Basic Financial Management Dr. Satish M. Inamdar M.Com., LL.B., Ph.D., F.C.A., A.I.C.W.A., A.C.S. FOURTH REVISED EDITION: 2017 ISO 9001:2008 CERTIFIED
Author No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the publisher. First Edition : 2009 Second Edition : 2011 Third Edition : 2013 Fourth 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: 022-23877178 E-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.
PREFACE TO THE FOUR OURTH REVISED EDITION I am pleased to present the revised edition of Basic Financial Management to the readers. The response for the first edition was stupendous. Last two decades have witnessed quite a few cases of frauds and failures in the Indian context. Readers on finance will be interested in knowing about the background of these cases 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 which have now been rectified in this edition. I expect the same for this revised edition also. Dr. Satish M. Inamdar
PREFACE Finance is undoubtedly the most basic and most important function in any business activity. The success of business depends upon the success of finance function. From academic point of view, finance is the most technical subject, having a very wide scope and having constantly changing rules and regulations. As such, a normal student attempts to keep himself away from the subject and this aggravates the problems for him. One cannot afford to ignore the subject of finance. The ultimate evaluation of any business activity is the 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 hardships involved in the process. My objective of writing this book is to introduce the basic concepts of finance to a nonfinance student in the simplest possible language. As such, I have deliberately avoided too much 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 are remaining, they are mine alone. I will be grateful to the readers if such errors or omissions can be pointed out and intimated so that necessary modifications can be done in the subsequent editions. Dr. Satish M. Inamdar
CONTENTS Chapter 1: INTRODUCTION 1 9 The Concept and Importance Approaches to the Term Finance Scope of Finance Function Financing Decisions Investment Decisions Dividend Policy Decisions Goals/Objects of Finance Function Wealth Maximisation Organisation of Finance Function Duties and Responsibilities of Finance Executive Recurring Duties Non-recurring Duties Fields of Finance Finance Function in Relation with Other Functions Chapter 2: Forms of Business Organisation 10 16 Proprietary Firms Joint Stock Companies Types of Companies Private Limited Company Public Limited Company Chapter 3: Financial Statements 17 36 Nature of Financial Statements Basic Principles behind the Preparation of Financial Statements Basic Concepts in Accounting Structure of Financial Statements Part I: Structure of Balance Sheet Liabilities Side Reserves and Surplus Secured Loans Unsecured Loans
Current Liabilities and Provisions Asset Side Current Assets, Loans and Advances Miscellaneous Expenditure Contingent Liabilities Part II: Structure of Profitability Statement Role Played by Financial Statements Limitations of Financial Statements Analysis and Interpretation of Financial Statements Types of Analysis Techniques of Analysis and Interpretation Chapter 4: Ratio Analysis 37 112 Introduction Role of Ratio Analysis Classification of Ratio Limitations of Ratio Analysis Chapter 5: Funds Flow/Cash Flow Statement 113 162 Introduction Uses/Advantages Construction of Funds Flow Statement Treatment of Special Items Cash Flow Statement Chapter 6: Financial Plan and Capitalisation 163 174 Part I: Financial Plan Importance Steps in Financial Planning Principles for Formulating Financial Plan Limitations of Financial Plan Part II: Capitalisation Theories of Capitalisation Undercapitalisation Remedies Available Overcapitalisation vs. Undercapitalisation Watered Capital vs. Overcapitalisation
Chapter 7: Sources of Long-term and Medium-term Finance 175 200 Shares Equity Shares Preference Shares Debentures Features of Debentures Amortisation of Debentures and Working Capital Protection of Interests of Debentureholders Term Loans Lease Financing Hire Purchasing Hire Purchasing vs. Leasing Accounting for Leasing and Hire Purchase Public Deposits Retained Earnings Credit Rating Chapter 8: Capital Structure 201 240 Part I: Capital Structure Goals/Principles of Capital Structure Management Factors Affecting Capital Structure Part II: Cost of Capital Part III: Trading on Equity, Capital Gearing and Leverages Trading on Equity Capital Gearing Leverages Part IV: Theories of Capital Structure Capital Structure and Cost of Capital Chapter 9: Working Capital Management 241 283 Concepts of Working Capital Need for Working Capital Theory of Working Capital Management Factors Affecting Working Capital Requirement Effect of Inflation on Working Capital Requirements Estimation of Working Capital Requirements
Financing the Working Capital Requirements Bank Credit as a Source of Meeting Working Capital Requirements Commercial Papers (CP) Control over Working Capital Action Taken by RBI Chapter 10: Management of Inventory 284 309 Motives for Holding Inventory Objects of Inventory Management Techniques of Inventory Management Chapter 11: Management of Receivables 310 329 Objective of Receivables Management Areas Covered by Receivables Management Credit Analysis Credit Terms Credit Collection Financing the Receivables Factoring vs. Bills Discounting Types of Factoring Monitoring the Receivables Chapter 12: Management of Cash 330 352 Motives for Holding Cash Estimating the Cash Requirements Principles of Cash Management Concept of FLOAT Chapter 13: Capital Budgeting 353 407 Importance of Capital Budgeting Process of Capital Budgeting Evaluation of the Projects Time Value of Money Present Value Tables Present Value of Series of Cash Flows
