Finance is the major elements.

Which activities the overall growth of the economy, Finance is regard as

the lifeblood of a business enterprise. This is because in the modern money-oriented economy finance is
one of the basic foundations of the kinds of economic activities. It is the master key which provides the
access to the soures for being emplyed in manufacturing and merchandishing activities. it has rightly
been said that business needs money to make more money. However it is also prove that so money will
get more money only when it is properly managed.

Hence efficient management of every business enterprises is closely linked with effiecient management
of finance.

Meaning of Finance

Finance is the main business activity, which are concerned with the acquisition and conservation of
capital funds in meeting financial needs and averall objectives of a business enterprise.

Finance system calls for the effective performance of financial institution, financial instruments and
financial markets.

FINANCIAL MANAGEMENT

The purpose of the chapter is to provide an overview about the theoretical background of financial and
leverage analysis and its association with examination of the performance of an organization. This
chapter brings out the importance of finance management at first, followed by the role of financial and
leverage analysis in evaluating the performance of an organization.

Financial management is an appendage to the finance function with the creation of compex industry
structure; the finance function has grown to very great heights. One cannot think of bisiness activity in
isolation from its financial implication. financial management refers to that part of the management
activity, which is concerned with planning and controlling of firms financial resources of raising funds for
the firm which is suitable and economical for the need of the business, appropriate employment of
funds thereof and all business decisions has financial management is applicable to every type of
organization irrespective of size kind of nature.

Objective of Financial Management

Financial managemenet evaluates how funds are produced and used. In all cases it involves a sound
judgement combined with logical approach of decision- making. The core of financial policy is to
''maximize earning in the long run and optimize them in short run" this calls or an evaluation of
alternative uses of funds and allocation for businesss function.

Financial management provides a framework for selecting a cource of action and deciding an
economically viable strategy.

The main objective of a business is to maximize the owner's welfare. This objective can be achieved by

Profit maximization
wealth maximiization

a. PROFIT MAXIMIZATION:

The term profit maximization is deep rooted in the economic theory. It is needed that when
pursue the policy of maximizing profits society’s resources are efficiently utilized. The firms
should undertake those actions that would pursue profits and drop those actions that would
decrease profits. The financial decisions should be oriented to the maximization of profits.

Profits provides yardstick for measuring the economic performance of firms. It makes allocation
of resources to profitable and desirable areas. It also ensures maximum social welfare. On these
grounds profit maximization serves as criteria for financial decision.

a. WEALTH MAXIMISATION:

Wealth maximization or value maximization or net present Value maximization provides an

appropriate and operationally feasible decision criterion for financial management decisions. It
provides an unambiguous measure of what financial management should seek to maximize in
making investment and financing decisions. It satisfies the three requirements of a suitable
criterion namely precise, time value of money and quality of benefits.

In wealth maximization criterion the benefits associated with assets are measured in terms of
cash flows rather than accounting profits. The cash flows are a precise concept with definite
meaning. It overcomes the deficiencies associated with accounting profits.

OBJECTIVES

To study the finance department by the theoretical knowledge to practical situation and to notice
difference in practice.

To analyze the financial statements and funds flow statements, study and present conclusions

Finally, to make acritical review of the working of the decision making process and make
recommendation if any.

KEY ACTIVITIES OF FINANCIAL MANAGEMENT

Financial analysis, planning and control.

Management of firm's asset structure.

Management of firm's financial structure.

FINANACIAL DECISION

Investment decisioins

Financing decisioins

a) Investment decision:

Investment decision relates to selection of asset in which funds will be inverted by a firm. The
assets that can be acquired by a firm may be long term asset and short term assets.

b) Financing decision:

Financing decision is concerned with financing mix or capital structure the mix of department
and equity is known as capital structure. Determination of the proportion of equity and debt is
the main issue in financing to share holders and also financial risk.

c) Dividend decision:

A firm may distribute its profits or retain the balance with it the decision depends upon the
preference of the shareholders and investment opportunities available to the firm. Dividend
decision has a strong influence on the market price of share.

