FIANCIAL MANAGEMENT

SUBMITTED BY: VIRAT MORI

RASHA JOSYULA
SHUBHAM PARIDA
ARYAN GUPTA
SUBMITTED TO: RAKESH SARNOT
CAPITAL BUDGETING
 Capital budgeting is the planning process used to determine which of an
organization’s long term investments such as new machinery, replacement machinery,
new plants, new products, and research and research development projects are worth
pursing.
 Capital budgeting is a required managerial tool.
 One duty of a financial manager is to choose investments with satisfactory cash flow
and rates and return.
 Therefore, a financial manager must be able to decide whether an investment is worth
undertaking and be able to choose intelligently between two more alternatives.
 To do this, a sound procedure to evaluate, compare, and select projects is needed.
 This procedure is called capital budgeting.
IMPORTANCE OF CAPITAL BUDGETING
• MAKING DECISIONS
 Ultimately, the objectives of capital budgeting is to help you make decision
that are smart for your business.
 Therefore, the capital budgeting process is crucial to consider before making
any big decisions for any type of project.
 There are number of capital budgeting techniques that can be used to
determine the viability and profitability of capital budget and investment
decision. These techniques include:
• The Accounting Rate Of Return Method
• The Payback Period Method
• The Net Present Value Method
• The Profitability Index Method
• The Internal Rate of Return Method
ACCONTING RATE OF RETURN METHOD
• Accounting rate of return (also known as simple rate of return) is the ratio of estimated
accounting profit of a project to the average INVESTMENT made in the project.
• ARR is used in INVESTMENT appraisal.
• ARR= Average Accounting Profit
Average INVESTMENT
PAY BACK PERIOD
• The payback period is the most basic and simple decision tool.
• With this method you are basically determining how long it will take to pay back the
initial investment that is required to under go a project.
NPV
• NPV is used in capital budgeting to analyze the profitability of an INVESTMENT or
project
• A Net Present value (NPV) that is positive is good (and negative is bad).
• NPV= CF1+CF2+CF3
(1+K)
INTERNAL RATE OF RETURN (IRR)
• The internal rate of return is a discount rate that is commonly used to
determine how much of a return an investor can expect to realize from a
particular project.
• IRR= Lower Rate + NPV DIFF. In Lower Rate * Diff. in Rate
Diff. in present value
PROFITABILITY INDEX
• Profitability index is an INVESTMENT appraisal technique calculated by
dividing the present value or future cash flows of a project by the initial
INVESTMENT required for the project.
Working Capital Management
 Working capital management ensures the best utilisation of a business's current assets
and liabilities for the company's effective operation.
 Working capital is descriptive of that capital which is not fixed. But the more common
use of working capital is to consider it as the difference between the book value of the
current assets and the current liabilities.
 Working Capital= Current Assets – Current Liabilities
 What are Current Assets
 Current assets are items of value that a company expects to convert into cash within one
year. The most common types of current assets include cash, accounts receivable,
inventory, and prepaid expenses.
 These assets are important because they can be used to pay off short-term debts and
other obligations.
 What are Current Liabilities
 Current liabilities are debts that must be paid within one year. The most common types
of current liabilities include accounts payable, short-term loans, and accrued expenses.
 These liabilities are important because they need to be paid off in a timely manner in
order to avoid default.
Determinants of working capital
1. Nature and Size of Business:
The requirement of working capital depends on the nature and size of business
manufacturing concerns require larger amounts of working capital in comparison
to trading concerns.
2. Position of Business Cycle:
Working capital requirement will be higher during times of boom com­pared to the
lean periods. It can be said that the volume of working capital is directly related
with the volume of production.
3. Production Policy:
If the production takes a longer period, there is greater need of working capital
compared to shorter period of production.
4. Market Conditions:
If there is a high degree of competition in the market, large inventory is essential
to sell goods. Thus, it requires high amount of working capital.
5. Seasonal Business:
In case of seasonal business, working capital requirements of a firm during the
production season will be more.
6. Dividend Policy:
Dividend policy also affects working capital. Payments of dividend causes
outflow of cash while retained profits act as source of working capital.
7. Credit Policy:
If the firm enjoys a lesser credit period, it has to purchase raw materials in cash
and working capital requirements will be greater.
8. Tax Level:
Working capital requirements also depend on the rates of taxes and advance tax
provisions.
CASH
 Cash is the most liquid asset.
 Cash is common denominator to which all other current assets can be reduced
because receivables and inventories get converted into cash.
 Cash is lifeblood of any firm needed to acquire supply resources, equipment
and other assets used in generating the products and services.
 Marketable securities also come under near cash, serve as back pool of
liquidity which provide quick cash when needed.
 Cash is bills, coins, bank balances, money orders, and checks.
CASH MANAGEMENT
 Cash as to management is concerned with management of cash in such a way
As to achieve the generally accepted objectives of the firm- maximum
profitability with maximum liquidity of the firm.
 Types of cash management
• Cash Flow from Operating Activities: It is found on an organization’s cash flow
statement and does not include cash flow from investing.
• Free Cash Flow to Equity: Free Cash Flow to Equity represents the cash
available after the capital is reinvested.
• Free Cash Flow to The Firm: It is used for valuation and financial modeling.
• The Net Change in Cash: It refers to the movement in the cash flow from one
accounting period to another.
Functions of Cash Management
1. Inventory Management
Cash management helps an organization in managing its inventories.
Higher inventory in hand indicates trapped sales, leading to less
liquidity. Therefore, a company must always focus on fast pacing it’s
stock out to allow cash movement.
2. Receivables Management
A company focuses on raising its invoices so that sales can be boosted.
The credit period concerning receiving cash might range between a
minimum of 30 and a maximum of 90 days. The organization has
recorded all its sales, but the money concerning these transactions has
not yet been received.
3. Payables Management
This is also an essential function of cash management where the
companies can avail of benefits like cash discounts and credit periods.
FOREIGN DIRECT INVESTMENT

 Foreign Direct Investment (FDI): a firm invests

directly in foreign facilities.
 A firm that engages in FDI becomes a multinational
enterprise (MNE)-
Multinational = "more than one country“
 Factors which influence FDI are related to factors
that stimulate trade
FORMS OF FDI

 FDI forms
- Purchase of assets: why? why not?
~ Quick entry, local market know-how, local financing may be possible,
eliminate
competitor, buying problems
- New investment: why? why not?
~ No local entity is available for sale, local financial incentives, no
inherited problems,
long lead time to the generation of sales
- International joint-venture
~ Shared ownership with local and/or other non-local partners
~ Shared risk
GOVERNMENT POLICY AND FDI

 Home country
- Outward FDI encouragement
• Risk reduction policies (financing, insurance, tax incentives)
- Outward FDI restrictions
• National security, BOP
 Host country
- Inward FDI encouragement
• Investment Incentives
 • Job creation incentives
- Inward FDI restrictions
• Ownership extent restrictions (national security; local nationals can
safeguard the host
country's interests