sources, viz., shares, debentures, banks , financial institutions, creditors, etc...

Concept of Cost of Capital Capital refers to the funds invested in a business . The capital can come from different sources such as equity shares, preference shares, and debt. All capital has a cost. However, it varies from one sources of capital to another, from one company to another and from one period of time to another. Cost of capital may be defined as the company's cost of collecting funds. This is equal to the average rate of return that an investor in a company will expect for providing funds. It is the minimum rate of return that the project must earn to keep the value of the company intact. The minimum rate of return is equal to cost of capital. The cost of capital in always expressed in terms of percentage. Proper allowance is made for tax purposes. This is done to get a correct picture of the cost of capital. Image Credits © genefama . Importance of Cost of Capital The concept of cost of capital is a major standard for comparison used in finance decisions . Accep...

Concept of Risk and Return in Investment Investment management is a game of money in which we have to balance the risk and return. inflation , the purchasing power of money gets reduced. Interest rate risk : Due to an economic situation prevailing in the country, the interest rate may change. Default risk : The risk of not getting investment back. That is, the principal amount invested and / or interest. Business risk : The risk of depression and other uncertainties of business . Socio-political risk : The risk of changes in government, government policies, social attitudes, etc. The returns on investment usually come in the following forms:- The safety of the principal amount invested. Regular and timely payment of interest or dividend. Liquidity of investment. This facilitates premature encashment, loan facilities, marketability of investment, etc. Chances of capital appreciation, where the market price of the investment is higher, due to issue of bonus shares, right ...

Need or Importance of Business Ethics These twelve points below discuss the need, importance of business ethics . business malpractices by indulging in unfair trade practices like black-marketing, artificial high pricing, adulteration, cheating in weights and measures, selling of duplicate and harmful products, hoarding, etc. These business malpractices are harmful to the consumers. Business ethics help to stop these business malpractices. Improve customers' confidence : Business ethics are needed to improve the customers' confidence about the quality, quantity, price, etc. of the products. The customers have more trust and confidence in the businessmen who follow ethical rules. They feel that such businessmen will not cheat them. Survival of business : Business ethics are mandatory for the survival of business. The businessmen who do not follow it will have short-term success, but they will fail in the long run. This is because they can cheat a consumer only once. Afte...

Rules or Principles of Business Ethics Rules or principles of business ethics are the code of conduct for businessmen. It tells us how businessmen should do business for social good. These principles are related to consumers, employees, investors, local community and the society as a whole. business practices such as artificial price rise and adulteration. Avoid profiteering : Don't indulge in unscrupulous activities like hoarding, black-marketing, sale and use of banned or harmful goods, etc., for the sake of greed to earn exorbitant profits. Encourage healthy competition : Don't destroy a healthy competitive atmosphere in the market which offers certain benefits to the consumers. Do not engage in a cut-throat competition. Avoid making attempts to malign and spoil the image of competitors by unfair means. Ensure accuracy : Always check and verify the accuracy in weighing, packaging and quality while supplying goods to the consumers. Pay taxes regularly : Pay taxes ...

What are Business Ethics? Meaning Ethics is a branch of social science. It deals with watak principles and social values. It helps us to classify, what is good and what is bad? It tells us to do good things and avoid doing bad things. business with a human touch in order to give welfare to the society. Definition of Business Ethics According to Andrew Crane , "Business ethics is the study of business situations, activities, and decisions where issues of right and wrong are addressed." According to Raymond C. Baumhart , "The ethics of business is the ethics of responsibility. The business man must promise that he will not harm knowingly." Features of Business Ethics The characteristics or features of business ethics are:- Code of conduct : Business ethics is a code of conduct. It tells what to do and what not to do for the welfare of the society. All businessmen must follow this code of conduct. Based on watak and social values : Business ethics is based ...

Demerits of Credit Rating The disadvantages, limitations or demerits of credit rating are listed below. Imgage Credits © Sameer Akrani. Possibility of Bias Exist : The information collected by the rating agency may be subject to personal bias of the rating team. However, rating agencies try their best to provide an unbiased opinion of the credit quality of the company and/or instrument. If not, they will not be trusted. Improper Disclosure May Happen : The company being rated may not disclose certain material facts to the investigating team of the rating agency. This can affect the quality of credit rating. Impact of Changing Environment : Rating is done based on present and past data of the company. So, it will be difficult to predict the future financial position of the company. Many changes take place due to changes in economic, political, social, technological, legal and other environments. All this will affect the working of the company being rated. Therefore, rating i...