Therefore, the dividend policy is too determined in terms of its impact on shareholders’ value.
The optimum dividend policy is one. Which maximize the value of shares and wealth of
shareholders the financial manager should determine the optimum payout ratio that is the
proportion of net profit to be paid out to shareholders? The financial manager should also
consider those factors. This determines the dividend policy in practice.

MEANINGNOF FINANCIAL ANALYSIS

One of the important steps of accounting is the analysis and interpretation of the financial
statements which results in the presentation of data that helps varios categories of persons in
formimg opinion about the profitability and financial position of the business concern.
In the words of Myers,''Financial statement analysis is largely is a study of relationship among
the various financial factors in a business s disclosed by a single set of statement and a study of
the trend of those factors as shown in a series of statement'.

The most important objective of the analysis and interpretation of financial statement are o
understand the significance and meaning of financial statement data to known the strength and
weakness of a business undertaking so that forecast may be made of the prospects of that
undertaking.

FIINANCIAL STATEMENTS

A Financial statement is an organized collection of data according to logical and consistent

accounting procedures. Its purpose is to convey an understanding of some financial aspect of
businiss firm. It way show a position at a moment of time as in the case of balance sheet, or may
reveal a series of activities over a given period of time, as in the casee and income satement.

Therefore, the financial statementt generally refers to two basic statements, such as Income
Statement and Balance Sheet. apart from these two statement, a company may also prepare a
statement of Retained Earning and statement of changes in financial position.

OBJECTIVES OR USES OF FINANCIAL ANALYSIS

financial analysis is helpful in assessing the financial position and profitability of a concern. The
following are the main objectives of analysis of financial statement:

To judge the present and future earning capacity or profitability of the concern.

To judge the operational efficiency as a whole and of its various parts or departments.

Tojuddge the short-term solvency of the concern for the benefit of the debenture holders and
trade creditorss.

To have comparative study in regd to one department with another department.

To help in assssing developments in the future by making forecastss and preparing budgets.

PROCESS OF FINANCIAL ANALYSIS

The analysis of financial statement is a process of evaluating the relationship between
component of financial statement to obtain a better understanding of the firm's position and
performance. The funcional analysis is the process of selections, relation and evaluation.

The first task of the financial analyst is to select the information relevant to the decision under
consideration form the total information contained in the financial statements.

The second step is to arrange the information in a highlight significant relationship.

the final step is interpretation and drawing of inferences and conclusions.

TYPES OF FINANCIAL ANALYSIS

A Financial analysis can be external or internal

External Analysis

Those persons who are not connected with the enterprise make it. They do not have access to the
enterprise. They do not have access to the detailed record of the company and hace to depend
mostly on published statements. Investor's credit agencies, governmental agencies and research
scholar makes such types of analysis.

Internal analysis

Those person who have access to the books of accounts make the internal analysis. They are
members of the organization. Analysis of financial statement or other financial data for
management purpose is the internal type of analysis. The internal analyst can give more reliable
result than the external analyst can because every type of information is at his disposal.

TECHNIQUES OF FINANCIAL ANALYSIS

The analysis and interpretation of financial statement is used to determine the financial position and
operations as well. A number of techniques are used to study the reltionship between different
statements.

The fowing methods of analysis are used.

COMPARAIVE INCOME STATEMENTS

The income statement discloses net profit or net loss or account of operations. A comparative income
statement will show the absolute figures two or more period, the absolute change from one period to
another and if desired the change in term of percentages. Since the figure two or more periods are
shown side by side, with the help of this we can quickly ascertain whether sales have inncreased or
decreased.. therefore, only a glance of data incorporated in this statement will be helpful in making
useful conclusions.

COMPARATIVE BALANCE SHEET

Balance sheet of two or more different dates can be used for comparing assets and liabilities and finding
out any increase or decrease in those items. Therefore, in a single balance sheet the emphasis is on
present positiion, it is on change in the comparative balance sheet. This type of balance sheet is very
helpful in studing the trends in a business concern.

