LITERATURE REVIEW

Financial management Financial management deals with planning and control of financial operations to corporate enterprise. Also deals with the procurement pf funds and their effective utilization. Financial Management is a subject which deals with the tools and techniques through which a companys balance sheet is constructed. It offers to the executives in building item in liabilities and assets side of a balance sheet. It clearly guides the financial manager to select long term as well as short term funds and its allocation to capital and revenue expenditure hence ultimately it is used as a communication tool to convince the investors about the performance of a corporate entity. Definition Financial Management may be defined as that area or set of administrative functions in an organization which, relates arrangement of cash and credit so that the organization may have the means to carry out its objective as satisfactorily as possible. OBJECTIVE OF FINANCIAL MANAGEMENT: Financial management evaluates how funds are used. In all cases, it involves a sounds judgment. With logical approach of decision-making. The core of financial policy is to maximize earnings in the long run and optimize them in short run this calla or an evaluation of alternative of funds are allocation for business functions. Specific objective

Profit maximization:

Earning profit by a corporate or a company is a social obligation. Profit is only means through which an efficiency of organization can be measured. As the business units are exploiting the resources of the country namely, land, labour, capital and resources has an obligation to make use of these resources to achieve profits. It is an economic obligation to cover the cost of funds and offer surplus funds to expansion and growth.

Wealth Maximization:

The concept of wealth Maximization refers to the gradual growth of the value of the assets of the firm in terms of benefits it can products. Any financial action can be judged in terms of the benefits it produces less cost of action. The wealth maximization attained by a company is

reflected in the market value of share. In other words, it is nothing but the process of creating wealth of an organization. This maximizes the wealth of shareholder. Other objective

Balanced assets structure:

The subject of financial management must have goal of maintaining balanced assets structure of company. The sizes of fixed assets are to be decided scientifically. The size of current assets must permit the company to exploit the investments on fixed assets. Therefore balance between fixed assets have to be maintained.

Liquidity

The liquidity objective of a company will exploit the long-term vision of a company. If a firm is liquid, it is an indication of positive growth. The application of management of cash flow yielded in increasing the companys capacity to meet short-term as well as long-term obligation of the company.

Judicious Planning of Funds

The concept of wealth or profit maximization is achieved only when a company reduces its cost. Cost here not only refers to the overall cost of operations but also the cost of funds. The weighted average cost of different sources of funds must be minimum. With the proper blend of debt of equity mix, short term or current liability are to planned consciously so that the cost incurred on this should not become a burden to the organization.

Efficiency

Innovative or Perish is the slogan of this century. If a company is innovative/efficient, it can be run successfully in its future periods. The threat of competition alarmed the businessman to be made creative and efficient. Hence it is the obligation of a finance manager to be vigilant in increase the efficiency level of a company.

Financial Discipline:

As in the recent past, country has witnessed different types of scandals, corporate financial indiscipline, misuse of funds. Hence it has become an obligation responsibility of a company to have finance discipline through various technique of financial management viz., capital budgeting fund flow and cash flow statement, performance budgeting, etc.

Financial decisions: Investment decision Financing decision Dividend decision Liquidity decision (working capital management) Investment decision: Investment decisions are referred to the activity of deciding the pattern of investment, both short-term as well as long-term investment, in other words capital assets and current liabilities. It has to show how the funds can be invested in assets would yield maximum return to the business concern. Financing decision: It is another important decision where a business concern has to take maximum care in financing different proposals. The appropriate mix of finance with debt to equity directly contributes to the profitability of a business unit. The instruments that are to be selected must aim at maximizing the returns the investor and to protect the interest creditors. Dividend decision: The ultimate objective of a business concern is to fulfill the desires of equity shares namely, high percentage of dividend , maximum returns to shareholders in the form of capital gain, cash dividend to be paid to the shareholders etc. Hence a sound decision on dividend is been take.

Working capital Working capital may be regarded as lifeblood of a business. Its effective provision can do much to ensure the success of a business, while its inefficient management can lead not only to loss of profit but also to the ultimate downfall of a promising concern. It represents the total of all currents assets. In other words, it is gross working capital it is also known as circulating capital or current capital, for current assets is rotating in their nature. A study of working capital is of major importance to internal and external analysis because of its close relationship with the current day-to-day operations of a business.

