Term Paper On Financial Management

Submitted to,
Mr. Mohammad Badruzzaman Bhuiyan Lecturer and course instructor Department of Tourism and Hospitality Management Faculty of Business Studies University of Dhaka

Submitted by,
Department of Tourism and Hospitality Management Faculty of Business Studies University of Dhaka

GYPSY"

Date: March 13, 2010 Department of Tourism and Hospitality Management Faculty of Business Studies University of Dhaka

Topic

Risk and Return

Group profile

GYPSY
Serial no.

Name
S. M. Mehedi Hasan Md. Mizanur Rahman Abdullah all Masum Irin Sultana Salma Nasrin

Roll
001
009 023 036 057

Designat ion
Leader
Member Member Member Member

1. 2. 3. 4. 5.

Q.N. 1.What is Finance?

Ans . The field of finance refers to the concept of time, money and risk and how they are related. Finance is concern with the process, institution, markets, and instrument involved in the transfer of money among individuals, business, and government. Or, we can say, Finance is a branch of Economics concerned with resource allocation, resource management acquisition and investment. Finance works most basically through individuals and business organizations depositing money in a bank. The bank then lends the money out to other individuals or corporations for consumption or investment, and charges interest on the loans. Finally, finance is a part of economics that deals with matter related to money and market.

Q.N. 2.What is Business Finance?

Ans. Business Finance is concerned with the sources of funds available to enterprises of all sizes and the proper usage of money or credit obtained from such sources. Business finance is the task of providing the funds for business activities. For small business, this is referred to as SME finance (Small and Medium Enterprises). It generally involves balancing risk and profitability, while attempting to maximize an entity's wealth and the value of its stock. So we can say, business Finance is an art of playing with fund to achieve the goal of company.

Q.N. 3.What is Management?

Ans. Management consists of the decision making activities undertaken by one or more individuals to direct and coordinate of other people on order to achieve results which couldnt be accomplished by any one person acting along. Or, Management in all business and human organization activity is simply the act of getting people together to accomplish desired goals and objectives. Finally we can say, management is a distinct process consisting of planning, organizing activating and controlling perform to determine and accomplish the stated objectives and other resources.

Q.N. 4.What is Financial Management?

Ans . Financial management is the global leader in developing and disseminating known as about financial decision making that is financial management refers to planning, directing, monitoring organizing and controlling of the monetary resources of organization. Or, Financial Management refers to managerial finance the branch of finance that concerned with the managerial significance of finance technique. Finally we can say, financial manager deals with decisions that firms make concerning their cash flows.

Q. N: 5. Discuss the managerial finance function or functions of financial management?

Ans . Financial management is that managerial activity which is concerned with the planning and controlling of the firms financial resources. Although it may be difficult to separate the finance function from production, marketing and other function, yet the functions themselves can be readily identified. There are four functions of financial management,
A. Investment of long term asset-mix decision B. Financing or capital mix decision C. Dividend of profit allocation decision D. Liquidity or short term asset mix decision

A firm performs finance functions simultaneously and continuously in the normal course of the business. The do not necessarily occur in a sequence. Finance functions call for skillful planning, control and execution of a firms activity. Here the functions are described in details.

A. Investment of long term asset-mix decision

Investment decision or capital budgeting involves the decision allocation of capital of commitment of funds to long term assets that would yield benefits in the future .Two important aspect of the investment decision are;
I. II.

The evaluation of the prospective profitability of new investments, and The measurement of a cut-off rate against that the prospective return of new investments could be compared.

As future is uncertain, investment decision involves risk. Besides the decision to commit funds in new investment proposals, capital budgeting also involves decision of recommitting funds when an asset becomes less productive or non-profitable.

B. Financing or capital-mix decision

Financing decision is the second important function to be performed by the financial manager. Broadly he or she must decide when, where and how to acquire funds to meet the firms investment needs. The central issue before him or her is to determine the proportion of equity and debt. The mix of debt and equity is known as the firms capital structure. The financial manager must strive to obtain the best financing mix or the optimum
capital structure for his or her firm. The firms capital structure is considered to be optimum when the market value of share is maximized. The use of debt affects the returns and risk of shareholders. When the shareholders return is maximized with minimum risk, the market value per share will be maximized and the firms capital structure would be considered optimum.

