Define Financial Management. Discuss the nature and functions of financial management.

 Q. Define Financial Management. Discuss the nature and functions of financial management.

Ans. MEANING OF FINANCIAL MANAGEMENT: The word ‘Financial Management’ is a combination of two words i.e Financial and Management. Financial meaning related to finance and management meaning making arrangements to get a job done in the most efficient and best possible manner. Thus, the combined meaning of financial management is to manage the finance related operations of a business enterprise in the best and most efficient manner. 

Financial management is that part of managerial process which is concerned with the planning and controlling of (financial resources of enterprise.) firm’s financial resources. It is concerned with the procurement of funds from most suitable sources and making the most efficient use of such funds. It deals with raising finance for the enterprise and the efficient utilisation of such finance. It includes investment decisions, financing decisions, dividend decisions, liquidity decisions, capital budgeting, budgetary control etc.

DEFINITION OF FINANCIAL MANAGEMENT: 

Financial Management or Finance function may be defined as:–

(1) “The finance function is the process of acquiring and utilising funds by a business.”

  — R.C. Osborn 

(2)  “Financial Management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations.” 

— Joseph L. Massie

NATURE OR CHARACTERISTICS OF FINANCIAL MANAGEMENT: 

(1) An essential part of top management: Financial Management is an essential part of top management. In the traditional approach financial manager was considered to be an unimportant person as far as the top management decision making was considered. But in the modern business management the financial manager is one of the active members of top management team and day-by-day his role is becoming more significant in solving the complex management problems. This is because almost all kinds of business activities such as production, marketing etc. directly or indirectly involve the acquisition and use of finance.

(2) Less Descriptive and More Analytical: Modern financial management is less descriptive and more analytical. Due to the development of new statistical and accounting techniques of financial analysis, the financial management chooses the best alternative out of the many possible alternatives.

(3) Continuous Function: Financing is a continuous function. In addition to the raising of finance, there is a continuous need for planning and controlling the finances of an enterprise. A firm performs finance functions continuously in the normal course of the business.

(4) Different from Accounting Function: There are key differences between the accounting and finance function. Accounting generates information or data whereas in the finance function the data are analysed and used for the purpose of decision making.

(5) Wide Scope: There is wide scope of financial management. It is concerned not only with the raising of finance but also with the allocation and efficient use of such finance. It is also responsible for financial accounting, cost accounting, auditing, budgeting, management of cash, management of receivables and management of inventories.

(6) Centralised Nature: Financial management is centralised in nature. Whereas the production management, marketing management and personnel management functions can be decentralised, it is neither possible nor desirable to decentralise the financial responsibilities.

(7) Measurement of Performance: Financial management is concerned with the wise use of finance. It fixes certain norms and standards against which the benefits of an investment decision are matched. In other words, it matches the cost of finance with the return received from its use. Thus, it is concerned with the achievement of broad financial goals which an enterprise sets for itself.

(8) Inseparable Relationship between Finance and Other Activities: There exists an inseparable relationship between finance on the one hand and production, marketing and other activities on the other. All activities are related to finance. For example, buying a new machine or replacing an old machine is clearly a responsibility of the production department but it also involves finance. Similarly, recruitment of employees, advertisement, sales promotion all require financial resources.

(9) Applicable to All Types of Organisations: It is applicable to all forms of organisations whether corporate or non-corporate such as sole proprietorship and partnership firms etc. Similarly, it also applies to the concerns engaged in manufacturing or providing services and also the activities of non-profit organisations.

FUNCTIONS OF FINANCIAL MANAGEMENT: There are three basic functions of financial management, namely (i) raising finance, (ii) investing it in assets, and (iii) distributing returns earned from assets to shareholders. Theses three functions are respectively known as financing decision, investment decision, and dividend policy decision. Various other functions are also performed such working capital decision, planning and controlling the finance and certain routine functions. Hence, the functions of financial management are: 

(1) Determining the Financial needs: The first task of the financial management is to estimate and determine the financial requirements of the business. For this purpose, the short-term and long-term needs of the business are estimated separately. Financial needs are estimated with a long-term view so that necessary funds will be available for expansion and renewal of plant and machinery in future. While determining the financial needs the financial management should take into consideration the nature of the business, possibilities for future expansion, attitude of the management towards risk, general economic circumstances, etc.

(2) Financing Decision: This function is related to raising of finance from different sources. For this purpose the financial manager is to determine the proportion of debt and equity. In other words, what proportion of total funds will be raised from loans and what proportion will be provided by shareholders. The mixing of debt and equity is known as the firm's capital structure or leverage. Raising of funds through debts results in a higher return to the shareholders but it also increases risk. Hence, a proper balance will have to be ensured between debt and equity. A capital structure with a reasonable proportion of debt and equity capital is termed the optimum capital structure. When the return to shareholders is maximized with minimum risk, the per share market value of company's shares will be maximized and the firm's capital structure will be considered optimum. In order to raise the capital, a prospectus is issued and services of underwriters are used.

