Basic FinancialBasic FinancialBasic FinancialBasic FinancialBasic FinancialManagementManagementManagementManagementManagement

Dr. Satish M. InamdarM.Com., LL.B., Ph.D., F.C.A., A.I.C.W.A., A.C.S.

ISO 9001:2008 CERTIFIED

FOURTH REVISED EDITION: 2017

First Edition : 2009Second Edition : 2011Third Edition : 2013Fourth Revised Edition : 2017

Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd.,�Ramdoot�, Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004.Phone: 022-23860170/23863863, Fax: 022-23877178E-mail: himpub@vsnl.com; Website: www.himpub.com

Branch Offices :

New Delhi : �Pooja Apartments�, 4-B, Murari Lal Street, Ansari Road, Darya Ganj,New Delhi - 110 002. Phone: 011-23270392, 23278631; Fax: 011-23256286

Nagpur : Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur - 440 018.Phone: 0712-2738731, 3296733; Telefax: 0712-2721216

Bengaluru : Plot No. 91-33, 2nd Main Road Seshadripuram, Behind Nataraja Theatre,Bengaluru - 560 020. Phone: 08041138821, 9379847017, 9379847005

Hyderabad : No. 3-4-184, Lingampally, Besides Raghavendra Swamy Matham, Kachiguda,Hyderabad - 500 027. Phone: 040-27560041, 27550139

Chennai : New-20, Old-59, Thirumalai Pillai Road, T. Nagar, Chennai - 600 017.Mobile: 9380460419

Pune : First Floor, "Laksha" Apartment, No. 527, Mehunpura, Shaniwarpeth(Near Prabhat Theatre), Pune - 411 030. Phone: 020-24496323/24496333;Mobile: 09370579333

Lucknow : House No. 731, Shekhupura Colony, Near B.D. Convent School, Aliganj,Lucknow - 226 022. Phone: 0522-4012353; Mobile: 09307501549

Ahmedabad : 114, �SHAIL�, 1st Floor, Opp. Madhu Sudan House, C.G. Road, Navrang Pura,Ahmedabad - 380 009. Phone: 079-26560126; Mobile: 09377088847

Ernakulam : 39/176 (New No.: 60/251) 1st Floor, Karikkamuri Road, Ernakulam, Kochi - 682 011.Phone: 0484-2378012, 2378016; Mobile: 09387122121

Bhubaneswar : 5 Station Square, Bhubaneswar - 751 001 (Odisha).Phone: 0674-2532129, Mobile: 09338746007

Kolkata : 108/4, Beliaghata Main Road, Near ID Hospital, Opp. SBI Bank,Kolkata - 700 010, Phone: 033-32449649, Mobile: 7439040301

DTP by : Pooja/Priyanka M.

Printed at : M/s. Aditya Offset Process (I) Pvt. Ltd., Hyderabad. On behalf of HPH.

© AuthorNo part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form orby any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior writtenpermission of the publisher.

PREFPREFPREFPREFPREFAAAAACE TCE TCE TCE TCE TO THE FO THE FO THE FO THE FO THE FOUROUROUROUROURTH REVISEDTH REVISEDTH REVISEDTH REVISEDTH REVISEDEDITIONEDITIONEDITIONEDITIONEDITION

I am pleased to present the revised edition of �Basic Financial Management� to thereaders. The response for the first edition was stupendous.

Last two decades have witnessed quite a few cases of frauds and failures in the Indiancontext. Readers on finance will be interested in knowing about the background of thesecases studies. These ten case studies is a part of this revised edition.

I thank all the readers for pointing out the errors/mistakes in the earlier edition whichhave now been rectified in this edition. I expect the same for this revised edition also.

Dr. Satish M. Inamdar

PREFACEPREFACEPREFACEPREFACEPREFACEFinance is undoubtedly the most basic and most important function in any business

activity. The success of business depends upon the success of finance function. Fromacademic point of view, finance is the most technical subject, having a very wide scope andhaving constantly changing rules and regulations. As such, a normal student attempts tokeep himself away from the subject and this aggravates the problems for him. One cannotafford to ignore the subject of finance. The ultimate evaluation of any business activity isthe profit-based evaluation and the term profit itself is a financial phenomenon. As such,one needs to get acquainted with the basic principles of finance, despite the hardshipsinvolved in the process.