C. Dividend of profit allocation decision

Dividend decision is the third major financial decision. The financial manager must decide whether the firm should distribute all profit, or retain them or distribute a portion and retain the balance. Like the debt policy, the dividend policy should be determined in terms of its impact on the share-holders value. The optimum dividend policy is one that maximizes the market value of the firms share. Thus, if shareholders are not indifferent to the firms dividend policy, the financial manager must determine the optimum dividend payout ratio. The financial manager should also consider the questions of dividend, stability, bonus share and cash dividends in practice.

D. Liquidity or short term asset mix decision Current asset management which affects a firms liquidity is yet another important finance functions. In addition to the management of long term asset, current asset should be managed efficiently for safeguarding the firm against the dangers of liquidity and insolvency. Investment in current assets affects the firms profitability, liquidity and risk. A conflict exists between profitability and liquidity while managing current assets. If the firm does not invest sufficient funds in current assets, it may become illiquid. But it would lose profitability as idle current asset would not earn anything. In order to ensure that neither insufficient nor unnecessary funds are invested in current assets the financial manager should develop sound technique s of managing current asset. He or should estimate firms needs for current asset and make sure that funds would be made available when needed.

So, the functions of financial manager are to review and control decisions to commit or recommit funds to new or ongoing uses. Thus in addition to raising funds , financial management is directly concerned with production, marketing and other functions , within as enterprise whenever decision are made about the acquisition of distribution of assets.

Q. N.6. Who is financial manager?

Ans . A financial manager is a person who is responsible in significant way to carry out the finance functions. A financial manager occupies a very important position in an organization structure. And he is responsible to for all types of investment and financing decisions. The financial manager has to plan organize, direct, control and evaluate all types financial decisions. He is also responsible for preparing the financial and reporting it to the regulatory agencies. So we can say that a financial manager is a person who is responsible for all types of financial fund management with planning, organizing, directing, controlling and evaluating etc.

Q. N.7. Discuss the role or contribution of financial manager.

Ans .

Financial manager is a person who is responsible for all significant investment and financing decision. He or she plays a very significant role within an organization. Some important roles or contributions are,
a. b. Financial planning Source identification

c.Investment fund d. e. Distribution of profit Protection of capital These are described below,

f. Managing funds g. h. Forecasting cash flow Raising of funds

a. Financial planning

Planning is deciding in advance what is to be done in future. j. Cost control Financial planning means planning about the finance functions. It is k. Price determination important for the firms. Every firms financial planning must be well thought and well decided. Because the success of firms is mainly depend on financial planning.
i. Forecasting future profit

b. Source identification

Identification of the source of fund is very important for a firm which is done by the financial manger. Because, before going ahead it is most important the sources from where the finance will come and which source is more secure and reliable.
c. Investment fund

The decision of investing fund is crucial. A financial manager takes the decision of investing the available fund by seeking the potential profitable sectors.

d. Distribution of profit

The financial manager decides whether the firm should distribute all profits or retain or distribute apportion and retain the balance.
e. Protection of capital

It is financial manager who thinks about the protection of capital and to make the protection of capital. He or she makes the survey of risky and risks free sector and take decision about the portion of capital will be invested in risky or risk free sector.

f. Managing funds

Managing funds involve identifying the sources of fund, gathering it and allocating it appropriately in all necessary sectors and is done by the financial manager.

g. Forecasting cash flow

Liquidity or current asset management is very important for a business. When a firm takes the long-term investment decision, the financial manager has to ensure that and it has enough liquidity and forecast the future cash flow.

h. Raising of funds

The responsibilities of raising funds are being performed by the financial managers.if financial manger planned the financial factor carefully, the company can be benefited.

i.

Forecasting future profit

Profit maximization is the goal of business. By analyzing the profit ratio of the past years, financial manager forecast about the future profit.

j.

Cost control

Financial managers take necessary steps to control the cost by identifying sectors where there was much wastage spending more than the necessity.

k. Price determination

Price determination is an important work done by financial manager. By identifying the cost of product and adding a rational profit which will better be accepted by all is decided by the financial manager. Finally, the financial manager has not always been in the dynamic role of decision making. Till recently he or she was to be considered to be an unimportant person, as far as the top management decision making was concerned. He or she will be an important management person only with the advent of the modern or contemporary approach to the financial management.

