Page 16 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 1: Introduction to Financial Management

Existing managements may lose control in the eventuality of being unable to take up the Notes
share entitlements. Financial strategies to prevent this are vital to the present management.

1.4.1 Methods and Tools of Financial Management

1. In the area of financing, funds are procured from long-term sources as well as short-term
sources. Long-term funds may be made available by owners, i.e., shareholders, lenders
through issue of debentures/bonds, from financial institutions, banks and public at large.
Short-term funds may be procured from commercial banks, suppliers of goods, public
deposits etc. The finance manager has to decide on optimum capital structure with a view
to maximize shareholder's wealth. Financial leverage or trading on equity is an important
method by which return to shareholders can be increased.
2. For evaluating capital expenditure (investment) decisions, a finance manager uses various
methods such as average rate of return, payback, internal rate of return, net present value
and profitability index.

3. In the area of working capital management, there are various methods for efficient
utilization of current resources at the disposal of the firm, thus increasing profitability.
The centralized method of cash management is considered a better method of managing
liquid resources of the firm.

4. In the area of dividend decision, a firm is faced with the problem of declaring dividend or
postponing dividend declaration, a problem of internal financing. There are tools to
tackle such situation.
5. For the evaluation of a firm's performance, there are different methods.

Example: Ratio analysis is a popular technique to evaluate different aspects of a firm.
6. The main concern of the finance manager is to provide adequate funds from the best
possible source, at the right time and the minimum cost and to ensure that the funds so
acquired are put to best possible use through various methods/techniques are used to
determine that funds have been procured from the best possible available services and the
funds have been used in the best possible way. Funds flow and cash flow statements and
projected financial statements help a lot in this regard.

Task Which of the following statements do you agree with?
(a) Financial management is essential only in private sector enterprises.

(b) Only capitalists have to bother about money. The bureaucrat is to administer and
not to manage funds.

(c) The public administrators in our country must be given a basic understanding of
essentials of finance.
(d) A state-owned transport company must immediately deposit in the bank all its
takings.
(e) "Financial Management is counting pennies. We do not believe in such miserly
attitude".

LOVELY PROFESSIONAL UNIVERSITY 11