My objective of writing this book is to introduce the basic concepts of finance to a non-finance student in the simplest possible language. As such, I have deliberately avoided toomuch of quantitative or mathematical elaboration or explanation to any concept of finance.I have attempted to explain the basic concepts with the help of examples and illustrations.Good number of problems have been incorporated for self-study.

I am thankful to Himalaya Publishing House for publishing this book.

Maximum efforts have been made to incorporate the current status of the subject.Maximum care has been taken to make the text error-free. Still if some errors areremaining, they are mine alone. I will be grateful to the readers if such errors or omissionscan be pointed out and intimated so that necessary modifications can be done in thesubsequent editions.

Dr. Satish M. Inamdar

Chapter 1: INTRODUCTION 1 � 9The Concept and ImportanceApproaches to the Term FinanceScope of Finance FunctionFinancing DecisionsInvestment DecisionsDividend Policy DecisionsGoals/Objects of Finance FunctionWealth MaximisationOrganisation of Finance FunctionDuties and Responsibilities of Finance ExecutiveRecurring DutiesNon-recurring DutiesFields of FinanceFinance Function in Relation with Other Functions

Chapter 2: Forms of Business Organisation 10 � 16Proprietary FirmsJoint Stock CompaniesTypes of CompaniesPrivate Limited CompanyPublic Limited Company

Chapter 3: Financial Statements 17 � 36Nature of Financial StatementsBasic Principles behind the Preparation of Financial StatementsBasic Concepts in AccountingStructure of Financial StatementsPart I: Structure of Balance SheetLiabilities SideReserves and SurplusSecured LoansUnsecured Loans

CONTENTCONTENTCONTENTCONTENTCONTENTSSSSS

Current Liabilities and ProvisionsAsset SideCurrent Assets, Loans and AdvancesMiscellaneous ExpenditureContingent LiabilitiesPart II: Structure of Profitability StatementRole Played by Financial StatementsLimitations of Financial StatementsAnalysis and Interpretation of Financial StatementsTypes of AnalysisTechniques of Analysis and Interpretation

Chapter 4: Ratio Analysis 37 � 112IntroductionRole of Ratio AnalysisClassification of RatioLimitations of Ratio Analysis

Chapter 5: Funds Flow/Cash Flow Statement 113 � 162IntroductionUses/AdvantagesConstruction of Funds Flow StatementTreatment of Special ItemsCash Flow Statement

Chapter 6: Financial Plan and Capitalisation 163 � 174Part I: Financial PlanImportanceSteps in Financial PlanningPrinciples for Formulating Financial PlanLimitations of Financial PlanPart II: CapitalisationTheories of CapitalisationUndercapitalisationRemedies AvailableOvercapitalisation vs. UndercapitalisationWatered Capital vs. Overcapitalisation

Chapter 7: Sources of Long-term and Medium-term Finance 175 � 200SharesEquity SharesPreference SharesDebenturesFeatures of DebenturesAmortisation of Debentures and Working CapitalProtection of Interests of DebentureholdersTerm LoansLease FinancingHire PurchasingHire Purchasing vs. LeasingAccounting for Leasing and Hire PurchasePublic DepositsRetained EarningsCredit Rating

Chapter 8: Capital Structure 201 � 240Part I: Capital StructureGoals/Principles of Capital Structure ManagementFactors Affecting Capital StructurePart II: Cost of CapitalPart III: Trading on Equity, Capital Gearing and LeveragesTrading on EquityCapital GearingLeveragesPart IV: Theories of Capital StructureCapital Structure and Cost of Capital

Chapter 9: Working Capital Management 241 � 283Concepts of Working CapitalNeed for Working CapitalTheory of Working Capital ManagementFactors Affecting Working Capital RequirementEffect of Inflation on Working Capital RequirementsEstimation of Working Capital Requirements

Financing the Working Capital RequirementsBank Credit as a Source of Meeting WorkingCapital RequirementsCommercial Papers (CP)Control over Working CapitalAction Taken by RBI

Chapter 10: Management of Inventory 284 � 309Motives for Holding InventoryObjects of Inventory ManagementTechniques of Inventory Management

Chapter 11: Management of Receivables 310 � 329Objective of Receivables ManagementAreas Covered by Receivables ManagementCredit AnalysisCredit TermsCredit CollectionFinancing the ReceivablesFactoring vs. Bills DiscountingTypes of FactoringMonitoring the Receivables