Q. N.8. Discuss the financial staff responsibilities.

Ans . The financial staff task is to acquire and then help operate resources so as to maximize the value of the firm. Here are some specific responsibilities.
a. b. c. d. e.

Forecasting and planning Major investment and financial decision Coordination and control Dealing with the financial market Risk management

These are described below;

a. forecasting and planning

The financial staff must coordinate the planning process. This means they must interact with people from other department as the look ahead and lay the plans that will shape the firms future.
b. Major investment and financing decision

A successful firm usually has rapid growth In sales, which requires investments in plant equipment and inventory .the financial staff must help determine the optimal sales growth rates, help decide what specific asset to acquire and then choose the best way to finance those assets.
c. Coordination and control

The financial staff must interact with other personnel to ensure that the firm is operated as effectively and efficiently as possible. All business decisions have financial implications and all managers financial ad otherwise need to take this into account.
d. Dealing with the financial market

Financial staff must deal with money and capital markets. As each firm affects and is affected by the general financial markets where funds are raised, whereas the firms securities are traded and where investors either make or lose money.
e. Risk management

All business faces risk including natural disasters such as fire and foods, fluctuation of foreign exchanges rate etc. some of these risks can be reduced by purchasing insurance or by hedging in the derivative market . The financial staff is responsible for the firms overall risk management program, including identifying risks that should be managed and the managing them in the most efficient manner. Finally, people working in financial management make decisions regarding which assets and their firm should be financed and how the firm should conduct its operation.

Q.N.9. Show the organization of financial management?

Ans . Organizational structures vary from firm to firm, but it has some common structure that we can know by the mean of typical picture. We can see in the picture below that, the Chief Financial Officer (CFO) generally has the title of vice president: finance and he or she reports to the president. The financial vice-presidents key subordinates are the treasurer and the controller. In most firms the treasure has direct responsibility roe managing the firms cash and marketable securities, for selling stocks and bonds raise capital, for observing the corporate pension planned for managing risk. The treasures also supervises the credit manger, the inventory manager and the director of capital budgeting.

Board of directors

President

Vice president: sales vice president: operation

vice president: finance

1. Manage directly cash and marketable securities 2. Plans the firms capital Structure Treasurer Controller

3. Manage the firms Pension fund

4.

Manages risk.

Credit financial Manager

accounting

Inventory tax manager

accounting

Director of capital budgeting

cost
accounting

Figure. Finance in the organizational structure of the firm

In the figure, the controller is typically responsible for the activities of the accounting and tax department. So this was the organization of financial management.

Q. N. 10. Discuss the alternative form of business organization.

Ans. One of the major decisions an entrepreneur must make is to determine which legal form of business ownership to use in creating a business venture. There are three main forms of business organization.
a. Sole proprietorship b. Partnership c. Corporation

These are described below.

a. Sole proprietorship

The sole proprietorship, as the name implies, is an unincorporated business owned by one individual. In term of numbers, about 80% of business are operated as sole proprietorship. On the other hand, based o the dollar value of sales about 13% of all business is conducted by sole proprietorship. Sole proprietorship is the most favorable business because it has some advantages,

It easily and inexpensively formed It is subject to few government regulations The business avoids corporate income taxes The proprietor retain all profit The proprietor enjoy freedom and flexibility in decision making It can be easily dissolved

The sole proprietorship also has some limitations,

It is difficult for a proprietor to obtain large sums of capital The proprietor has unlimited personal liabilities for the business debts The life of a business organized as proprietorship is limited The proprietorship has limited funds for expansion The proprietor lacks of business and management skills

b. Partnership

A partnership exists whenever two or more persons associate to conduct a non corporate business for profit. Partnership may operate under different degrees of formality, managing from informal, oral understandings

to formal agreements field with the secretary of the state in which the partnership was formed.