Techniques for Evaluation of Capital Expenditure Proposals Final Choice of Evaluation Method Limitations of Capital Budgeting Evaluation Criteria in Certain Typical Situations Part A: Calculation of Cash Outflow Part B: Calculation of Cash Outflow will Remain the Same Planning, Organisation and Control of Capital Expenditure Illustrative Problems Chapter 14: Management of Earnings 408 423 Part I: Dividend Policy Factors Determining Dividend Policy Choosing the Dividend Policy Forms of Dividend Payment Part II: Retained Earnings Factors Affecting Retained Earnings Kinds/Sources of Reserves and Surplus Appendix Cases of Financial Frauds and Failures Case 1 : CRB... 427 430 Case 2 : Dinesh Dalmia... 431 436 Case 3 : Global Trust Bank (GTB)... 437 441 Case 4 : Harshad Mehta... 442 447 Case 5 : Home Trade... 448 452 Case 6 : IPO Scam... 453 462 Case 7 : Ketan Parekh... 463 471 Case 8 : Unit Trust of India (UTI) and US-64... 472 478 Case 9 : Satyam Computer Services Limited... 479 497 Case 10 : Subhiksha Trading Services Limited... 498 502
Chapter 1 Intr troduction THE CONCEPT AND IMPORTANCE A 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 raw material, processing it by the use of labour force and other services, converting the raw material into the finished goods and selling the finished goods in order to generate the profits. Thus, production, marketing and finance are the key operational areas in case of any manufacturing activity out of which the finance is the most crucial area. It is so because the functions of production and marketing are also related to finance 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 many persons may be directly affected due to the success or failure of an organisation. E.g. : Owners (shareholders) Creditors Suppliers, Lenders of money/funds Employees Public at large As such an organisation has to be very careful while dealing with funds or money. Approaches to the Term Finance The 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 was used in the broad sense to include the whole gamut of raising the funds externally. This approach towards finance was criticised on various grounds.
2 Basic Financial Management (a) It is too narrow and restrictive in nature. Procurement of the funds is only one of the functions of finance and other functions are ignored by this approach. (b) It considers the financial problems only of corporate enterprises. In that sense, it ignores the financial problems of non-corporate entities like properietary concerns, partnership firms etc. (c) It considers only the basic and non-recurring problems relating to the business. Day-today 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 management was out of the purview of finance function. (2) The second approach holds that finance is concerned with cash. As all the transactions are ultimately expressed in terms of cash, the term finance will be concerned with every activity of the enterprise. Thus, according to this approach, the finance function is concerned with all the functional areas of the business, e.g., Production, Marketing, Purchasing, Personnel Administration, Research and Development and so on. Obviously, this approach is too broad to be meaningful. (3) The third approach which is more balanced one and hence the acceptable one to the modern scholars, interprets the term finance as being concerned with procurement of funds and wise application of funds. This approach is supposed to be the more acceptable as it gives equal weightage to both procurement of funds as well as utilisation of the funds. This approach is called 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 the finance 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 Function The 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 Decisions These 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 for manufacturing and selling the products in the market and earning the profits out of the same. Thus obtaining 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 by outside sources (Debt Capital) The financing decisions are basically concerned with the answers to the questions 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 Decisions The 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 be invested. 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 Capital Management. (i) Capital Budgeting: The investment decisions in this area are basically concerned with the answers to the questions like: (1) How assets or projects or proposals should be chosen to make the investments in? Are there any 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 under situation of risk and uncertainty? (ii) Working Capital Management: The investment decision in this areas are basically concerned with deciding the optimum extent to which the funds should be invested in current assets. If the company invests less amount in current assets it may loose the ability to meet the current obligations which are to be met with the help of current assets. It may also loose the capacity to carry on the business on a regular and smooth basis. If the company invests too much in current assets, it may adversely affect the profitability due to the costs of funds blocked in current assets. The decisions regarding working capital management attempt to ensure the balance between these two principles of liquidity on one hand and profitability on the another. Dividend Policy Decisions Whatever 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 are entitled to receive the profits in the form of the dividends. However, it is not necessary for the company to 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 be used for future purpose.