Chapter 12: Management of Cash 330 � 352Motives for Holding CashEstimating the Cash RequirementsPrinciples of Cash ManagementConcept of FLOAT

Chapter 13: Capital Budgeting 353 � 407Importance of Capital BudgetingProcess of Capital BudgetingEvaluation of the ProjectsTime Value of MoneyPresent Value TablesPresent Value of Series of Cash Flows

Techniques for Evaluation of Capital Expenditure ProposalsFinal Choice of Evaluation MethodLimitations of Capital BudgetingEvaluation Criteria in Certain Typical SituationsPart A: Calculation of Cash OutflowPart B: Calculation of Cash Outflow will Remain the SamePlanning, Organisation and Control of Capital ExpenditureIllustrative Problems

Chapter 14: Management of Earnings 408 � 423Part I: Dividend PolicyFactors Determining Dividend PolicyChoosing the Dividend PolicyForms of Dividend PaymentPart II: Retained EarningsFactors Affecting Retained EarningsKinds/Sources of Reserves and SurplusAppendix

Cases of Financial Frauds and FailuresCase 1 : CRB ....................................................................................... 427 � 430Case 2 : Dinesh Dalmia ...................................................................... 431 � 436Case 3 : Global Trust Bank (GTB) ..................................................... 437 � 441Case 4 : Harshad Mehta ..................................................................... 442 � 447Case 5 : Home Trade .......................................................................... 448 � 452Case 6 : IPO Scam .............................................................................. 453 � 462Case 7 : Ketan Parekh........................................................................ 463 � 471Case 8 : Unit Trust of India (UTI) and US-64 .................................. 472 � 478Case 9 : Satyam Computer Services Limited .................................... 479 � 497Case 10 : Subhiksha Trading Services Limited .................................. 498 � 502

THE CONCEPT AND IMPORTANCEA business is an activity which is carried on with the intention of earning the profits. If the

business of a manufacturing type of activity is considered, it involves basically the purchasing the rawmaterial, processing it by the use of labour force and other services, converting the raw material into thefinished goods and selling the finished goods in order to generate the profits. Thus, production, marketingand finance are the key operational areas in case of any manufacturing activity out of which the financeis the most crucial area. It is so because the functions of production and marketing are also related tofinance ultimately. If the decisions relating of funds or money fail, it may mean the death of the organisation.The decisions regarding money/funds may make or destroy the organisation. The interests of so manypersons may be directly affected due to the success or failure of an organisation.

E.g. : Owners (shareholders)CreditorsSuppliers,Lenders of money/fundsEmployeesPublic at large

As such an organisation has to be very careful while dealing with funds or money.

Approaches to the Term FinanceThe concept of finance has changed markedly with the change in times and circumstances. The

various views on the finance can be categorised as stated below:(1) According to the first approach, the term finance was interpreted to mean the procurement of

funds by corporate enterprises to meet their financing needs. The term procurement wasused in the broad sense to include the whole gamut of raising the funds externally.This approach towards finance was criticised on various grounds.

ChapterChapterChapterChapterChapter

1

InInInInIntrtrtrtrtroductionoductionoductionoductionoduction

2 Basic Financial Management

(a) It is too narrow and restrictive in nature. Procurement of the funds is only one of thefunctions of finance and other functions are ignored by this approach.

(b) It considers the financial problems only of corporate enterprises. In that sense, it ignoresthe financial problems of non-corporate entities like properietary concerns, partnershipfirms etc.

(c) It considers only the basic and non-recurring problems relating to the business. Day-to-day financial problems of a normal company do not receive any attention.

(d) It concentrates only on long-term financing. It means that the working capital managementwas out of the purview of finance function.

(2) The second approach holds that finance is concerned with cash. As all the transactions areultimately expressed in terms of cash, the term finance will be concerned with every activityof the enterprise. Thus, according to this approach, the finance function is concerned with allthe functional areas of the business, e.g., Production, Marketing, Purchasing, PersonnelAdministration, Research and Development and so on. Obviously, this approach is too broadto be meaningful.

(3) The third approach which is more balanced one and hence the acceptable one to the modernscholars, interprets the term finance as being concerned with procurement of funds and wiseapplication of funds. This approach is supposed to be the more acceptable as it gives equalweightage to both procurement of funds as well as utilisation of the funds. This approach iscalled the Managerial Approach to the term finance.