Definition In accounting, working capital is the difference between the inflow and outflow of funds. In others words, it is the net cash inflow. It is defined as the excess of current assets over current liabilities and provision. CONCEPT OF WORKING CAPITAL: There are two types of working capital, they are 1) Gross working capital 2) Net working capital 1) GROSS WORKING CAPITAL Gross working capital is the amount of fund invested in various components of current assets. The concept has the following advantages: a) Financial manager are profoundly concerned with current assets b) It enables a firm to realized the greatest return on its investment c) Helps in the fixation of various areas of financial responsibility d) Enables a firm to plan and control funds and to maximize the return on investment. 2) NET WORKIN CAPITAL Net working capital is the difference between current assets and current liabilities. The concept of net working capital enables a firm to determine how much amount is left for operational requirement. Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds, it is an indication of financial soundness of a company. THE NEED OR OBJECTIVE OF WORKING CAPITAL The need for working capital to run a day business activities cannot be over emphasized. We will hardly find a business firm, which doesnt require any amount of working capital , indeed; firm differ in their requirements of the working capital. We know that a firm should aim at maximizing the wealth of its shareholders. In its endeavor to do so, a firm should earn sufficient return from its operation. Earning a study amount of profit require successful sale activity. The firm has to invest enough funds in current assets for cash instantaneously. There is always an operation cycle involves in the conversion of sales into cash.

The various need of working capital is as follows: 1) To pay wages and salaries 2) It helps to purchase of raw-material, components and spares. 3) It helps to incur day to day expenses and overhead costs such as fuel, power and office expenses etc. 4) It also helps to meet the selling cost as packing, advertising etc. 5) It provides credit facilities to the customers. 6) It helps to maintain the inventories of raw-material, work in-progress, stores and spares and finished stock. ADEQUACY, INADEQUACY AND EXCESSIVE WORKING CAPITAL Adequacy of working capital Working capital should be adequate for the following reasons:

It protects a business from the adverse effect of shrinkage in the value of current assets. Possible to pay the entire current obligation promptly and take advantage of cash discount. Permits the carrying of inventories at a level that would enable a business to serve satisfactorily the need of its customers. Enables a company to operate its business more efficiently because there is no delay in obtaining materials etc. because of credit difficulties. Inadequate working capital

The credit worthiness of the company is likely to be put at risk because of the lake of liquidity. The company may not be able to take advantage of profitability business opportunity. The modernization of equipment and even routine repairs and maintenance facilities may be difficult to administer. The company cannot afford to increase its cash sales and many have to restrict its activities to credit sales only The company cannot afford to increase its cash sales and many have to restrict its activity to credit sales only.

Excessive working capital Excessive working capital raises to following problems..

High liquidity may induce a company to undertaken greater production which may not have a matching demand. It may find itself in an embarrassing position unless its marketing policies are properly adjusted to boost up the market for its good.

The company may invest heavily in its fixed equipment which may be justified by actual sales or production. This may provide a fertile ground for later overcapitalization. The company may enjoy high liquidity and at the same time, suffer from low profitability. The company may be tempted to overtrade and lose heavily. The company keep very big inventories and tip up its funds unnecessarily. KINDS OF WORKING CAPITAL: Working capital can be divided into two kinds:

Permanent or fixed working capital

Permanent working capital is the minimum amount of current assets which is needed to conduct a business even during the dullest season of year. This amount varies from year to year, depending upon the growth of a company and the stage of business cycle in which it operates. It is the amount of funds required to produces the goods and services which are necessary to satisfy demand at a particular point. It represents the current assets which are required on a continuing basis over the entire year. It is maintained as the medium to carry on operations at a time.

Variable or temporary working capital

Variable working capital represents the additional assets which are required at different times during the operating year-additional inventory, extra cash etc., seasonal working capital is the additional amount of current assets particularly cash, receivables and inventory which are required during the more active business seasons of the year. It is temporarily invested in current assets. FACTORS DETERMINING WORKING CAPITAL Working capital varies from company to company. The factors that determines the need for working capital are given below:

Nature of Business: Requirement of working capital depends upon the nature of business in public utility business like railways, electric supply, transport, etc., working capital requirement is more , whereas, it is less in manufacturing business.

