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FINANCIAL MANAGEMENT – INTRODUCTION

Financial management means procurement of funds at minimum costs and effective utilization in order
to maximize the wealth of shareholders. The term of financial management refers to its relationship
with the closely-related fields of economics and accounting, its functions, scope and objectives. Financial
management, as an academic discipline, has undergone fundamental changes in its scope and coverage.
In the early years of its evolution it was treated synonymously with the raising of funds. In the current
literature pertaining to financial management, a broader scope so as to include, in addition to
procurement of funds, efficient use of resources is universally recognized.

Financial management, as an integral part of overall management, is not a totally, independent area. It
draws heavily on related disciplines and fields of study, such as economics, accounting, marketing,
production and quantitative methods. A part from economics and accounting, finance also draws for its
key day to day decisions on supportive disciplines such as marketing, production and quantitative
methods, for instance, financial managers should consider the impact of new product development and
promotion plans made in the marketing area since their plans will require capital outlays and have an
impact on the projected cash flows. Finally, the tools of analysis developed in the quantitative methods
area are helpful in analyzing complex financial management problem. Organization makes their planning
for the financial sources which are very helpful in the future course of action. Taking a commercial
business as the most common organizational structure, the key objectives of financial management
would be to:

i) Create wealth for the business


ii) Generate cash, and
iii) Provide an adequate return on investment bearing in mind the risks that the business is taking
and the resources invested.

WORKING CAPITAL INTRODUCTION

In simple terms, working capital means the amount of funds that a company require for its day-to-day
operations. Working capital management involves managing the relationship between a firm's short-
term assets and its short-term liabilities. The goal of working capital management is to ensure that the
firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-
term debt and upcoming operational expenses.

Every business whether big, medium or small, needs finance to carry on its operations and to achieve its
target. In fact, finance is so indispensable today that it is rightly said to be the lifeblood of an enterprise.
Without adequate finance, no enterprise can possibly accomplish its objectives. So this chapter deals
with studying various aspects of working capital management that is necessary to carry out the day-to-
day operations. The term working capital refers to that part of firm’s capital which is required for
financing short term or current assets such as cash, marketable securities, debtors and inventories funds
invested in current assets keep revolving fast and are being constantly converted in to cash and this cash
flows out again in exchange for other current assets. Hence it is known as revolving or circulating capital.

On the whole, Working Capital Management performs a key function and is of top priority for every
finance manager. All managers must, however, keep in mind that for their pursuit to liquidity, they
should not lose sight of their basic goal of profitability. They should be able to attain a judicious mix of
liquidity and profitability while managing their working capital. Working capital management deals with
the most dynamic fields in finance, which needs constant interaction between finance and other
functional managers. The finance manager acting alone cannot improve the working capital situation. In
recent times a few case studies regarding management of working capital in selected companies have
been in order to make in-depth analysis of the several experts of working capital management. The
finding of such studies not only throws new lights on the technical loopholes of management activities
of the concerned companies, but also helps the scholars and researchers to develop new ideas
techniques and methods for effective management of working capital.

Working Capital Management

Decisions relating to working capital and short term financing are referred to as working capital
management. These involve managing the relationship between a firm's short-term assets and its short-
term liabilities. The goal of working capital management is to ensure that the firm is able to continue its
operations and that it has sufficient cash flow to satisfy both maturing short- term debt and upcoming
operational expenses.

The following should be effective in working capital management:

Cash management: Identify the cash balance which allows for the business to meet day to day
expenses, but reduces cash holding costs.

Inventory management: Identify the level of inventory which allows for uninterrupted production but
reduces the investment in raw materials and minimizes reordering costs and hence increases cash flow.
Besides this, the lead times in production should be lowered to reduce Work in Process and similarly,
the Finished Goods should be kept on as low level as possible to avoid over production.

Debtor’s management: Identify the appropriate credit policy, i.e. credit terms, discounts etc. which will
attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by
increased revenue and hence Return on Capital.