In the light of the above discussions, it will be worthwhile to note some of the definitions of thefinance function given by some modern scholars.

R.C. Osborn: The finance function is the process of acquiring and utilising funds of a business.Bonneville and Dewey: Financing consists of the raising, providing, managing of all the money,

capital or funds of any kind to be used in connection with the business.Prather and Wert: Business finance deals primarily with raising, administering and distributing

funds by privately owned business units operating in non-financial fields of industry.

Scope of Finance FunctionThe scope of the term finance function, as considered by the modern approach, can be said to be

concerned with the following three types of decisions.(a) Financing Decisions(b) Investment Decisions(c) Dividend Policy Decisions

Financing DecisionsThese decisions are basically concerned with the process of acquiring the funds. Any business

activity is basically, concerned with raising of the funds, whenever required, employing these funds formanufacturing and selling the products in the market and earning the profits out of the same. Thusobtaining the funds for their deployment in the business is the starting point of any business activity.

Introduction 3

Further, the funds required by the business may be raised either by own sources (Equity Capital) or byoutside sources (Debt Capital) The financing decisions are basically concerned with the answers to thequestions like.

(1) What should be the amount of the funds that should be raised?(2) What should be the mix of equity and debt capital in which the required amount of funds

should be raised?

Investment DecisionsThe second area with which the finance deals is the utilisation of the funds raised and required by

the business. The investment decisions relate to the selection of the assets in which the funds should beinvested.

The assets which can be acquired by a business are basically of two types.(i) Fixed Assests: These are those properties and infrastructural facilities with which the business

is carried on. These are the assests which yield the return over a period of time.(ii) Current Assets: These are those properties which are created during the course of business

and are capable of getting converted into cash usually within a year.The investment decisions with respect to first kind of assets are in the form of �Capital Budgeting�.

The investment decisions with respect to the second kind of assets are in the form of �Working CapitalManagement�.

(i) Capital Budgeting: The investment decisions in this area are basically concerned with theanswers to the questions like:

(1) How assets or projects or proposals should be chosen to make the investments in? Are thereany techniques available to select such assets or projects or proposal?

(2) How the decisions regarding choice of assets or projects or proposals should be made undersituation of risk and uncertainty?

(ii) Working Capital Management: The investment decision in this areas are basically concernedwith deciding the optimum extent to which the funds should be invested in current assets. If thecompany invests less amount in current assets it may loose the ability to meet the current obligationswhich are to be met with the help of current assets. It may also loose the capacity to carry on thebusiness on a regular and smooth basis. If the company invests too much in current assets, it mayadversely affect the profitability due to the costs of funds blocked in current assets. The decisionsregarding working capital management attempt to ensure the balance between these two principles ofliquidity on one hand and profitability on the another.

Dividend Policy DecisionsWhatever profits are earned by the business, the owners of the business are entitled to receive

them. In case of the corporate form of organisation, the shareholders are the owners and they areentitled to receive the profits in the form of the dividends. However, it is not necessary for the companyto distribute the entire amount of the profits earned by it among the shareholders by way of dividends.It may decide to distribute only a part of the profits, retaining the remaining amounts of profits to beused for future purpose.

4 Basic Financial Management

Goals/Objects of Finance FunctionProfit Maximisation

As a basic principle, any business activity aims at earning the profits. According to this principle,all the functions of the business will have the profit as the main objective. Similarly, the finance functionwill also have the profits as the main objective. But this was only a tradintional belief. Now, profit cannotbe the sole and only goal or objective of the finance function due to the following problems connectedwith this objective.

(1) The term profit is a ambiguous concept which isn�t having precise connotation, e.g., Profitscan be long-term or short-term. Profits can be before tax or after tax and so on. If profitmaximisation is accepted as the goal of finance function, the next question that arises is�Which types of profits should be maximised?�

(2) The profits always go hand in hand with risks. The more profitable ventures necessarilyinvolve more amount of risk. The owners of the business will not like to earn more and moreprofits by accepting more risk. If the profit maximisation is accepted as the goal of financefunction, it totally ignores the risk factor.

(3) Profit maximisation as the goal of financial function ignores the time pattern of returns. Considerthe following two proposals A and B which involve the same amount of returns.