The major advantages of partnership are, Low cost and ease of formation The partners can pool their knowledge and skills The partners can provide more funds It can be able to attract and retain the employees It also avoid corporate income taxes

The partnership has also some disadvantages

Unlimited liability Limited life of the organization Difficulty of transferring ownership Difficulty of raising large amounts of capital Potential conflicts between partnership Difficulty in dissolving the business

So this was the partnership business form.

c. Corporation

A corporation is a legal entity created by a state and it is separate and distinct from its owners and managers. This separateness gives the corporation three major advantages,

Unlimited life Easy transferability of ownership interest Limited liability

The corporation form offers significant advantages over proprietorship and partnerships, but it also has two major disadvantages;

Corporate earnings of may be subject to double taxation- the earning of the corporation are taxed at the dividends level and then any earnings paid out as dividends are taxed again as income to the stockholders. Setting up a corporation, and filing the many required state and federal reports, is more complex and time consuming than for a proprietorship or partnership.

Although there are some disadvantages, corporation is more profitable business organization. So, these was the alternative form of business .the modern business world is based on these types or form of business.

Q. N.11. Define ethics and business ethics. Why business ethics is more important for your organization?
Ans. The standard of conduct by which ones actions are judged as right or wrong, honest or dishonest, fair or unfair is ethics. Business ethics can be thought of as a companys attitude and conduct toward its employees, customers, community and stockholders. High standard of ethical behavior that, a firm treats each party that it deals with a fair and honest manner. A firms commitment to business ethics can be measured by the tendency of the firm and its employees to adhere to law and regulations. Many firms today have in place strong codes of ethical behavior and they also conduct training programs designed to ensure that employees understand the correct behavior in different business situations.

Importance of ethics Ethics play a significant role in the business organization. Law cannot and should not be developed to govern all business interactions. If this is the case, than people must rely on the ethical practices of others to ensure the open conduct of business. Ethics is very important for some reasons,

Business needs ethics for products safety and quality. Business has spent time and money to improve the safety of products. Spurred on by the fear of law suits and consumer action, business has initiated a number of innovative ideas to ensure product safety and quality. Practicing fair employment is another importance of ethics. For example, hiring and firing decisions should be based solely on an individuals ability to perform the job. Favoritism and malpractices should not exist in employee recruitment. Marketers are sometimes accused of deceptive practices that lead consumers to believe that they will get more value than they actually do. So business should maintain fair marketing and selling practices. Ethics is also important in the use of confidential information for personal gain. Companies have become more sensitive to the needs of consumers for product information. So the information must ne available and believable to all. Community involvement is a very crucial importance of ethics. any business or organization involve with a society, customer, employees, other business communities government etc. so it should develop the relationship with these communities .

So we can realize that ethics is the most important matter not only for human but also for business. So each and every business must practice the business ethics.

Q. N.12. What is social responsibility? Explain the social responsibility of a business to others.
Ans . Social responsibility means the concept that business should be actively concerned with the welfare of society at a large. It is the set of obligation an organization has to protect and enhance the societal context in which it functions. Any business organization must be responsible to the society, customers, bits employees, government, its investors and other business communities.

Responsibility to the society

To build up educational institution To develop infrastructure To control environment pollution To donate in charities

Responsibilities to the customers

Determining fair price Producing and supplying quality products Supplying product at a place close to the consumers door

Responsibilities to the employees

Determining appropriate salary scale Rewarding them based on performance Giving them friendly working atmosphere Motivating them properly

Treating employee equally

Responsibilities to the government

To pay taxes regularly Should not break government rules and regulations To cooperate with the government in all activities

Responsibilities to the investors or stockholders

Acting in stockholders best interest Maximizing the stockholders wealth

Responsibilities to the business community

Should not be hostile to other business To maintain good relationship with the competitors

These are the responsibilities that a businessman should take into account while establishing a new business organization. Because business is the most important sector that can improve a society.

Q.N.13. What do you mean by agency relationship? What are some mechanisms that encourage managers to act in the best interest of stockholders?

Ans.