4 Basic Financial Management Goals/Objects of Finance Function Profit 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 function will also have the profits as the main objective. But this was only a tradintional belief. Now, profit cannot be the sole and only goal or objective of the finance function due to the following problems connected with this objective. (1) The term profit is a ambiguous concept which isn t having precise connotation, e.g., Profits can be long-term or short-term. Profits can be before tax or after tax and so on. If profit maximisation 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 necessarily involve more amount of risk. The owners of the business will not like to earn more and more profits by accepting more risk. If the profit maximisation is accepted as the goal of finance function, it totally ignores the risk factor. (3) Profit maximisation as the goal of financial function ignores the time pattern of returns. Consider the 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 treated on par. But it will not be proper as proposal A involves higher amount of returns in the earlier years, while proposal B involves the returns in the later years. It makes proposal A more profitable ultimately as the returns received earlier are more valuable than the returns received later. The objectives of profit maximisation doesn t differentiate between the returns received earlier and the returns received later. (4) Profit maximisation as the objective doesn t take into consideration the social considerations as well as the obligations to various interests of workers, customers, society etc. and the ethical trade practices. If these factors are ignored, the company can t survive for long. Profit maximisation 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 objective has to be one having more broad a base, which is more precise, which considers risk factor and time value of money and which give consideration to social and ethical elements also. The alternative is in the form of wealth maximisation as the objective of the finance function. Wealth Maximisation Due 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 also be 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 of undertaking it. The benefits can be measured in terms of stream of future expected cash flows, but they must 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 creates wealth or which has discounted stream of future benefits exceeding its cost, is desirable and should be accepted 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 due to 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 are more 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 the concept of risk also, by making necessary adjustments in discounting rate. As such, cash flows of a project involving higher risk are discounted at a higher discounting rate and vice versa. Thus, the discounting rate used to discount future cash flows reflects the concepts of both time and risk. Due to the above reasons, the wealth maximisation is considered to be superior to profit maximisation as an objective or goal of finance function. However, it should be noted that wealth maximisation goal is only an extension of profit maximisation goal. If the time period is too short and risk elements is minimum, both wealth maximisation and profit maximisation will mean the same thing. Organisation of Finance Function At 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 partners only 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 be handled 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 reports directly to the President and Board of Directors. Secondly, it should be noted that generally the organisation of finance is centralised one, unlike other businesss functions. Board of Directors takes the main financial decisions. Board of Directors may delegate the powers to the executive committee, comprising of managing director, other one or two directors 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 highly centralised function are very obvious.