A (`) B (`)Year I 70,000 �Year II 20,000 �Year III 10,000 1,00,000

1,00,000 1,00,000

Both the proposals A and B involve same amount of profits and hence ideally should be treatedon par. But it will not be proper as proposal A involves higher amount of returns in the earlieryears, while proposal B involves the returns in the later years. It makes proposal A moreprofitable ultimately as the returns received earlier are more valuable than the returns receivedlater. The objectives of profit maximisation doesn�t differentiate between the returns receivedearlier and the returns received later.

(4) Profit maximisation as the objective doesn�t take into consideration the social considerationsas well as the obligations to various interests of workers, customers, society etc. and theethical trade practices. If these factors are ignored, the company can�t survive for long. Profitmaximisation at the cost of social and moral obligations is a short-sighted policy.As such, profit maximisation can�t be a prime objective of the finance function. The objectivehas to be one having more broad a base, which is more precise, which considers risk factorand time value of money and which give consideration to social and ethical elements also. Thealternative is in the form of wealth maximisation as the objective of the finance function.

Wealth MaximisationDue to the limitations attached with the profit maximisation as an objective of the finance function,

it is no more accepted as the basic objective. As against it, it is now accepted that the objective of the

Introduction 5

business should be to maximise its wealth and value of the shares of the company. This object can alsobe stated as maximisation of value.

The value of the asset is judged not in terms of its cost but in terms of the benefit it produces.Similarly the value of a course of action is judged in terms of the benefits it produces less the cost ofundertaking it. The benefits can be measured in terms of stream of future expected cash flows, but theymust take into consideration not only their magnitude but also the extent of uncertainty.

Thus, wealth maximisation goal as decision criteria suggests that any financial action which createswealth or which has discounted stream of future benefits exceeding its cost, is desirable and should beaccepted and that which does not satisfy this test, should be rejected.

The goal of wealth maximisation is supposed to be superior to the goal of profit maximisation dueto following reasons.

(1) It uses the concept of future expected can flows rather than the ambiguous term of profits.As such measurement of benefits in terms of cash flows avoids ambiguity.

(2) It considers time value of money. It recongnises that the cash flows generated earlier aremore valuable than those generated later. That is why while computing value of total benefits,the cash flows are discounted at a certain discounting rate. At the same time, it recognises theconcept of risk also, by making necessary adjustments in discounting rate. As such, cashflows of a project involving higher risk are discounted at a higher discounting rate and viceversa.

Thus, the discounting rate used to discount future cash flows reflects the concepts of both timeand risk.

Due to the above reasons, the wealth maximisation is considered to be superior to profit maximisationas an objective or goal of finance function. However, it should be noted that wealth maximisation goal isonly an extension of profit maximisation goal. If the time period is too short and risk elements isminimum, both wealth maximisation and profit maximisation will mean the same thing.

Organisation of Finance FunctionAt the outset, it must be cleared that there is no standard pattern for the organisation of finance

function. It varies from the enterprise to enterprise and its characteristics in terms of nature, size,convention etc. In smaller concerns, where the operations are relatively less complicated and simple,there may not be seperate executive to look after finance function. In fact, the proprietor or partnersonly will be looking after all the functional areas like production, marketing, finance etc.

In bigger concerns, the execution of finance function becomes a specialised task and may behandled by an executive who may be in the form the Treasurer, Finance Controller, Finance Manager,Vice President (Finance) and so on. He is generally given the charge of credit and collection accounting,investment and audit departments. He is responsible for preparing annual financial reports. He reportsdirectly to the President and Board of Directors.

Secondly, it should be noted that generally the organisation of finance is centralised one, unlikeother businesss functions. Board of Directors takes the main financial decisions. Board of Directorsmay delegate the powers to the executive committee, comprising of managing director, other one or twodirectors and finance officer of the company. This executive committee takes all the financial decisions.Routine financial matters may delegated to lower level officers. The reasons for finance being highlycentralised function are very obvious.

6 Basic Financial Management

(1) Financial decisions are the most crucial ones on which survival or failure on the organisationdepends.

(2) Financial decisions affects the solvency position of the organisation and a wrong decision inthis area may land the organisation in to crisis.