Managers are the persons employed by the board of director and empowered by the owners of the firm-the shareholders-to make decisions, and that creates a potential conflict of interest known as agency theory. An agency relationship arises whenever one or more individuals called principle hire another individual or organization called an agent, to perform some services and delegate decision making authority to the agent. In financial management the primary agency relationships are those between i. ii. Stockholders and managers and Managers and debt holders

Stockholders versus manager Agency problem is a potential conflict of interests between the agents (manager) and the outside stockholders or the creditor. It arises whenever the manager of a firm owns less than 100% of the firms common stock. In most large corporations, potential agency conflicts are important, because large firms managers generally own only a small percentage of the stock. In this situation by creating a large, rapidly growing firm, managers; increase their job security increase their own power, status and salary create more opportunities for the lower and middle managers

Mechanism that encourage managers Managers can be encouraged to act in stockholders best interest through incentives and reward them for good performance but punish them for poor performance. Some specific mechanism used to motivate managers to act in shareholders best interest includes the following,

a. Managerial compensation Manager obviously must be compensated and the structure of the compensation package can and should be resigned to meet two priming activities, i. ii. to attract and retain able managers to align managers actions as closely as possible with the interest of shareholders.

But gradually a senior executives compensation is structured in three parts; I. a specified annual salary, which is necessary to meet living expenses II. III. a bonus paid at the end of the year which depends on the companys profitability during the year Options to buy stock or actual shares of stock, which reward the executive for long -term performance.

Managers are more likely to focus on maximizing stock prices if they are large shareholders. And often the companies grant the followings, I. Performance share

Performance share is the stock that is awarded to executives on the basis of the companys performance and the continued services.

II.

Executive stock options

It is an option to buy stock at a stated price within a specified time period that is granted to an executive as part of his or her compensation package.

b. Direct invention by the stockholders Years ago most stock was owned by individuals, but today the majority is owned by institutional investors such as insurance, company, pension funds, and mutual funds. Therefore, Institutional money managers

have the clout, if they chose it to use, to exercise considerable influence over most firms operations. First, they can talk with firms management and make suggestions regarding how the business should be run. In effect institutional investors act as lobbyists for the body of stockholders Second, any shareholder who has owned at least $200 of a companys stock for one year can sponsor a proposal that must be voted on at the annual stock holders meeting, even if the proposal is opened by management

c. The threat of firing Until recently, the probability for a large firms management being ousted by its stockholders was so remote that it posed little threat. This situation existed because the shares of most firms were so widely distributed and managements control over the voting mechanism was so strong that it was almost impossible for dissident stockholders to get the votes needed to overthrow a management team. However a noted earlier that situation is changing. In recent years the top managers at Mattel, Compaq, coca-cola, lucent, yahoo, UAL and Xerox have resigned or fired after serving as CEO only a short period of time.

d. The threat of takeover Hostile takeovers (when management does not want the firm to be taken over) are likely to occur when a firms stock is undervalued relative to its potential because of poor management. In a hostile takeover, the mangers of the acquired firm are generally fired, and anyone who manages to stay on loses status and authority. Thus managers have strong incentive to take actions designed to maximize stock prices. In other words of one companys president, if you want to keep your job, dont let yours stock sell at a bargain price. Finally these are the mechanisms that are most important for a manager to know.

Q. N. 14. Why should managers not take actions that are unfair to any of the firms stockholders?
Ans.

There are possibilities of being conflicts between creditors and stockholders. Creditors have a claim on part of the firms earning stream for payment of interest and principle on the debt, and they have a claim on the firms assets in the event of bankruptcy. The stockholders through their managers/agents cannot expropriate wealth from creditors, as for unethical behavior is penalized in the business world. First, creditors attempt to protect themselves against stockholders by pricing restrictive covenants in debt management. Moreover, of creditors perceive that firms managers are trying to take advantages of them they will either refuse to deal further with the firm or else will change higher than normal interest rate to compensate for the risk of possible exploitation. Thus firms that deal unfairly with creditors either lose access to the debt markets or are saddled with high interest rate and restrictive covenants all of which are detrimental to shareholders. In view of these constraints, it follows that to best serve their shareholders in the long-run, manager must play fairly with creditors. As agent of both shareholders and creditors managers must act in a manner that is fairly balanced between the interests of the two classes of security holders. Similarly, because of other constraints sanctions, management actions that would expropriate wealth from any of the firms other shareholders, including its employees, customers, suppliers and community, will ultimately be the detriment of its shareholders. In our society stock price maximization requires fair treatment for all parties whose economic positions are affected by managerial decisions.

The End