6 Basic Financial Management (1) Financial decisions are the most crucial ones on which survival or failure on the organisation depends. (2) Financial decisions affects the solvency position of the organisation and a wrong decision in this area may land the organisation in to crisis. (3) The organisation may gain economies of centralisation in the form of reduced cost of raising the funds, acquisition of fixed assets at the competitive prices etc. Though there is no standard pattern for organisation of finance function, in general terms, the organisation 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 Executive On 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 in advance the quantum of funds required, their duration etc. The funds may be needed by the company for initial promotional expenditure, fixed capital, working capital or for dividend distribution. The finance executive should assess this need of funds properly. (b) Raising the Funds Required: The finance executive has to choose the sources of funds to fulfil financial needs. The sources may be in the form of issue of shares, debentures, borrowing from financial institutions or general public, lease financing etc. The finance executive has also to decide the proportion 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 in the form of shares or debentures, he has to arrange for the underwriting or listing of the same. If the company 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 can allocate the funds basically for two purposes. (i) Fixed Assets Management: He has to decide in which fixed assets the company should invest the funds. He has to ensure that the fixed assets acquired or to be acquired satisfy the present as well as future needs of the company. He has to ensure that the funds invested in the fixed assets justify the investments in terms of the expected cash flows generated by them in future. If there are more than one proposal for making in fixed assets, the finance executive has to decide in which proposal the company should invest the funds. For this purpose, he may be required to take the help of various techniques of capital budgeting to evaluate the various proposals, e.g., Pay Back Period, Net Present Value, Internal Rate of Return, Profitability Index etc. If the outright purchases of fixed assets is not useful, the finance executive may consider to take them on lease or on hire purchase. The finance executive has to ensure that in order to facilitate the replacement of fixed assets after their economic life is over, proper depreciation policies are formulated. The wrong policies in the area of providing for the depreciation may result into over-capitalisation or under-capitalisation. (ii) Working Capital Management: The finance executive has to ensure the sufficient funds are made 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 there is no blocking of funds in the current assets, as it may prove to be costly in terms of cost of these funds and also in terms of opportunity cost of their use. Thus, the finance manager has to ensure that investments in the current assets is minimum without affecting the operations of the company. (d) Allocation of Income: Allocation of the income of the company is the exclusive responsibility of the finance executive. For this purpose, basically the income may be distributed among the sharehlders by way of dividend or it may be retained in the business for future purpose like expansion. Decision in this regard may be taken in the light of financial position, present and future cash requirements, preferences of the shareholders etc. (e) Control of Funds: The finance executive is responsible to control the use of funds committed in the business so as to ensure that cash is flowing as per the plan and if there is any deviation between estimates and plans, proper corrective action may be taken in the light of financial position of the company. 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, expediate receipts and delay the payments wherever possible etc. (f) Evaluation of Performance: The financial executive may be required to evaluate and interpret the financial statements, financial position and operations of the company. For this purpose, he may be required to ensure that proper books and records are maintained in proper way so that whatever data is required for this purpose is available in time. For the evaluation and interpretation of the finanacial statements, 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 various direct and indirect taxes like income tax, wealth tax, excise and customs duty, sales tax etc. The finance executive may be expected to deal with the various tax planning and tax saving devices in order to minimise the tax liability. (h) Other Duties: In addition to all the above duties, the financial executive may be required to prepare annual accounts, prepare and present financial reports to top management, carrying out internal audit, get done statutory and tax audit, safeguarding securities and assets of company by properly insuring them etc. Non-recurring Duties The 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 enterprise at the time of acquisition and merger thereof etc. FIELDS OF FINANCE There 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 to variety 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. It covers all the activities carried on with the intention of earning profits. Thus, business finance covers the 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 the financial practices, policies and problems of corporate enterprises or companies to describe in simple words. The corporation finance studies the financial operations carried on by a coporate enterprise from the 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 invididuals and organisations beyond national boundaries and developing the methods to handle these funds more effectively. This study may become crucial as it involves exchange of currencies, and also as the governments of either of the nations may have close watch and control on these transactions involving foreign currencies. (4) Public Finance: It deals with the financial matters of the Governments. It becomes crucial as the Governments deal with huge sums of money which can be raised through the sources like taxes or other methods and are required to be utilised within the statutory and other limitations. Further, the Governments don t operate with the objectives similar to that of the private organisation, i.e., earning the profits is not the intention with which the Governments operate, but they operate with the intention of accomplishing social or economic objectives. (5) Private Finance: It deals with the financial matters of non-government organisations. Finance Function in Relation with Other Functions Other 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 simplest reason that for executing these functions, funds are required which is the area covered by finance function.
Introduction 9 For example to produce good quality of finished goods, the business needs good infrastuctural facilities like building, machineries etc. A regular flow of production requires facilities like quality raw material, work in progress, consumable stores, quality control equipment, good maintenance facilities etc. All these activities need the investment to be made either in terms of fixed capital and/or working capital which is the area of finance function. To market the finished goods and guarantee regular flow of goods in the market, it may be rquired to have good distribution systems which may call for investment in terms of fixed assets or labour force. All these activities need the investments to be made either in terms of fixed capital and/or working capital which is the area of finance function. The Personnel function deals with the availability of proper kinds of labourers at proper time, training them properly and fixing their job responsibilities. All these activities needs funds, e.g., to pay salaries, wages and other facilities to workers, funds are needed. To provide training facilities to workers, it may be necessary to invest 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 ultimately related 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.!!!