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Unit 1: Introduction to Financial Management




                 to maximize shareholder’s wealth. Financial leverage or trading on equity is an important  Notes
                 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?

              1.   Financial management is essential only in private sector enterprises.
              2.   Only capitalists have to bother about money. The bureaucrat is to administer and
                   not to manage funds.

              3.   The public administrators in our country must be given a basic understanding of
                   essentials of finance.
              4.   A state-owned transport company must  immediately deposit  in the  bank all  its
                   takings.
              5.   “Financial Management is counting pennies.  We do not believe  in such miserly
                   attitude”.

            1.4.2  Forms of Business Organization

            The three most common forms of business organization are sole proprietorship, partnership
            and  the  company.  Other  specialized  forms  of  business  organizations  also  exist.  Sole
            proprietorship is the most in terms of total receipts and  in net profits the corporate form of
            business dominates.

            Sole Proprietorship

            A sole proprietorship is a business owned by one person who runs for his own profit. Majority
            of the business firms are sole proprietorships. The typical sole proprietorship is a small business




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