(3) Investment Decision: Investment decision also known as 'Capital Budgeting' is related to the selection of long-term assets or projects in whick investments will be made by the business. Long-term assets are the assets which would yield benefits over a period of time in future. Since the future benefits are difficult to measure and cannot be predicted with certainty, investment decisions involve risk. Investment decisions should, therefore, be evaluated in terms of both expected retum and risk. Further, a minimum required rate of return also known as cut-off rate is also determined against which the expected return from new investment can be compared.

(4) Working Capital Decision: It is concerned with the management of current assets. It is an important function of financial management since short-term survival of the firm is a pre-requisite for its long-term success. Current assets should be managed in such a way that the investment in current assets is neither inadequate nor unnecessary funds are locked up in current assets. If a firm does not have adequate working capital, that is its investment in current assets is inadequate, it may become illiquid and as a result may not be able to meet its current obligations and, thus, invite the risk of bankruptcy. On the other hand, if the investment in current assets is too large, the profitability of the firm will be adversely affected because idle current assets will not earn anything. Thus the financial management must develop a sound technique of managing current assets. It should properly estimate the current assets requirements of the firm and make sure that funds would be made available when needed.

(5) Dividend Policy Decision: The financial management has to decide as to which portion of the profits is to be distributed as dividend among shareholders and which portion is to be retained in the business. For this purpose the financial management should take into consideration the factors of dividend stability, bonus shares and cash dividends in practice. Usually, the profitable companies pay cash dividends regularly. Periodically, the bonus shares are also issued to the existing equity shareholders.

(6) Financial Control: The establishment and use of financial control devices is an important function of financial management. These devices include budgetary control, cost control, ratio analysis etc. In financial control, first of all standards of financial performance are determined. Thereafter, actual performance is compared with the predetermined standards and the deviations are ascertained. The reasons for such deviations are also found out so that steps are taken to remove those deviations.

(7) Routine Functions: For the effective execution of the finance functions, certain routine functions have to be performed in the normal course of the business The routine functions are:

(a) Supervision of cash receipts and payments and safeguarding of cash balance,

(b) Opening bank accounts and managing them.

(c) Safeguarding of securities, insurance policies and other valuable documents.

(d) Maintaining records and preparation of reports.

(e) Establishing a proper system of internal audit.

Define Financial Management. Discuss the nature and functions of financial management.

What is Business Environment ? What are its characteristics?

 Q. What is Business Environment ? What are its characteristics?

Ans. MEANING OF BUSINESS ENVIRONMENT: Business Environment (means)  is the sum total of all those factors which influence the business has no control. It has both threats and opportunities for the business. Threats refers to the negative changes that occurs in business environment and hinders the performance of the business organisation. Opportunities refers to the positive changes that occurs in the business environment and helps the organisation to improve its performance. The study of business environment enables the managers to identify threats and opportunities. 

Thus, Business Environment refers to the all the external factors which have a bearing on the functioning of the business. It refers to all forces which are external to business and beyond its control. 

Definition:

According to Prof. Keith Davis, “Business Environment is the aggregate of all conditions, events and influences that surround and affect the business.” 

In the words of V.P. Michael, “Business Environment is the sum total of the environmental factors which provide an atmosphere for the business. It has a direct relation with business organisation which operates in it.” 

CHARACTERISTICS OF BUSINESS ENVIRONMENT: 

(1) Totality of external forces: Business environment is the total of all those forces/factors which are available outside the business and over which the business has no control. That’s why its nature is of totality. 

Or

Aggregation of external forces:  A business environment is the aggregate of all the external forces such as individuals, consumers, government and legal matters that affect the performance of an organisation either positively or negatively. 

(2) Specific and general forces: Forces outside the business can be divided into two parts:

a) Specific: These forces affect the firms of an industry separately. e.g. customers, suppliers, investors, competitive firms etc. 

b) general: These forces affect the firms of an industry equally. e.g. social, political, legal and technical situations. 

Specific forces affect the business directly and immediately in its day-to-day working whereas general forces have an indirect effect on the business. 

(3) Interrelatedness: Different factors or components of business environment are related to each other and affect each other.

(4) Dynamic nature: Components of business environment changes continuously. So, the business environment is dynamic in nature which means it keeps on changing from time to time, reigon to reigon and country to country. 

(5) Uncertain: Business environment creates uncertainty for business firms as it is very difficult to predict environment and changes of future. Because of its uncertain nature, its study and analysis is difficult.