Importance of labour : In cash of labor intensive industries, more working capital required as the wage bill is more and in the case of capital intensive industries, less working capital is required. Cost of raw-Materials: a business unit requires more working capital if the rammaterial required is more in quantity and higher in cost. Credit Policy: when suppliers of raw materials give credit facility for longer them , the requirement of working capital is less , and if the company gives credit to its customers and buy raw material for cash , the working capital requirement is high. Cash Requirement : If the cash requirement for meeting various payments like rent, salary,etc are high, then the working capital requirement would also be high and vice versa. Seasonal variations: during busy season and during inflation , more workin capital is required due to huge production , whereas during stock season, the working capital requirement is low. Dividend Policy: dividend policy has an effect on the cash position of every company. Often a change in the working capital necessitates a change in the dividend policy. However, if a firm wants to maintain a steady dividend policy, it shall have a good working capital. Turnover of circulating capital: if the sale or turnover is quick, limited working capital is adequate. The faster the sale, the lesser will be the working capital requirement and vice versa. Banking connection: a company with good banking connection and credit facility requires limited working capital and vice versa. APPROACHES OF FINANCING WORKING CAPITAL: Among the various sources of financing, the firm the firm has to identify creation sources to finance its current assets. These sources can be categorized into long term and short term. The long term sources include shares, debentures, preference shares, retained earnings, debt from financing institutions. The short term sources comprise short term bank loans and commercial papers. Hedging Approach or Matching Approach : if the firm adopts a hedging approach to finance its capital, each asset would be offset with a financing instrument of the same appropriate maturity. Thus, the type of financing plan involves the matching of expected life of asset with the expected maturity period of sources of fund raised to finance assets. For example , a plant having 10 years life period may be financed by raising 10 year loan. Thus, under this approach of financing, the temporary working capital can be financed with the help of short term sources and permanent working capital with the help of long term sources.

 Conservative approach: when the percentage of funds obtained from long term sources are longer, it can be said that the firm is following the conservative financial policy. In such situation the firm relies heavily on long term financing and is less risky under the conservative plan. The firm finances it permanent current asset and part of temporary current assets with long term sources in periods when firm does not need to hold temporary current assets, it improves its liquidity position by investing surplus funds in the marketable securities. Aggressive approach: when the firm depends upon the short term funds to finance its assets, it can be said that the firm financial policy, the firm finances even a part of its permanent current assets with the short term funds, whereas the matching approach requires that the permanent current assets have to be financed with long term funds. Short Term V/S Long Term Financing: under its financial plan , the firm can use either the short term funds or long term funds in order to finance its assets. Once it decides to have short term or long term funds under its financial plan, it should decides the extend to which the portion of assets under the short term funds can make use of technique of risk return trade off. Flexibility Cost Risk Risk Return trade off: There is a conflict between the use of short term and long term funds in the financial plan. Short term financing is less costly than long term financing but , at the same time , short term financing involves greater risk than the long term financing. Thus , to choose between short term and long term financing , the firm has to bring about equilibrium between risk and return LONG TERM SOURCES OF WORKING CAPITAL FINANCE: A company requires working capital for the payment of day-to-day expenses. The net working capital is the difference between current assets and current liabilities. The current assets are held by a firm for short term purpose and they are converted into cash early as possible. On the other hand , the fixed assets are those which are required not for the purpose of resale but to enhance the earning capacity of the firm. While working capital is mainly raised by short term bank borrowing, fixed assets are financed by long term sources of finance. As per principles of sound financial management, even for financing working capital, long term sources should be used at least up to a certain extent. It is of paramount importance to use a judicious mix of various long term sources , so that the value of the firm can be maximized. This will lead to maximization of the wealth of shareholders also.

