FINANCIAL MANAGEMENT

Group membersMahesh Avhad (02)

Omkar Bandekar (03)Devendra Dhakate (10)

Nandita Kandalgaonkar (23)Tahseen Fatima (13)

Srividhya Pattabiraman (47)Shweta Richharia (41)

Concept• Used in 2 sense1. Narrow sense2. Broader sense

Cash management

• Transactional motive- to meet routine cash requirement (operating expense)• Precautionary motive- For unanticipated and unpredictable(strikes)

• Speculative motive-to gain advantage of opportunities(purchase at favorable

prices)• Compensative motive- Minimum balance of cash at bank

Motives of Holding Cash

• To prevent bankruptcy• Good relation with bank• Good relation with trade creditors & suppliers• To lead strong credit rating• To maintain balance level

Cash Cycle

A. Material ordered B. Material receivedC. PaymentsD. Cheque clearanceE. Goods soldF. Customer mails paymentG. Payment receivedH. Cheques depositedI. Funds collected

Ways of improving net cash flow

• Increase sales• Reduce direct & indirect cost and OH expenses• Increase prices especially to slow prayers• Reduce the amount/time of credit given to the

customer• Bill as soon as work has been done or order is

fulfilled• Improve systems for paying suppliers

continued

• Use of 80/20 rule to control inventories, receivables and payables

• Improve systems for paying suppliers• Use more proactive collection techniques• Add late payment charges or fees where possible• Re-negotiate bank facilities to reduce charges• Seek to extent debt repayment periods• Sell off surplus assets or make them productive • Raise additional equity

• ZED ltd wishes to arrange for overdraft facilities with its bankers during the period April to June of a particular year when it will be manufacturing mainly for stock. Prepare a cash budget for the above period from the following data . Indicating the extent of bank facilities the company will require at the end of each month.

Sample Question

Source of finance

• Equity Equity shares are also termed as ordinary

shares or common shares and the holders of such shares are known as shareholders or stockholders

Shares

• Under section 2 clause 46 of the Indian companies act, 1956.

“ share means share in the share capital of the company and includes stock except where a distinction between stock and share is expressed or implied”

Who is Shareholder

• Subscribers to the memorandum of a company

• Other persons, who agree in writing to become the members of the company

Number of members(Membership)

Private company Public company

Minimum 2 7

Maximum 50 Unlimited

Equity share

• Equity share capital is also called as the “risk bearing ” capital of the company and the equity share holders as the real risk bearers of the company.

• Do not enjoy special rights• In profit is not adequate they may not receive any

dividend• In event of liquidation of the company the equity

share holder is the last person to receive back his capital

Basic concepts

1. Share:• Unit value of the capital of a ltd comp• It represents the interests of its share holder

in the capital of the comp.2. Authorized capital:• It is maximum capital a company can raise.

Basic concept

3. Issued capital:• It is the part of authorized capital which is

actually offered to the prospective investors for subscription

4. Unissued capital:• The balance of authorised capital which is

not issued to the prospective investors.

5. Subscribed capital:• The portion of the issued capital which has

been subscribed by the investors/public.6. Reserve capital:• It is that part of the uncalled capital which

may only be demanded on winding up or liquidation but not when the company is going concerned

Basic concepts

Basic concepts

7. Paid-up share capital:• It is that portion of the subscribes share

capital on which money hav been collected by the issuing company. Here the balance is the unpaid amount or calls in arrears.

8. Calls in arrears:• It is that part of called-up capital which has

not been paid by the share holders

Advantages of Equity Shares

1. It represents of permanent source of finance2. It does not carry any fixed burden3. It enhances the credit worthiness of the firm

Disadvantages of Equity Shares4. It cost is very high5. Issue of equity to outsiders causes dilution of

control

Debentures: As a source of finance

• Defined as an, “acknowledgement of debt, given under the seal of the company and containing a contract for the repayment of the principal sum at a specified date and for the payment of interest at fixed rate percent untill the principal sum is repaid, and it may or may not give the charge on the assets to the company as security of the loan”

Features of Debentures

1. Debenture holders are the creditors of the company

2. Interest of debentures has to be paid irrespective of the fact whether the company has made any profit or suffered a loss

3. Debenture holders have no voting rights 4. Debenture holders have a prior claim over the

share holders in the event of liqiudation regarding the repayment of the money

Features of Debentures

5. Debentures are generally secured on the assets of the companies and therefore there is less risk

Types of Debentures

• Redeemable Debentures• Irredeemable Debentures• Convertible Debentures• Nonconvertible Debentures• Secured Debentures• Unsecured Debentures

Advantages of debentures

To the company• Long term capital• Tax benefits• No interference in

management and control• Lower rate of interest than

the rate of dividend

To the investors• Safety and security of

investment • Fixed income• Liquidity – easy sale in stock

exchange• Conversion into shares

Disadvantages of debentures

To the company• Fixed financial burden• Decrease in credit

worthiness• Danger to existence of the

company

To the investors• No control • No extra profit even

company earns huge amount of profit also.

Term loans: As a source of finance

Term loans typically carry fixed interest rates, monthly or quarterly repayment schedules and the set maturity date.

1. Intermediate term loans : Usually running less than 3 years and generally

paid in monthly installments 2. Long term loans : These loans commonly set for more than 3 years.

Most are between 3 and 10 years, and some loan fall as long as 20 years.

Types of term loan

• Short term loan : repayable within a period of 36 months.

• Medium term loans : repayable in more than 36 months and less than 72 months.

• Long term loans : repayable in more than 72 months.

Basic features of term loan

• Maturity : mostly for a period of 6-10 years• Direct negotiation : It avoids underwriting

commission and other floatation costs• These are provided on the basis of formal

agreement which consist of term and conditions.

• These are granted on the basis of a detailed appraisal of the project

Basic features of term loan

• Security : There are 2 types of security• Primary security : they are secured by the

assets acquired using term loan funds• Secondary security : They are secured by

company’s current and future assets.

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