(6) Complex in nature: Business environment is a combination of many factors that have an Inter relation with business in many ways. These factors affect each other also. It is very difficult to know how these factors will influence the business. Thus, business environment is complex in nature. 

(7) Relativity (Relation): Business environment is a relative concept. It means business environment is related to local conditions. That’s why business environment is different in different countries and even different at different places in the same country. For eg. political conditions, religion, beliefs etc are different in different reigons. 

(8) Multi-faceted: Environment is multi-faceted. The same environment trend can have different effects on different industries. The same (one) can be threat for one company and opportunity for another company. 

(9) Far reaching impact: Environment has far reaching impact on business. Business and its environment are interdependent to each other. So any change in an environment has a direct impact on organisation in different ways. 

OR 

CHARACTERISTICS OF BUSINESS ENVIRONMENT: 

(1) Complex in Nature: Environment is a combination of many factors like political, economic, legal, social, cultural, technological, etc. These factors affect the business in many ways. Therefore, the influence that they exercise on business cannot be recognised independently.

(2) Dynamic: It is obvious that environment is a mixture of many factors and there are constant changes in some of them. It is only because of these changes in the factors of environment that make environment dynamic. The environmental factors change with passage of time. The plans and policies of business too have to be changed to keep pace with changing environment.

(3) Business Environment Affects Different Firms Differently: It is not necessary that any 

particular change in environment should affect all business units in a similar manner. One business unit may welcome a change in environment, while some other business unit may feel adverse effect of the same change. Therefore, environment may affect different business units in different manner.

(4) Business Environment has both Short-term and Long-term Impact: Every change in environment has both short-term and long-term impact on business. The changed environment affects the profitability, productivity and development of business in both short term and long term.

(5) Unlimited Effect of External Environmental Factors: External factors of business environment are uncontrollable. These factors have very deep effect on business. Sometimes the effect of these factors is so deep that it may take the business unit to closure. For example, decision of government to ban wine, whisky will compel wine shops to wind-up their business.

(6) Uncertain: The external business environment is very uncertain. There can be sudden change in it at any time. Because of its uncertain nature, its study and analysis is difficult.

(7) Interdependent Components: Various components of business environment are interdependent of each other. Different components of environment affect each other. For example, economic environment affects social environment and is also affected by it.

(8) Includes both Internal and External Environment: Business environment includes both internal and external environment. Internal environment means environment within the organisation; this environment is within the control of business unit. External environment is outside the organisation and is beyond the control of business unit. Business unit will have to change its activities along with changes in external environment.

What is Business Environment ? What are its characteristics?

Holding Company: What It Is, Advantages and Disadvantages

 Q. What is meant by Holding Company? Explain the advantages and disadvantages of Holding Companies. 

Ans. MEANING OF HOLDING COMPANY: A holding company is a company which controls another which controls another company by acquiring all or majority of its shares carrying voting rights or controlling the composition of board of directors. The company whose shares have been acquired is known as subsidiary company. The subsidiary company continues to operate as before because acquisition of controlling interest by another company does not result in its liquidation. 

ADVANTAGES OF HOLDING COMPANIES: 

(i) Easy Method of Acquiring Control: A company needs to invest comparatively a small amount in order to acquire control over other company through this method. 

(ii) Possibility of Maintaining Separate Goodwill: By maintaining the separate identities of holding and subsidiary companies, it would be possible to naintain their separate goodwill. 

(iii) Ascertainment of Separate Profitability and Financial Position: Since each subsidiary company has to prepare its own accounts, the profitability and financial position of each company is known.

(iv) Availing Income-Tax Benefits: By maintaining separate identities of holding and subsidiary companies, it would be possible to avail income tax benefits by carrying forward the losses of each company to the next year. This is not possible in case of amalgamation.

(v) Easy to Get Rid of Subsidiary: Whenever it is desired to get rid of the subsidiary company, it can be easily done by disposing off the shares of such company in the market.

(vi) Easy to Wind-up the Subsidiary: In case the subsidiary company is continuously running into losses, it can be easily wound-up.

(vii) Efficiency in Management: Since both the companies maintain their separate identity, the size of the holding company remains the same. It is easier to manage both the companies separately.

(viii) Elimination of Competition: Since both the companies are managed by the same group, competition between them is completely eliminated.

(ix) Benefit of Internal and External Economies: Both the companies can avail of the technical know-how and financial resources of each other. Hence, they are able to avail the internal and external economies.

(x) Other Advantages: Other advantages are:

I. Increase in goodwill and credit worthiness of both the companies,

II. Smooth supply of raw material,

III. Getting on assured market, and

IV. Pooling of resources whenever needed.

DISADVANTAGES OF HOLDING COMPANIES:

(i) Fraud in Inter-Company Transactions: Inter-Company transaction between holding and subsidiary are often entered at too high or too low priss in order to suit the holding company.