Sources of Working Capital Finance: Trade Credit: Trade credit refers to the credit that a customer gets from supplier of goods in the normal courses of business. In practice, the buying firms do not have to pay cash immediately for the purchase made. This deferral of payment is a short term financing and called trade credit. And is a major sources of financing for firm. In India , it contributes to about one-third of the short term , financing , particularly due to small firms are heavily dependent on trade credit as a source of finance since they find it difficult to raised funds from bank or other sources in the capital market. Credit terms: A credit term refers to the condition under which the supplier sell goods or services on credit to the buyer is required to repay the credit. These conditions includes the due date and the cash discount[if any] given for the prompt payment. Due date [also called net date] is the date which the supplier expected payment. Credit terms indicates the length and beginning of the credit period. Cash discount is the concession offered to the buyer n supplied to encourage him to make payment promptly. The cash discount can be availed by the buyer if he pays by a certain date this is quite earlier than the due date. Benefits and cost of trade credit: As started earlier, trade credit earlier is normally available to a firm. Therefore , it is spontaneous sources of financing. As the volume of the firms purchase increases, trade credit also expand. The major advantages of trade credit are as follows:

Easy flexibility Flexibility Informality

WORKING CAPITAL MANAGEMENT: Working capital management is an integral part of overall corporate management. To a financial manager, a working capital sphere throws a welcome challenge and opportunity. Working capital management establishes the best possible trade-off between the profitability and net current assets employed and the ability to pay current liability as they fall due. Definition LOUIS BRANDT observes: we need to know when to took for working capital funds, how to use them and how to measure, plan and control them. WORKING CAPITAL POLICY OPTIONS: We saw earlier that working capital policy normally covers two facts; (A) The target levels for each category of current assets and (B) The methods of financing current assets. The need for maintaining a balance between excess and inadequacy and for guiding the volume rate of flow and the spread of the element or components of working capital, has also been emphasized, we have also noted that a proper mix of the payment, long and short term sources of fund has to be planned and utilized to finance investment in current assets. The general concept and return associated with the management of working capital , which are to be borne in mind, while deciding on the working capital policy, can be stated thus. The cost of long-term fund do not fluctuate as after and as much as the cost of short term funds. The variability of short-term rate is much grater than of long term funds. As the level of firms net working capital gets reduced, the firms risk increases. In other words, a higher net working capital turn over can be taken as indicative of higher risk. Many current liability are free and the use of these; to finance current assets will increase the firms profitability. The finance manager s decision on the level and composition of current assets and the level and composition of current liability will have its impact on the companys profitability and risk. Combination of these decisions lead to different net working capital position or strategies, which can be described as aggressive balanced or conservative depending on their implication in the companys risk, profitability and liquidity. DETERMINATION OF WORKIN CAPITAL The working capital position of the company determine its liquidity position. Some of the methods used in calculating the working capital position are by calculating the following term of assets and liabilities.

 Current Assets: current assets include cash and those assets which can be easily converted into cash within a short period of time generally, one year, such as marketable securities , bills receivable, sundry debtor, inventories, work-in-progress, etc. Net Working Capital: Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. It the difference between current assets and current liabilities. Net working capital = current assets-current liabilities. Current Liabilities: current liabilities are those obligations which are payable within a short period of generally one year and include outstanding expenses, bills payable sundry creditors, accrued expenses, short term advances, income tax payable, dividend payable, etc. Sales: Sales is the exchange of products for money. Each and every company wants to make profits in order to increase the demand for the products. Fixed Assets: It indicates the efficiency with the firm is utilizing its investments in fixed assets such as plants and machinery, land and building, etc. Investments: Investment is a parting of funds to as be used by the user of a fund for production activity. Ti includes bank overdraft, long term investments. Creditors : Sundry creditors are outsiders to who company owe money. It includes bankers, friends, suppliers, relatives, financial institutions, etc. Debtors : Debtors are the persons who have to make payment for the company. It includes customers, buyers, etc. usually the time given for buyers for credit payment is 60-90days. Cash : cash is very important for each and every organization. In each process cash plays a very important role either in starting a new plant, purchase of assets, raw-material, in order to meet its day-today expenses like payment of suppliers, salaries and wages etc. it includes cash-in-hand and cash-at-bank.\ Working Capital : Working capital is the difference between inflow and outflow of funds. It is the excess of current assets over current liabilities. RATIOS RELATED TO WORKING CAPITAL: Another analytical tool that can be used for the analysis of working capital is the accounting ratios, particularly the working capital ratios. Some of the important working capital ratios are: Current Ratio: Current ratio may be defined as the relationship between currents assets and current liabilities. This ratio helps to know the solvency and liquidity of the firm. The ratio is connected with the working capital and hence it is called Working Capital Ratio. It is calculated by dividing the

