SCOPE OF FINANCIAL MANAGEMENT

a. Estimating the total requirements of funds for a given period.

b. Raising funds through various sources, both national and international, keeping in
mind the cost effectiveness;
c. Investing the funds in both long term as well as short term capital needs;
d. Funding day-to-day working capital requirements of business;
e. Collecting on time from debtors and paying to creditors on time;
f. Managing funds and treasury operations;
g. Ensuring a satisfactory return to all the stake holders;
h. Paying interest on borrowings;
i. Repaying lenders on due dates;
j. Maximizing the wealth of the shareholders over the long term;
k. Interfacing with the capital markets;
l. Awareness to all the latest developments in the financial markets;
m. Increasing the firms competitive financial strength in the market; and
n. Adhering to the requirements of corporate governance.
FUNCTIONS OF FINANCIAL MANAGEMENT
(a) Investment decisions,
(b) Financing decisions,
(c) Dividend decisions.

Financial planning involves analyzing the financial flows of a company, forecasting

the
consequences of various investment, financing and dividend decisions and weighing
the
effects of various alternatives.
Determine the financial resources required in meeting the companys operating
program.
Forecast the extent to which these requirements will be met by internal
generation of
funds and to what extent they will be met from external sources.
Develop the best plans to obtain the required external funds.

 Establish and maintain a system of financial control governing the allocation and
use
of funds.
Formulate programs to provide the most effective cost - volume - profit
relationship.
Analyze the financial results of operation.
Report the facts to the top management and make recommendations on future
operations of the firm.
STEPS IN FINANCIAL PLANNING :
Establishing Objectives
Policy Formulation
Forecasting
Formulation of Procedures
The SEBI was established in 1988 through an administrative order, but it became a
statutory
and really powerful organization since 1992 with the formation of Securities and
Exchange
Board of India Act, 1992 when the Capital Issues Control Act (CICA) was replaced
and the
office of the Controller of Capital Issues (CCI) was abolished.
The SEBI is a body of six members comprising the Chairman, two members from the
Government of India, Ministries of Law and Finance, one member from the RBI and
two
other members. The office of the SEBI is in Mumbai.
To carry out its objectives, the SEBI performs the following functions: Regulate the business in stock exchanges and other securities markets;
Registering and regulating the working of stock brokers, sub-brokers, share
transfer
agents, bankers to an issue, merchant bankers, underwriters, portfolio managers,
investment
advisor and such other intermediaries, who are associated with the securities
market in any manner;
Registering and regulating the working of depositories, custodians of securities,
FIIs,
credit rating schemes, including mutual funds;
Promoting and regulating Self-Regulatory Organisations (SROs);
Prohibiting fraudulent and unfair trade practices relating to the securities market;
Providing investors education and training of intermediaries in securities market;
Prohibiting & Regulating substantial acquisition of shares and takeovers of
companies;
Calling for information from, undertaking inspection, conducing inquiries and
audits
of the stock exchanges, intermediaries and self-regulatory organizations in the
securities market;
Performing such functions and exercising such powers under the Securities
Contract
(Regulation) Act, (SCRA) 1956 as may be delegated to it by the Central Government;

 Levying fees & other charges for carrying out its work;
Conducting research for the above purposes;
Performing such other functions that may be prescribed
Under the SEBI Act, some of the powers exercised by the Central Government
under SCRA Powers to prohibit contracts in certain cases.
They relate to the
Powers to call for periodical return, direct enquries to be made from any
recognized
stock exchange;
Grant approval to any recognized stock exchange & to make bye-laws for the
regulation
and control of contracts;
Powers to make & amend bye-laws of recognized stock exchanges;
Licensing of dealers in securities, in certain areas;
Powers to compel listing of securities by public companies;
Granting approval to amendment to the rules of a recognized stock exchange;
Powers to ask every recognized stock exchange, to furnish to the SEBI, a copy of
the
annual report containing particulars that may be prescribed;
Powers to supercede the governing body of a recognized stock exchange;
Powers to suspend business of any recognized stock exchange.
The credit extended in connection with the goods purchased for resale by a retailer,
or for
raw materials used by manufacturer in producing its products is called the trade
credit.
The accrued expenses refer to the services availed by the firm, but the payment for
which has not yet been made.
CP was introduced as a money market instruments in India in January, 1990 with a
view to
enable the companies to borrow for short term. Commercial Paper (CP) is an
unsecured promissory note issued by a firm to raise funds for a short period,
generally, varying from a few days to a few months. For example, in India, the
maturity period of CP varies between 15 days to 1 year while in some other
countries, the maturity period may go up to 270 days. It is a money market
instrument and generally purchased by commercial banks, money market mutual
funds and other financial institutions desirous to invest their funds for a short
period. As the CP is unsecured, the firms having good credit rating can only issue
the CP.
Inter-corporate Deposits (ICDs): Sometimes, the companies borrow funds for a
short-term period, say up to six months, from other companies which have surplus
liquidity for the time being. The ICDs are generally unsecured and are arranged by a
financier. The ICDs are very common and popular in practice as these are not
marred by the legal hassles. The convenience is the basic virtue of this method of
financing. There is no regulation at present in India to regulate these ICDs.

