Financial

1. Financial Management

2. Objective • Explain what is Financial Management • Explain what are Financial Statements • Describe the various Sources of Finance –Long Term Sources and Short Term Sources • Explain Leverages • Describe the Types of Leverages • Explain the Types of Shares • Explain Terms related to Financial Markets • Explain what is Accounting • Explain what is Budget

3. Introduction Look at the newspaper clipping to see what is making headlines today.

4. Introduction Look at the newspaper clipping to see what is making headlines today. What do you think is the primary motive of any business? What can help in the smooth and proper functioning of any business? So, what do you think helped Helios Inc. decide the value of Jupiter Software? • The answer to the above questions lies in the financial position and proper financial management of a business. • Let us now learn about financial management in detail.

5. What is Financial Management? Financial management is concerned with the acquisition, financing, and management of assets with some overall goal in mind. It is the art and science of managing money. Financial management is the most essential requirement of any organized business or activity. It is the process of procuring and judicious use of resources with a view to maximize the value of the firm. Financial management is interdependent with other areas of management.

6. Importance of Financial Statements Provides arithmetical accuracy to the future plans Better awareness about the present position of business Guides the future course of action for businesses To understand the future of a business Requirements of lenders To exercise control

7. Parties Interested in Financial Statements Management Creditors Stock Holders General Public Chamber of Commerce Government Employees Banks

8. Equity Capital An Equity Share means a share of unit value in the Share Capital of a Company. Shareholders are theoretically owners of the company, and receive return on investment in the form of dividend which is decided by the board of directors, who themselves are usually major shareholders. It is a permanent source of capital except in the case of buyback. Payment of dividend is not compulsory, hence the company may choose to retain and plough back earnings if they are required. Equity Capital Self-Financing Equity Capital Deep Discount Bond Debentures Preference Shares

9. Degree of Operating Leverage: (DOL) By using fixed operating cost, a small change in sales revenue that magnified into a larger change in operating income/EBIT. Operating leverage involves using a large proportion of fixed costs to variable costs in the operations of the firm. The higher the degree of operating leverage the more volatile the EBIT figure will be relative to a given change in sales, all other things remaining the same. It may be determined by the relationship between sales revenue & EBIT. Percentage change in EBIT DOL= ------------------------------------ Percentage change in Sales (Small changes in Sales , Large change in EPS) Sales---Variable Cost DOL=------------------------------------------------- EBIT where, EBIT=Sales-VC-FC IF DOL=2, then a 1% increase in sales will result in a 2 % increase in operating income.

10. Differences between DOL and DFL • Objective 1 Degree of Operating Leverage (DOL) • Stage 2 1st stage leverage 3 Degree of Financial Leverage(DFL) 4 2nd stage leverage 5 6

11. Risk involved in Leverage • Operating Leverage • Financial Leverage Risk Involved in Leverage Affects a firm’s business risk Affects a firm’s financial risk Business Risk: The variability or uncertainty of a firm’s operating income (EBIT). Financial Risk: The variability or uncertainty of a firm’s earnings per share(EPS) and the increased probability of insolvency that arises when a firm uses financial leverage • Example: • Sales volume variability • Competition • Growth / Growth Prospects • Product Diversification • Operating Leverage • Size

12. Features of Equity Shares Owners of the company Right to vote No fixed rate of dividend Risk bearing capital

13. Advantages of Equity Shares • • To the Issuing Company To the Shareholders • Highly profitable shares • Owners of the company • Limited liability • Permanent source of capital • No fixed dividend • Creditworthiness of the company

14. Legal Forms of Business Corporation Limited Liability Company (LLC) A business owned by a single individual. The owner maintains title to the firm’s assets. Owner has unlimited liability. Partnership Sole Proprietorship

15. Government Corporation and Financial Markets Cash Securities Reinvest Corporation Investors CashflowDividends, etc Tax

16. Required Documents Balance Sheet/Statement of Financial Position: This document is filled out at the end of each period and lists the organization’s assets (current, fixed, and net) and liabilities (current and long-term). Income Statement/Statement of Activities: This is a report of the organization’s revenues, expenses, and change in net assets over a fiscal year. It will denote whether the organization realized a profit or incurred a loss for the period. Statement of Cash Flows: This report is usually prepared by an auditor at the request of the organization. It provides information on the flow of cash in and out of the organization. Other documents as required by state: This can be better understood by consulting a Certified Public Accountant or tax advisor.

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