total of current assets by total of the current liabilities. The norm or standard rule of thumb of current ratio is 2:1 Current Ratio = Current Asset Current liabilities Quick Ratio : Quick ratio, also known as Acid Test Ratio or Liquid ratio, is a more rigorous test of liquidity than the current ratio. The term liquidity refers to the ability of a firm to pay its shortterm obligation as and when they become due. Quick ratio may be defined as the relationship between quick/liquid assets and current or liquid liabilities. The quick ratio can be calculated by dividing the total of the quick assets by total current liabilities. The norm or standard rule of thumb of quick ratio is 1:1 Quick Ratio= Quick Assets Current Liabilities Debtors Turnover Ratio: It indicates the numbers of times the debtors are turn over during a year. Generally ,the higher the value of debtors turnover the more efficient is the management of debtors /sales or more liquid are the debtors similarly low debtors turnover implies inefficient in management .It is a relationship between net sales and average debtors . There is no rules of thumb or standard which may be issued as a norm while interpreting this ratio. Debtors Turnover Ratio[DTR] = Net Sales Average debtors Average Debtors = Opting stock+closing stock 2 Debtors Collection Period: The efficiency in the collection of debts is indicated by this ratio. It shows the changes in the company credit policy or changes in its ability to collect from its debtors. There is no rule of thumb or standard which may be issued as a norm while interpreting this ratio. Debtor Collection Period = Debtors sales 365days

Working Capital Turnover Ratio: The working capital turnover ratio indicates the efficiency or in efficiency in the utilization of working capital in generating sales. This ratio is considered better then stock turnover ratio because its shows the utilization of the entire working capital whereas stock turnover ratio indicates only the turnovers of inventories which is only a part of the working capital. The ratio can be calculated by dividing the net sales by net working capital. There is no rule of thumb of standard which may be issued as a norm while interpreting the ratio. W.C.Turnover Ratio = Net Sale / Net W.C. INVENTORY MANAGEMENT Inventory management is one of the components of working capital management. It involves the process of providing continuous flow of raw materials to production department. More than 60% of working capital will normally be invested in the inventory. An efficient system of inventory management directly contributes to the growth of profitability of the business concern. Due to inflation and the concept of time value of money, inventory management has gained important recognition in the day-to-day management of business unit. The scientific process of implementing inventory management provides inventory at right time, from right source and at right prices. It also involves the steps that are to be undertaken with regard to storage and supervision of these materials. The main objective of inventory management is to reduce the order placing, receiving and inventory carrying cost. This not only ensures continuous flow of raw- materials but also reduces the cost of production. Objectives of Inventory Management: 1. To provide continuous supply of raw materials to carryout uninterrupted production. 2. To reduce the wastage and to avoid loss of pilferage, breakage and deterioration. 3. To exploit the opportunities available and to reduce the cost of purchase. 4. To introduce scientific inventory management techniques. 5. To provide right materials at right time, from right sources and right prices. 6. To meet the demand for goods of ultimate consumer on time. 7. To avoid excess and inadequate storing of raw materials. 8. To protect quality of raw materials. 9. To reduce the order placing and receiving costs to the minimum. 10. To ensure effective utilization of the floor space.