Benefits of Credit Rating to Investors The advantages , importance or benefits of credit rating to the investors are:- Imgage Credits © Sameer Akrani. Helps in Investment Decision : Credit rating gives an idea to the investors about the credibility of the issuer company, and the risk factor attached to a particular instrument. So the investors can decide whether to invest in such companies or not. Higher the rating, the more will be the willingness to invest in these instruments and vise-versa. Benefits of Rating Reviews : The rating agency regularly reviews the rating given to a particular instrument. So, the present investors can decide whether to keep the instrument or to sell it. For e.g. if the instrument is downgraded, then the investor may decide to sell it and if the rating is maintained or upgraded, he may decide to keep the instrument until the next rating or maturity. Assurance of Safety : High credit rating gives assurance to the investors about the safety of th...

What is Credit Rating? Meaning Credit rating is done for debt instruments such as debentures, fixed deposits, commercial papers, bonds, etc. Image credits © Anvrecife . The company which issues debt instruments is called an issuer or issuing company. The issuer, issues instruments to collect finance from investors. Investor looks at the credit rating of instrument and issuer before investing. If the credit rating is a high , investor will invest in the company. That is, he will purchase the debentures, bonds, etc. issued by that company. If the credit rating is low , investor will not purchase the debentures, bonds, etc. of that company. So, credit rating guides the investor while investing. Credit rating is an opinion about a debt instrument and its issuer. It tells an investor, whether the debt instrument is safe or risky. It tells whether the issuer will be able to pay the interest and repay the principal amount in time. Credit rating is only an opinion. It is not a re...

Importance of Corporate Governance The need, significance or importance of corporate governance is listed below. management of the companies. They force the management to use corporate governance. That is, they put pressure on the management to become more efficient, transparent, accountable, etc. The also ask the management to make consumer-friendly policies, to protect all social groups and to protect the environment. So, the changing ownership structure has resulted in corporate governance. Importance of Social Responsibility : Today, social responsibility is given a lot of importance. The Board of Directors have to protect the rights of the customers, employees, shareholders, suppliers, local communities, etc. This is possible only if they use corporate governance. Growing Number of Scams : In recent years, many scams, frauds and corrupt practices have taken place. Misuse and misappropriation of public money are happening everyday in India and worldwide. It is happening in t...

Features of Corporate Governance The characteristics or features of corporate governance are listed below. Imgage Credits © Sameer Akrani. Transparency : This means that the Board of Directors must release all relevant information to the stakeholders. They must show all the necessary financial and operational data to the stakeholders. They must not hide any important information or maintain any secrecy. Protection of Shareholders' Rights : The Board of Directors must protect the rights of the stakeholders. They must protect all the stakeholders, especially the minority stakeholders. More Powers to CEO : The CEO must be given more powers so that he can approve the companies plans and strategies independently. Accountability : The CEO and the Board of Directors must be made accountable for their actions to the stakeholders and to the entire society. Based on Ethics : Corporate governance is based on ethics, tabiat principles and values. So, the Board of directors must avoi...

Price Differentials in Financial Management First let's understand the meaning of terms Price and Differential. Price : The literal meaning of the word 'PRICE' is the amount of money expected, required or given by one party to another party in return of some goods and / or services. Differential : Whereas, the word 'DIFFERENTIAL' means something pertaining to diversity (difference) between comparable things in terms of their price, quantity, quality, etc. Pricing is an important factor in the financial management . Basically, the cost of production comprises a major share of the raw material pricing. The procurement of a raw material needs proper forecasting and analysis. This helps an organisation to quote a competitive price of the finished product. Article and Image Credits © Moon Rodriguez. 1. Customer Price differentials may occur because of the terms of payment and the category of the customer. In this case, the same product is charged with different ...

What is Portfolio Management? Meaning First let's understand the meaning of terms Portfolio and Management . Portfolio is a group of financial assets such as shares, stocks, bonds, debt instruments, mutual funds, cash equivalents, etc. A portfolio is planned to stabilize the risk of non-performance of various pools of investment . Management is the organization and coordination of the activities of an enterprise in accordance with well-defined policies and in achievement of its pre-defined objectives. Now let's comprehend the meaning of term Portfolio Management. Portfolio Management (PM) guides the investor in a method of selecting the best available securities that will provide the expected rate of return for any given degree of risk and also to mitigate (reduce) the risks. It is a strategic decision which is addressed by the top-level managers. For example, Consider Mr. John has $100,000 and wants to invest his money in the financial market other than real estate in...