IMPORTANCE

Proper management of working capital is very important for the success of an enterprise. “It aims at
protecting the purchasing power of assets and maximizing the return on Investment. Constant
management is required to maintain appropriate levels in the various working capital accounts. The
current assets and current liabilities flow round in a business like an electric current. The working capital
plays the same role in the business as the role of the heart in the human body. Just as the heart gets
blood and circulated the same in the body, in the same enterprise, adequate amount of working capital
is pre-requisite. The adequacy of cash and current assets together with their efficient handing virtually
determine the survival or demise of a business. Inadequate working capital is a business ailment as
compared to the availability of excess working capital may lead carelessness. About costs and therefore,
to inefficiency of operations. Many a times business failure takes place due to lack of working capital. If
a concern maintains an adequate amount of working capital, it enjoys a good credit rating and gets
discount on payment. It will ensure proper functioning of the business operations and help in the
maximization of threat of return. Adequate working capital helps in maintaining solvency of the business
by providing uninterrupted flow of production. Quick payment of credit purchase of raw materials
ensures the regular supply of raw materials from suppliers. Suppliers are satisfied by the payment on
time. It ensures regular supply of raw materials and continuous production. A firm having adequate
working capital, high solvency and good credit rating can arrange loans from banks and financial
institutions in easy and favorable terms.

Working capital management at ……………………..

A study of working capital is of major importance to internal and external analysis because of its close
relationship to current day-to-day operations of business, Inadequacy or mismanagement of working
capital is the leading cause of business failures.

……………………………………………………

FINANCIAL ANALYSIS:

Financial analysis (also referred to as financial statement analysis or accounting analysis or Analysis of
finance) refers to an assessment of the viability, stability and profitability of a business, sub-business or
project. It is performed by professionals who prepare reports using ratios that make use of information
taken from financial statements and other reports. These reports are usually presented to top
management as one of their bases in making business decisions. Financial analysis may determine if a
business will:

i) Continue or discontinue its main operation or part of its business;


ii) Make or purchase certain materials in the manufacture of its product;
iii) Acquire or rent/lease certain machineries and equipment in the production of its goods;
iv) Issue stocks or negotiate for a bank loan to increase its working capital;
v) Make decisions regarding investing or lending capital;
vi) Make other decisions that allow management to make an informed selection on various
alternatives in the conduct of its business.
Goals:

Financial analysts often assess the following elements of a firm:

1) Profitability - its ability to earn income and sustain growth in both the short- and long-term. A
company's degree of profitability is usually based on the income statement, which reports on
the company's results of operations;
2) Solvency - its ability to pay its obligation to creditors and other third parties in the long-term;
3) Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations; Both
solvency and liquidity are based on the company's balance sheet, which indicates the financial
condition of a business as of a given point in time.
4) Stability - the firm's ability to remain in business in the long run, without having to sustain
significant losses in the conduct of its business. Assessing a company's stability requires the use
of the income statement and the balance sheet, as well as other financial and non-financial
indicators. etc.

Further,

Method: Financial analysts often compare financial ratios (of solvency, profitability, growth, etc.),
through:

1) Past Performance - Across historical time periods for the same firm , for example: the last 5
years
2) Future Performance - Using historical figures and certain mathematical and statistical
techniques, including present and future values, this extrapolation method is the main source of
errors in financial analysis as past statistics can be poor predictors of future prospects.
3) Comparative Performance - Comparison between similar firms. These ratios are calculated by
dividing account balance, taken from the balance sheet and/or the income statement, by
another, for example: Net income / equity = return on equity (ROE) Net income / total assets =
return on assets (ROA)

Financial ratios face several theoretical challenges:

i) They say little about the firm's prospects in an absolute sense. Their insights about relative
performance require a reference point from other time periods or similar firms.
ii) One ratio holds little meaning. As indicators, ratios can be logically interpreted in at least
two ways. One can partially overcome this problem by combining several related ratios to
paint a more comprehensive picture of the firm's performance.
iii) Seasonal factors may prevent yearend values from being representative. A ratio's values
may be distorted as account balances change from the beginning to the end of an
accounting period. Use average values for such accounts whenever possible.
iv) Financial ratios are no more objective than the accounting methods employed. Changes in
accounting policies or choices can yield drastically different ratio values.
RATIO ANALYSIS:

Ratio analysis is the process of determining and interpreting numerical relationships based on financial
statements. A ratio is a statistical yardstick that provides a measure of the relationship between two
variables or figures. A ratio analysis is a quantitative analysis of information contained in a company’s
financial statements. Ratio analysis is based on line items in financial statements like the balance sheet,
income statement and cash flow statement; the ratios of one item or a combination of items to another
item or combination are then calculated. Ratio analysis is used to evaluate various aspects of a
company’s operating and financial performance such as its efficiency, liquidity, profitability and
solvency. The trend of these ratios over time is studied to check whether they are improving or
deteriorating. Ratios are also compared across different companies in the same sector to see how they
stack up, and to get an idea of comparative valuations. Ratio analysis is a cornerstone of fundamental
analysis.

Objectives of Ratio Analysis:

Financial ratios are true test of the profitability, efficiency and financial soundness of the firm. These
ratios have following objectives:

(1) Measuring the profitability: Profitability is the profit earning capacity of the business. This can be
measured by Gross Profit, Net Profit, Expenses and Other Ratios. If these ratios fall we can take
corrective measures.

(2) Determining operational efficiency: Operational efficiency of the business can be determined by
calculating operating / activity ratios.

(3) Measuring financial position: Short-term and long-term financial position of the business can be
measured by calculating liquidity and solvency ratios. In case of unhealthy short or long-term position,
corrective measures can be taken.

(4) Facilitating comparative analysis: Present performance can be compared with past performance to
discover the plus and minus points. Comparison with the performance of other competitive firms can
also be made.

(5) Indicating overall efficiency: Profit and Loss Account shows the amount of net profit and Balance
Sheet shows the amount of various assets, liabilities and capital. But the profitability can be known by
calculating the financial ratios.

(6) Budgeting and forecasting: Ratio analysis is of much help in financial forecasting and planning. Ratios
calculated for a number of years work as a guide for the future. Meaningful conclusions can be drawn
for future from these ratios.

Limitations:
The following are the limitations of ratio analysis:

1. It is always a challenging job to find an adequate standard. The conclusions drawn from the ratios can
be no better than the standards against which they are compared.

2. When the two companies are of substantially different size, age and diversified products, comparison
between them will be more difficult.

3. A change in price level can seriously affect the validity of comparisons of ratios computed for different
time periods and particularly in case of ratios whose numerator and denominator are expressed in
different kinds of rupees.

4. Comparisons are also made difficult due to differences of the terms like gross profit, operating profit,
net profit etc.

5. If companies resort to ‘window dressing’, outsiders cannot look into the facts and affect the validity of
comparison.

6. Financial statements are based upon part performance and part events which can only be guides to
the extent they can reasonably be considered as dues to the future.

7. Ratios do not provide a definite answer to financial problems. There is always the question of
judgment as to what significance should be given to the figures. Thus, one must rely upon one’s own
good sense in selecting and evaluating the ratios.

INTRODUCTION OF IDEA CELLULAR LIMITED

Idea Cellular is an Aditya Birla Group Company, India's first truly multinational corporation. Idea is a pan-
India integrated GSM operator offering 2G and 3G services, and has its own NLD and ILD operations, and
ISP license. With revenue of Rs. 31,571crore; revenue market share of nearly 17.5 per cent; and
subscriber base of over 161 million in FY 2013, Idea is India’s third largest mobile operator. Idea ranks
among the top 10 country operators in the world with a traffic of over 1.5 billion minutes a day. Idea’s
robust pan-India coverage is built on a network of over 100,000 2G and 3G cell sites, spread across over
55,000 towns in India. Using the latest in technology, Idea provides world-class service delivery through
the most extensive network of customer touch points, comprising nearly 4,500 exclusive Idea outlets,
and over 7,000 call centre seats. Idea’s customer service delivery platform is ISO 9001:2008 certified,
making it the only operator in the country to have this standard certification for all 22 service areas and
the corporate office.

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