(3) The organisation may gain economies of centralisation in the form of reduced cost of raisingthe funds, acquisition of fixed assets at the competitive prices etc.

Though there is no standard pattern for organisation of finance function, in general terms, theorganisation of finance function takes the following form.

Board of Directors!

Executive Committee! ! !

Vice President Vice President Vice President(Production) (Finance) (Marketing)

! ! !Finance Controller Treasurer

(1) Accounting and Costing (1) Receivable Management(2) Annual Reporting (2) Taxes and Insurance(3) Internal Auditing (3) Cost Management(4) Budgeting (4) Securities(5) Statistics and Finance (5) Banking Relations(6) Record Keeping (6) Real Estates

(7) Dividend Distributions

Duties and Responsibilities of Finance ExecutiveOn the basis of the scope of the finance, which has already been discussed, the various duties and

responsibilities which a finance executive has to fulfil can be classified as below:(1) Recurring Duties.(2) Non-recurring Duties.

Recurring Duties(a) Deciding the Financial Needs: In case of a newly started or growing concern, the basic duty

of the finance executive is to prepare the financial plan for the company. Financial plan decides inadvance the quantum of funds required, their duration etc. The funds may be needed by the companyfor initial promotional expenditure, fixed capital, working capital or for dividend distribution. The financeexecutive should assess this need of funds properly.

(b) Raising the Funds Required: The finance executive has to choose the sources of funds tofulfil financial needs. The sources may be in the form of issue of shares, debentures, borrowing fromfinancial institutions or general public, lease financing etc. The finance executive has also to decide theproportion in which the various sources should be raised. For this he may have to keep in mind basic

Introduction 7

three principles of cost, risk and control. If the company decides to go in for issue of securities say inthe form of shares or debentures, he has to arrange for the underwriting or listing of the same. If thecompany decides to go in for borrowed capital, he has to negotiate with the lenders of the funds.

(c)Allocation of Funds: The financial executive has to ensure proper allocation of funds. He canallocate the funds basically for two purposes.

(i) Fixed Assets Management: He has to decide in which fixed assets the company should investthe funds. He has to ensure that the fixed assets acquired or to be acquired satisfy the presentas well as future needs of the company. He has to ensure that the funds invested in the fixedassets justify the investments in terms of the expected cash flows generated by them infuture. If there are more than one proposal for making in fixed assets, the finance executivehas to decide in which proposal the company should invest the funds. For this purpose, hemay be required to take the help of various techniques of capital budgeting to evaluate thevarious proposals, e.g., Pay Back Period, Net Present Value, Internal Rate of Return, ProfitabilityIndex etc. If the outright purchases of fixed assets is not useful, the finance executive mayconsider to take them on lease or on hire purchase. The finance executive has to ensure thatin order to facilitate the replacement of fixed assets after their economic life is over, properdepreciation policies are formulated. The wrong policies in the area of providing for thedepreciation may result into over-capitalisation or under-capitalisation.

(ii) Working Capital Management: The finance executive has to ensure the sufficient funds aremade available for investing in current assets as it is the lifeblood of the business activity.Non-availability of funds to invest in current assets in the form of say cash, receivables,inventory etc. may halt the business operations. At the same time, he has to ensure that thereis no blocking of funds in the current assets, as it may prove to be costly in terms of cost ofthese funds and also in terms of opportunity cost of their use. Thus, the finance manager hasto ensure that investments in the current assets is minimum without affecting the operationsof the company.

(d) Allocation of Income: Allocation of the income of the company is the exclusive responsibilityof the finance executive. For this purpose, basically the income may be distributed among the sharehldersby way of dividend or it may be retained in the business for future purpose like expansion. Decision inthis regard may be taken in the light of financial position, present and future cash requirements, preferencesof the shareholders etc.

(e) Control of Funds: The finance executive is responsible to control the use of funds committedin the business so as to ensure that cash is flowing as per the plan and if there is any deviation betweenestimates and plans, proper corrective action may be taken in the light of financial position of thecompany. For this purpose, he may be required to supervise the cash receipts and disbursements,ensure the safety of cash receipts and disbursements, ensure the safety of cash balances, expediatereceipts and delay the payments wherever possible etc.