Common Size Financial Statements

common size financial statements are those in which figures reported are converted into percentage to
some common base. When this method is pursued, the income statemen exhibits each expense item or
grou[ of expense items as a percentage of net sales.and net sales are taken at 100 percent. Similarly.
each individual asset and liability. Classification is shown as a percentage of total assets and liabiliies
respectively. Statements prepared in this way are referd to as common size statements.

Common-size statements prepared for one firm over the years would highlight the relative changes in
each group of expenses, assets and liabilities. these statement can be equally useful for inter -firm
comparisions given the fact that absolute figures of two firms of the same industry are not comparable.

Trent percentages

Trent percentages are very much helpful in making comparative study of the financial statements for
several years. The way calculating trend percentage involves the calculation of percentage relationship
that each item bears to the same items in the base year. Each items of base years are is taken as 100
and on that base the percentages for each of the items of each of the years are calculated. These
percentage can be taken as index number showing the relative changes in the financial data resulting
with the passage of time. This method is a very much useful, analytical device for the management since
by substitution of percentages for large amounts, brevity and readability are achieved.
Funds flow statements

funds flow statement is a financial statement, which indicates thw various means by which the funds
have been obtained during the certain period and the ways to which these funds have used during that
period.

In short it is the statemen, which shows the movement of funds between two balance sheet dates.

The funds flow statement is called by different names, such as statement of source and applications of
funds, statement of changes in working capital, where GAAT statement and statement of resource
provided and applied.

Cash flow statement

Cash flow statement shows the movement of cash and their causes during the period under
consideration.It may be prepared annually,half yearly,monthly, weekly or for any other duration. Cash
flow statement is prepared to show the impact of financial policies and procedures on the cash position
of the firm and takes into consideration all transactions that have a direct impact upon caash.A cah flow
statement concentrates on transactions that have direct impact on cash. It deas with inflow and outflow
of cash between two balance sheet dates. In other word, a statement of change in a financial position of
a firm on cash basis is calleld a cash flow statement.

Leverage ratios

Leverage refers to increased means of accomplishing some perpose. In financial management,It refers
to employment of funds to accelerate rate of return to owners. It may be favorable. An unfavorable
leverage exists if the are of return remains to be lower.it can be used as a tool of financial planning by
the financial manager.

Leverage may be

opeprating leverage

Financial leverage

combined leverage

return on investment leverage

Operation leverage

It occurs when with fixed costs the percentage change in profits due to change in sales volume. It shows
the extent of the change in earning before intrest and tax (EBIT) as a result of change in sales volume,
two important points relating to fixed cost mand break-even point should be noted about operating
leverage.

The significance of operating leverage lies in the fact that it tells the finance manager about the impact
of change in sales revenue an operation income. thus a firm with high degree of operating leverage will
experience much large effect on EBIT because of small change in sales chnge in sales. As far as possible a
firm should avoid operatiing under conditions of high degree of operating leverage, as it is a high-risk
situation. It will be desirable to operate at sufficiently above hte breake-event point to avoid the danger
of sharp fluctuations in profits because of variations in sales. It may be noted carefully that the degree of
operating leverage goes on decreasing with every increase in sales volume above the breake-even point.
it is calculated by the following formulas:

Combined leverage

This leverage exhibits the relationship between a change in sales and in corresponding variation in
taxable income.

Combined leverage= contribution

Taxable income

Financial leverage
when a firm procures debut capital to finance its needs, it is said to have financial leverage. It tells the
extent of the change in earning before tax (EBIT) due to hcange in operating income (EBIT). It is
calculated with the help of the following formula.

Return on investmet leverage

it may be favorable or unfavorable. If the rate of return on investment (ROI) of a firm is higher than the
cost of debt capital, it is said favorable financial leverage. On the other hand, if the rate of return on
investment (ROI) is lower than the cost of capital, the firm is said to have unfavorable financial leverage.
Favorable financial leverage is also refered to as trading on equity.

2 CHAPTER

Fianl leverage results from the difference between the rate of return the company earn on
investment in its own asset and the rate return the company must pay its creditors (Garrison et
al.,2004). Considerble effort has been expended to explain the relationship between a firm's real
asset risk and the riskiness of its equity. Theoretical and empirical justification exists for relating
stock risk to leverage. Percival (