Cash Credit The credit facility under the cash credit is similar to the over draft.
Under
the cash credit, a loan limit is sanctioned by the bank and the borrowing firm can
withdraw
any amount at any time, within that limit. The interest is charged at the specified
rate on the
amount withdrawn and for the relevant period. The bank may or may not charge
any
minimum commitment fee.
The bill discounting is common only among small-size business firms. One of the
short-coming
of the bill discounting system is that the bank, which discounts that bill, must
establish
and verify the creditworthiness of the buyer, which, at times, may be difficult,
complicated
and time consuming process.
Letter of Credit A letter of credit is a guarantee provided by the buyers banker to
the
seller that in case of default or failure of the buyer, the bank shall make the
payment to the
seller. The responsibility of the buyer is assumed by the bank in case the latter fails
to honour his obligations. The letter of credit issued by the bank may be given by
the buyer to the seller
along with the bill of exchange. So, in fact, the letter of credit becomes a security of
the bill
and any bank (or the bank of the seller) will have no problem in discounting the bill.
Depository Receipts (DR)
A DR means any instrument in the form of a depository receipt or certificate created
by the
Overseas Depository Bank outside India and issued to the non-resident investors
against the
issue of ordinary shares. A Depository Receipt is a negotiable instrument evidencing
a fixed
number of equity shares of the issuing company generally denominated in US
dollars. DRs
are commonly used by those companies which sell their securities in international
market
and expand their shareholdings abroad. These securities are listed and traded in
International
Stock Exchanges. These can be either American Depository Receipt (ADR) or Global
Depository Receipt (GDR). ADRs are issued in case the funds are raised through
retail market
in United States. In case of GDR issue, the invitation to participate in the issue
cannot be
extended to retail US investors.
Foreign Currency Convertible Bonds (FCCBs)

The FCCB means bonds issued in accordance with the relevant scheme and
subscribed by a
non-resident in foreign currency and convertible into ordinary shares of the issuing
company
in any manner, either in whole or in part, on the basis of any equity related warrants
attached
to debt instruments. The FCCBs are unsecured, carry a fixed rate of interest and an
option
for conversion into a fixed number of equity shares of the issuer company. Interest
and
redemption price (if conversion option is not exercised) is payable in dollars. Interest
rates
are very low by Indian domestic standards. FCCBs are denominated in any freely
convertible
foreign currency.
Exchange rate risk (ERR) is inherent in the businesses of all multinational
enterprises as they
are to make or receive payments in foreign currencies. This risk means eventual
losses incurred
by these enterprises due to adverse movements of exchange rates between the
dates of contract and payment.
Multinational enterprises are subject to the following three types of risks/exposures:
Transaction Exposure
Consolidation Exposure
Economic Exposure
Transaction Exposure
Whenever there is a commitment to pay foreign currency or possibility to receive
foreign
currency at a future date, any movement in the exchange rate will affect the
domestic value
of the transaction. The following situations give rise to transaction exposure:
Trade transactions with foreign countries when billing is done in foreign currencies
like export or imports;
Banking and financial transactions done in foreign currencies like lending and
borrowing
or equity participation, etc.
Consolidation (or Translation) Exposure
This results from direct (joint ventures) or indirect investments (portfolio
participation) in foreign
countries. When balance sheets are consolidated, the value of assets expressed in
the
national currency varies as a function of the variation of the currency of the country
where
investment was made. If, at the time of consolidation, the exchange rate is different
from

what it was at the time of the investment, there would be a difference of

consolidation. The
accounting practices in this regard vary from country to country and even within a
country
from company to company.
There is great responsibility on the part of corporate finance manager, who is
expected to
manage the assets and liabilities with fluctuating foreign exchange rates in such a
way that the
profits and cash-flow levels stick to budgeted levels as far as possible.
Economic Exposure
In an open economy, the strength of currencies of competitors due to relative costs
and prices
in each country which, in turn, have a bearing on exchange rate and the structure of
business
itself gives rise to economic exposure which may put companies at a competitive
disadvantage.
Though this is not a direct
Internal Techniques Of Hedging
There are several techniques which can be used in this category to reduce the
exchange rate
risk:
Choosing a particular currency for invoice
Leads and Lags
Indexation clauses in contracts
Netting
Shifting the manufacturing base
Centre of reinvoicing
Swaps
Netting (Internal Compensation)
An enterprise may reduce its exchange risk by making and receiving payments in
the same
currency. Exposure position in that case is simply on the net balance. Hence an
enterprise
should try to limit the number of invoicing currencies. The choice of currency alone
is not
sufficient. Equally important is that the dates of settlement should match.
External Hedging Tools
Risks under transaction exposure can be minimized using various tools available in
the foreign
exchange and financial markets. Of these, four are important.
Forward exchange contracts
Money market hedge
Currency Futures
Options

Factors Determining Capital Structure

(1) Minimization of Risk : (a) Capital structure must be consistent with business risk.
(b) It should result in a certain level of financial risk.
(2) Control : It should reflect the managements philosophy of control over the firm.
(3) Flexibility : It refers to the ability of the firm to meet the requirements of the
changing
situations.
(4) Profitability : It should be profitable from the equity shareholders point of view.
(5) Solvency : The use of excessive debt may threaten the solvency of the company.
Different Theories of Capital Structure
(1) Net Income (NI) appoarch
(2) Net Operating Income (NOI) Approach
(3) Traditional Approach
(4) Modigliani-Miller Model
(a) without taxes
(b) with taxes.