Saturday, January 30, 2010

Finance Manager- Functions

The changed business environment has increased the role of finance manager. Increasing pace of industrialization, rise of larger-scale units, innovations in information processing techniques and intense competition has increased the need of financial planning and control.

Financial forecasting and planning
Finance manager has to estimate the requirement of funds to acquire assets. The decision has to be taken keeping in mind both the fixed capital and working capital requirement. How to acquire such funds and when to apply the raised funds is the crucial role of a finance manager.

Acquisition of funds
Funds can be raised from many sources such as banks , equity market , financial institution etc. Main role of the finance manager is to look out for the most cheapest source of finance after reviewing the pros and cons of each source that is available.

Investment of funds
Funds should be used in the best possible way. It should always be kept in mind that return on investment must be always higher than the cost of acquisition.
After the funds have been acquired it is the role of finance manager to allocate it to various areas of requirement. Such areas may be fixed assets, working capital or investment in other sources.
A finance manager has to keep the principles of safety, liquidity and soundness while investing funds.

Helping in value decision
Merger and acquisition has become a common phrase in this competitive market. A finance manager must help the management in such a valuation and must understand various methods of valuation of shares and other assets so that correct values are arrived at.

Maintaining proper liquidity
Maintaining liquidity is very essential for a business concern to finance short term capital need, day to day working requirements and to take advantages of sudden market opportunities. Finance manager has to take decision on the degree to which liquidity has to be maintained so that funds are not kept idle.

Sunday, January 24, 2010

Financial Planning- Steps

Financial plan refers to a statement estimating the amount of funds that is required and deciding its composition. The quantum of funds depends on the asset requirement of the business. The time when funds are required has to be properly judged so that it can be brought into the business without any delay.

Steps that has to be taken in financial planning are very clear

Establishing financial objectives
Financial objective of the business must be clearly set. Both Short term and long term needs should be kept under consideration. Main aim must be the optimum utilization of the financial resource. The concern should take advantage of the prevailing economic conditions.


Formulating Financial Policies
Financial policies deal with the procurement, administration and distribution of funds. It must take care of the present and future financial needs simultaneously. It must have clear cut plans for raising funds as well as its probable uses.

Formulating procedures
Procedures are formed to ensure consistency of actions. The procedure follow the formulation of policy. If it is a policy to raise short term funds from bank, then a procedure must be laid to approach the lenders and the person authorized to initiate such actions.


Providing for flexibility
The financial planning should ensure proper flexibility in objectives, policies and procedures to adjust according to changing economic conditions. Changing economic conditions may offer new opportunities. The concern should be capable of taking advantage of such a situation. A rigid financial plan restricts to gain such advantages.

Saturday, January 16, 2010

Working capital- Determinants

Working capital refers to that part of firm’s capital that is required to finance current assets of the company such as marketable securities, debtors, inventories and cash. Working capital comprises of funds that is used for wages, salaries and day to day expenses of the enterprise.
Working capital holds a very important place in the enterprise and must be planned carefully and strategically so to avoid unnecessary outlay of funds and simultaneously optimize profits.



Nature of the business
Financial firms and trading firms requires less working capital as funds are not tied to inventories. Whereas manufacturing concerns need large working capital to finance inventories to carry out the production cycle smoothly.

Scale of Business
Working capital is also determined by the scale of business and its turnover. Small scale business requires very less working capital when compared to the large scale businesses and Giant concerns. One has to determine such activities of the concern before making provisions for the working capital requirements.
Production Policy
Production depends on various factors like seasonal fluctuations, availability of raw materials etc. If production carries out continuously throughout the year then it would demand high working capital. Whereas in business where production is carried out seasonally, less working capital is tied up.

Rate of Stock turnover
High rolling stocks helps in realization of sales money whereby reducing the additional requirement of working capital. Dead Stocks and low turnover results in large sum of funds to get tied up.

Working capital cycle
It is the cycle that begins from purchase of raw materials to realization of cash after sales. It includes phases like work in progress, finished goods and sales of finished goods. The larger the cycle more would be working capital needs.


Credit Policy
It is often defined as terms of sales and purchase. An enterprise purchasing raw materials in cash and selling out finished goods on credit will require more working capital when compared to enterprise purchasing raw materials on credit and finished goods in cash.
Length of credit also has a substantial bearing over working capital requirements.

Synchronizing and correlating such factors and estimating their trade offs have helped large organization to grow as giants.

Saturday, January 9, 2010

Corporate Finance- Making Simple

The main objective of financial management is to arrange sufficient finances for meeting short-term and long term needs. These funds have to be procured at minimum costs so that profitability of the business can be maximized.

Here are some simple steps that can be followed to manage the finances of a corporate

Estimating Financial Requirement

This is the foremost task to determine the short term and long term needs of finance on the basis of its strategic importance. Such an estimate must be screwed to perfection since shortage of funds would have an adverse effect and excess funds may lead in extravagant spending, speculative activities and rising interest figures.

Selecting sources of finance

There may be as many sources of finances such as shares, debentures, financial institutions, banks and public deposits. If funds are required on a long term basis then shares and debentures may help the cause. Financial institutions and banks can be used to finance on a short term need.
If the management does not want to tie its assets then public deposits may used as a source to finance.

Selecting a Pattern of Investment

After the finances are available it becomes very necessary to allocate it properly. Finances must be first allocated to procure fixed assets(Plant and Machinery) and then the remaining must be allocated to meet the working capital requirements(Day to day working requirements like wages, bills etc). Proper techniques like cost-benefit analysis and opportunity costs analysis must be followed before a capital investment.

Proper Cash Management

Cash may be required to purchase raw materials, pay creditors, wages, utility bills etc. Inadequate cash may hamper the production cycle or may limit the scope of some attaining seasonal and contingent advantages. Excess cash may cause funds to remain idle and increasing the cost of capital by rising Interest charges. Hence proper cash management becomes a must by maintaining balance between cash inflows and cash outflows.

Implementing Financial Controls

Various control Devices and techniques must be used in ordinary course of business to monitor the usage of finances. These devices are return on investment, budgetary control, break even analysis, cost control, ratio analysis and cost and internal audit.
Return on investment is taken as the best measure in many corporate

Proper use of Surplus

To gain maximum growth judicious use of surpluses becomes a must. Surplus can be used in diversification, expansion and to declare dividends that would satisfy shareholders and eventually helps in raising market prices of shares.
Ploughing back of profits may be used to finance expansion and diversification but may go against the interest of shareholders. So an optimum balance has to be carved out between the two options.

This simple process is used by businesses to grow into corporate.