(ii) Fear of Oppression of Minority Shareholders: Subsidiaries company is run in a manner that suits the interest of holding company. Financial and other resources of the subsidiary are used to the benefit of holding company. As such there is always the danger of oppression of minority shareholder’s interests. 

(iii) Forced Appointment of Directors: Subsidiary companies are forced to appoint the directors or other officers chosen by the holding company. Their remuneration is also fixed by the holding company which may be too high.

(iv) Difficulty in Ascertaining the True Financial Position: Shareholders in the holding company may not be aware of the true profitability and the financial position of subsidiary companies. Likewise, creditors and the outside shareholders in the subsidiary Company also may not be aware of the true picture of the company.

(v) Fear of Mismanagement: Where the group has a good number of constituents and managerial ability is limited, there must be mismanagement resulting into ruin of the group as a whole.

(vi) Difficulties in Valuing the Inventory: Difficulties may be experienced while valuing the Inventory containing huge quantities of inter-company goods.

(vii) Speculation in Shares: By manipulation of profits, reserves, inter-company sales etc. directors may speculate in the shares of the subsidiary companies, when such shares are quoted in the stock exchange.

(viii) Creation of Secret Reserves: Secret reserves may be easily created by the unscrupulous directors to the detriment of the minority interest.

What is meant by Holding Company? Explain the advantages and disadvantages of Holding Companies. 

salient features of Right to Information Act, 2005

 Q. Discuss the salient features of Right to Information Act, 2005. 

Ans. The salient features of Right to Information Act, 2005 are as under:

1. This Act may be called Right to Information Act, 2005.

2. This Act defines ‘Appropriate Government’ which may be termed as Public Authority.

3. The Public Authority is established, constituted, owned, controlled or substantially financed by funds provided directly or indirectly by the Central Government or the Union Territory or State Government.

4. This Act is applicable to all public authorities such as all central and state government ministries, departments, organisations, undertakings, autonomous bodies, municipalities, Panchayat, etc. enacted by law and also covers the Union Territories, Election Commission, Auditor General, Public Service Commission and the judiciary and the legislature are covered under its purview. Interal and Foreign private institutions situated (working) within the country have been kept out of its purview. 

5. The Act requires the public authority and its officers to maintain and keep ready its records and machinery so as to facilitate the right to Information.

6. The Act provides that if the Information sought for relates to another office or another public Information officer, then the Public Information Officer receiving the application for Information can transfer the application to the Public Information Officer of the concerned office. 

7. In general cases, normally the request for information shall be disposed by the concerned Information officer within 30 days of the receipt of request. Where the information sought relates (pertains) to third party, the same shall be provided within 40 days of the receipt of request. But if the information sought for concerns the life or liberty of a person, the same shall be provided within 48 hours of the receipt of request. 

8. The fee for seeking information shall be reasonable. There shall be no fee for citizens below poverty line.

9. The Act provides for Constitution of a Central Information Commission at the highest level and State Information Commission at state level. There shall be Chief Information Commissioner and Information Commissioner in both the Commissions. 

10. The Act provides for two-level forum for making appeal, i.e. appeal shall be filed at two levels.

– One within the organisation to the senior officer to the Public Information officer known as First Appellate Authority.

– The second appeal shall be filed with the Central or State Information Commission, as the case may be. 

11. The Act provides that if the concerned Public Information Officer does not furnish the required information within specified period or refuses to provide information, the applicant making request for information shall file an appeal within 30 days of the date of such refusal. An appeal shall be disposed of within a 30 days of the receipt of the appeal or within such extended period not exceeding a total of 45 days from the date of filling.

12. The provisions of this Act are of overriding nature and these provisions cannot be made ineffective by proceedings of the lower courts. 

13. The Central and State Information Commissions shall, after the end of each year, prepare a report on the implementation of this Act during that year and forward a copy to the appropriate Government which shall be laid down before each House of Parliament or State Legislature as the case may be. 

14. The Central Government, by using power vested (मिली हुई है) under this Act, shall check out programmes to advance the understanding of the public and develop (promote) the information machinery. 

15. If any Public Information Officer neither furnishes the information nor refuses to furnish the information within specified time, he shall be penalised with ₹ 250 per day for the delay period subject to the total amount of such penalty not exceeding ₹ 25,000.

16. The amount of fee deposited by the applicant for seeking information shall have to be returned, if information is not furnished within specified period.

17. If any person, with one reason or the other, is unable to give written application for seeking information, he can tell it orally to the concerned Public Information Officer and it will be taken as his oral request for seeking information. In such cases, the concerned Public Information Officer shall render all reasonable assistance to the person making the request orally to reduce the same in writing.

The salient features of Right to Information Act, 2005