Financial Management

Port City International University Assignment On: Financial Management Topic: Topic 1: - Role of Capital Budgeting in Modern Business. Topic 2: - Functions of Financial Managers. Submitted To Md. Musa Assistant Professor Department of Business Administration Port City International University. Submitted By Name: Faisal Ahmed ID: MBA 02006706 Course Code: 603 Mobile No: 01677-991482 Topic 1: - Role of Capital Budgeting in Modern Business. Capital budgeting is the process that a business uses to determine which proposed fixed asset purchases it should accept, and which should be declined. This process is used to create a quantitative view of each proposed fixed asset investment, thereby giving a rational basis for making a judgment. Here is the top 10 Role of capital budgeting – #1 – Long Term Effect on Profitability #2 – Huge Investments #3 – Decision cannot be Undone #4 – Expenditure Control #5 – Information Flow #6 – Helps in Investment Decision #7 – Wealth Maximization #8 – Risk and Uncertainty #9 – Complicacies of Investment Decisions #10 – National Importance Let us discuss each one of them in detail – #1 – Long Term Effect on Profitability For the growth & prosperity of any organization, a long-term vision is necessary, because a wrong decision may severely impact the survival of the firm which may influence the capital budgeting in the long run. Not only this, it impacts the company’s future cost & growth. In the long run, capital spending has a huge impact on business profitability. If the expenditures occurred after preparing a budget properly, there are certain chances of increasing the profitability of an organization. #2 – Huge Investments Any organization needs a huge investment to grow as the company has limited resources to grow while taking the investment decision, it has to make a wise decision. Because the wrong decision may blow up the sustainability of the business. It may highly impact the purchase of an asset, rebuilding or replacing existing equipment. #3 – Decision cannot be Undone Most of the time, the capital investment decision are irreversible in nature, it caters huge investment and is difficult to find the market for it. The only way to remains with the company is to scrap the asset and bear the losses. #4 – Expenditure Control Capital budgeting requires more attention to the expenditure and do R&D for an investment project if required. A good project turns into bad if the expenditures were not done in a controlled manner and not monitored carefully, While this step is quite crucial in the capital budgeting process. #5 – Information Flow The initialization of the project is merely an idea whether it is accepted or rejected, depends upon the various level of authority and circumstances. The capital budgeting process facilitates the transfer of information to appropriate decision-makers so they can make a better decision in the growth of the organization. #6 – Helps in Investment Decision The long-term investment decisions are time-consuming as it takes several years for accomplishment beyond the current period. Uncertainty defines the involvement of the risk in it. Management loses his flexibility and liquidity of funds when making an investment decision. It must be considered while accepting the proposal. #7 – Wealth Maximization Motivate the organization to invest in long term investment to safeguard the interest of the shareholder in the organization. If the organization invests in certain projects in a planned manner, the shareholder will show their interest in the organization. It will help them to maximize the growth of the organization. Any expansion of the organization is further related to the growth, sales, and future profitability of the firm and assets based on capital budgeting. #8 – Risk and Uncertainty When we invest in certain project expects a certain return in the permanent commitment of funds. More risk is involved because of the permanent commitment of funds. Capital budgeting decision is surrounded by a great number of uncertainties whether the investment is in present or in future. Longer the period of the project, more the risk and uncertainty involved. The estimates about the cost, revenues, and profits may vary depending upon the time. #9 – Complicacies of Investment Decisions The investment in long term proposals is quite tedious and involves a lot of complicacy in nature. While the purchase of fixed assets is a continuous process, so the management needs to understand the complicacy of connected projects. #10 – National Importance Initiation of any project offers new job opportunities, helps in the economic growth which increases per capita income. These are the contribution made by the company while the selection of a new project. Few Other Important Aspect of Capital Budgeting Capital Budgeting decision involves two more important decisions such as: Financial Decision Investment Decision At the time of taking the project, the business has confirmed to give the commitment to a project, and associated risk involved in it. Project delay, cost overruns & regulatory restriction that impact a lot in the project execution, ultimately increases the cost of the project. Apart from it, the company also makes an investment in its future direction and its growth which influences much more on the future projects that business considers a lot and evaluate it accordingly. So whenever capital investment decision is taken into account it considers both perspective financial & investment. Topic 2: - Functions of financial management or manager. A Financial manager organizes and manages an organization’s or an individual’s financial portfolio. They also make financial reports, supervise investments and help with cash management. So, a financial manager is a person or persons that manage the monetary affairs of an individual or related individual or indeed an entity or business to maximize monetary success or turn around poor financial situations. Functions of financial