(f) Evaluation of Performance: The financial executive may be required to evaluate and interpretthe financial statements, financial position and operations of the company. For this purpose, he may berequired to ensure that proper books and records are maintained in proper way so that whatever data isrequired for this purpose is available in time. For the evaluation and interpretation of the finanacialstatements, financial executive may use the techniques like ratio analysis, funds flow statements etc.

8 Basic Financial Management

(g) Corporate Taxation: As the company is a separate legal entity, it is subjected to the variousdirect and indirect taxes like income tax, wealth tax, excise and customs duty, sales tax etc. The financeexecutive may be expected to deal with the various tax planning and tax saving devices in order tominimise the tax liability.

(h) Other Duties: In addition to all the above duties, the financial executive may be required toprepare annual accounts, prepare and present financial reports to top management, carrying out internalaudit, get done statutory and tax audit, safeguarding securities and assets of company by properlyinsuring them etc.

Non-recurring DutiesThe non-recurring duties of the finance executive may involve preparation of financial plan at the

time of company promotion, financial readjustments in times of liquidity crisis, valuation of the enterpriseat the time of acquisition and merger thereof etc.

FIELDS OF FINANCEThere can be various fields in which the finance function may operate. In each field, finance

executive deals with the management of money and claims against money. The distinctions arise due tovariety of problems and variety of objects. The various fields of finance can be stated as below.

(1) Business Finance: The term business and hence business finance is a very broad term. Itcovers all the activities carried on with the intention of earning profits. Thus, business finance coversthe study of finance function in the area of business which includes both trade as well as industry.

(2) Corporation Finance: Corporation Finance is a part of business finance and deals with thefinancial practices, policies and problems of corporate enterprises or companies to describe in simplewords. The corporation finance studies the financial operations carried on by a coporate enterprise fromthe stage of its inception to the stage of its growth and expansion.

(3) International Finance: Interntional Finance is the study of flow of funds between invididualsand organisations beyond national boundaries and developing the methods to handle these funds moreeffectively. This study may become crucial as it involves exchange of currencies, and also as thegovernments of either of the nations may have close watch and control on these transactions involvingforeign currencies.

(4) Public Finance: It deals with the financial matters of the Governments. It becomes crucial asthe Governments deal with huge sums of money which can be raised through the sources like taxes orother methods and are required to be utilised within the statutory and other limitations. Further, theGovernments don�t operate with the objectives similar to that of the private organisation, i.e., earningthe profits is not the intention with which the Governments operate, but they operate with the intentionof accomplishing social or economic objectives.

(5) Private Finance: It deals with the financial matters of non-government organisations.

Finance Function in Relation with Other FunctionsOther than finance, every business generally operates in these main functional areas viz. Production,

Marketing and Personnel. All these functions are closely related to finance function due to the simplestreason that for executing these functions, funds are required which is the area covered by financefunction.

Introduction 9

For example to produce good quality of finished goods, the business needs good infrastucturalfacilities like building, machineries etc. A regular flow of production requires facilities like quality rawmaterial, work in progress, consumable stores, quality control equipment, good maintenance facilitiesetc. All these activities need the investment to be made either in terms of fixed capital and/or workingcapital which is the area of finance function. To market the finished goods and guarantee regular flow ofgoods in the market, it may be rquired to have good distribution systems which may call for investmentin terms of fixed assets or labour force. All these activities need the investments to be made either interms of fixed capital and/or working capital which is the area of finance function. The Personnelfunction deals with the availability of proper kinds of labourers at proper time, training them properlyand fixing their job responsibilities. All these activities needs funds, e.g., to pay salaries, wages and otherfacilities to workers, funds are needed. To provide training facilities to workers, it may be necessary toinvest in some fixed assets like building or equipment etc.

To conclude, it may be stated that all the functions or activities of the business are ultimatelyrelated to finance. The success of the business depends on how best all these functions can be coordinated.

QUESTIONS

1. Describe the scope and importance of the finance function in the management of a corporation.2. Explain the meaning, nature and scope of Finance Function.3. Explain the organisational framework of finance function. State the relation of finance to

other functions of a business enterprise.4. What are the duties discharged by the financial executive in a large business organisation.5. (a) Explain the traditional and modern concept of finance function.

(b) State the relation of finance function to other functions of a business enterprise.6. Define business finance. Distinguish between private finance and public finance. How the

finance discipline has changed during the past few decades?7. Write short notes:

(a) Modern concept of business finance.(b) Structure of finance department.

!!!