MANAGEMENT OF CASH Cash is the most liquid asset that a business owns. It indicates money and such instruments as cheques, money orders and bank drafts. Cash in the business enterprise may be compared to the blood of human body, which gives life and strength, to the human body and the cash imparts life and strength, profits and solvency to the business organization. Through firms differ in a considerable degree in terms of nature business, capital structure, personnel employed, risk of technology and so on, they have in common the basic mechanism involving conservation of funds in to saleable products and back in to liquid form. Cash in its ultimate state yield no return as such it is barren. One of the most urgent confronting corporate financial management is to make cash balances work harder. The essence of effective management is the synchronization of the rates of inflow of receipts with the rate of outflow of cash disbursement. Planning for cash requirements is an essential management function of any business. It is not enough for an undertaking to make a profit. Cash resources should be planning to finance a cash flow. Importance of Cash Management:

Cash management assumes more importance than other current assets because cash is the most significant and the least productive asset that the firm holds. It is significant because it is used to pay firms obligations. However , cash is un productive and as such , the aim of cash management is to maintain adequate cash position to keep the firm sufficiently liquid to use excess cash in some profitable ways. Management of cash is also important because it is difficult to predict cash flow accurately and that there is no prefect coincident between inflow and outflow of cash. Cash management is also important because cash constitutes the smaller portion of the total current assets: even then, considerable time of management is devoted for it. Operating Cycle and Cash Cycle: The investment in WC is influenced by four key events in the production and sales cycle of the firm:

Purchase of raw-materials. Payment of raw-materials. Sales of finished goods. Collection of cash for sales. The firm begins with the purchase of raw-material which are paid for after a delay which represents the account payable period. The firm converts the raw-materials into finished goods and then sell the same. The time lag between the purchase of raw-materials and the sales of finished goods is the inventory period. Customers pay their bills some time after sales.

The period that elapses between the date of sales and date of collection receivable is the account payable period. The time that elapses between the purchase of raw material and collection of cash for sales is referred to as the operating cycle, whereas the time length between the payment for raw material purchase and the collection of cash for sales is referred to as the cycle. The operating cycle is the some of the inventory period and same accounts receivable period, whereas the cash cycle is the sum of the inventory period and the accounts payable period. From the financial statement of the firm, it can estimates the inventory period , the accounts receivable period, and the accounts payable period. CASH MANAGEMENT MODELS: Every business enterprise will have to take sound decision regarding the optimum cash balance it should possess. Several factors influence the holding of optimum cash balance in an enterprise. The factors that decide the safety level of cash holding are:

Average daily cash outflows during peak days and normal days [ADCO]. Required days of cash holding [RDC] (i.e., number of days the cash is required to meet the cash demand) Certain models have been developed to manage cash. These models assist in determining the optimum cash to be held by the enterprise. The models are: Baumol Model Miller-Orr Model Orglers Model 1. The Baumol Model: William J.Baumol designed a model in 1952 to throw light on holding optimum cash. This model deals with the cost of holding cash in the enterprise. The model suggests that the amount of cash held should be such that cost of holding them should be at minimum cost here refers to two types of costs, (1) Opportunity cost of cash (2) Cost of converting the securities into cash . 2. Miller and Orr Model: Miller and Orr.D developed a model in 1966. This is an improvement over the Baumol model. Baumol model assumes that cash payment are fixed and steady. The variations in cash payments are not considered. Miller-Orr model fixes the maximum and minimum limits or upper and lower limits of the cash balances. The optimum balance lies in between upper and lower limits.

Orglers Model:

This model was developed by orgler relating to cash management is based on Liner Programming. The model assumes that any revenue generated is immediately reinvested and any expense incurred is immediately financed. It has the objective function of minimizing the premise value of the net revenue from the cash budget over the entire planning period RECEIVABLE MANAGEMENT: The term receivable are defined as debt owed to firm by the customers, arising from sales of goods and services in ordinary courses of business. The major cost associated with extensions of credit and accounts receivables are: a) Collection Cost: These costs are administrative cost incurred in collection from the customer to whom credit sale in made. b) Capital Cost: there is a time lag between sale of goods on credit and payment the customer. Meanwhile the firm has to pay employees and supplies of raw material needs additional capital. c) Default Cost: these are the cost of bad debts associated with credit sales. Credit Policy: The credit policy of a firm provides the framework to determine whether or not to extend credit to be extended, this credit policy decision of firm has board dimension. Credit Standard Credit Analysis The company selling its products C&P and provide credit up to 30 to 100 days to its customers.