management or manager Until around the first half of the 1900s, financial managers primarily raised funds and managed their firm’s cash positions and that was pretty much it. In the 1950s, the increasing acceptance of present value concepts encouraged financial managers to expand their responsibilities and to become concerned with the concepts encouraged financial managers to expand their responsibilities and to do become concerned with the selection of capital investment projects. In the modern day, the financial management plays a dynamic role in the development of company. The functions of financial managers are as follows: 1. Performing financial analysis and planning: The concern of financial analysis and planning is whit: Transforming financial data into a form that can be used to monitor financial condition. Evaluation the need for increased (reduced) productive capacity and (iii) determining the additional evaluating the need for increased (reduced) productive capacity and Determining the additional/reduced financing required. Although this activity relies heavily on accrual-base financial statements, its underlying objective is to assess cash flows and develop plans to ensure adequate cash flows to support achievement of the firm’s goals. 2. Identification of sources: After financial planning, the main function of financial managers is to identify the possible sources of fund. In this case, the financial manager has to consider various sources like owner’s capital, retained earnings, loan from banks, friends and other financial institutions etc. He must identify those sources from which funds can be raised with simple terms and conditions, and minimum cost. 3. Raising of funds: After identification of sources of funds, that function of financial manager is to raise necessary funds by analyzing the terms and conditions of various sources. In this case, the financial manager must consider the cost of fund and the benefit expected form investment of the fund. The financial manager must identify the amount of funds available form each source and the periods when they will be needed. Then the manager should take steps to confirm that the funds will actually be handy and committed to the firm. 4. Investment of fund: The finance manager has to decide to allocate funds into profitable ventures. So that they are safety on investment and regular returns is possible. 5. Distribution of profit: The net profits decision has to be made by the financial manager. This can be done in two ways. a. Dividend declaration: It cover identifying the rate of dividends and other benefits similar bonus. b. Retained profit: The volume has to be decided which will depend upon expansional, innovational, diversification plans of the company. 6. Protection of Capital: Because of uncertain future, investment decisions involve risk. An investor will expect higher return form an investment if risk is high. For a less high-risk investment, the forecast return will be lower. Such risk should not be taken which reduced capital. To protect capital, the financial manager has to trade off risk and return. 7. Managing fund: In the management of funds, the financial manager acts as a specialized staff officer to the president of the company. The manager is liable for having enough funds for the firm to dealing its business and to pay its bills. The management of funds has both fluidity and profitability future. If the firm’s funds are inadequate, the firm may default on the payment of bills, interest on its debt, or repayment of the principal when a loan is due. If the firm doesn’t carefully choose its financing methods, it may excessively interest cost with a subsequent decline in profits. 8. Financial controls: The financial manager has not to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many technics like ratio analysis, financial forecasting, price and profit control, etc. 9. Forecasting cash flows: Successful day-to-day operations require the firm to be able to pay its bills promptly. This is hugely a matter of match cash inflows vs outflows. The firms must be able to forecast the sources and timing of inflows form customers and use them to pay creditors and suppliers. 10. Forecasting profits: The financial manager is usually responsible for gathering and analyzing the relevant data making forecasts of profit levels. To estimate profits, form future sales, the firm must be aware of current costs, likely increases in costs. And likely changes in the ability of the firm to sell its products at established or planned selling prices. 11. Managing assets: Assets are the resources by which the firms is able to conduct business. A firm’s assets must be carefully managed and a number of decisions must be made concerning their use. The role of asset management deposes to the decision making the role of the financial manager. The decision-making role cross liquidity and profitability lines. Converting idle equipment to cash improves liquidity. Reducing costs improves profitability. 12. Pricing: Some of the most important decisions made by a firm involve the prices established for products, product line, and services. The philosophy and approach to pricing policy are critical elements in the company’s marketing effort, image, and sales level. The financial manager can supply important information about costs, changes in costs at varying level of production. And the profit margins needed to carry on the business successfully. In effect, finance provides tools to analyze profit requirements in pricing decisions and contributes to the formulation of pricing policies. Block and Hirt divided the functions of the financial manager into two categories. (i) Daily activities, and (ii) less routine or occasional activities. The daily activities of financial manager include credit management, inventory control, and the receipt and disbursement of funds. Less routine activities encompass the sale of stocks and bonds and the induction of capital budgeting and dividend model.