Financial and Strategic Management Study Material PDF

STUDY MATERIAL EXECUTIVE PROGRAMME FINANCIAL AND STRATEGIC MANAGEMENT MODULE 2 PAPER 8 i  © THE INSTITUTE OF COMPANY SECRETARIES OF INDIA TIMING OF HEADQUARTERS Monday to Frida...

STUDY MATERIAL EXECUTIVE PROGRAMME FINANCIAL AND STRATEGIC MANAGEMENT MODULE 2 PAPER 8 i  © THE INSTITUTE OF COMPANY SECRETARIES OF INDIA TIMING OF HEADQUARTERS Monday to Friday Office Timings – 9.00 A.M. to 5.30 P.M. Public Dealing Timings Without financial transactions – 9.30 A.M. to 5.00 P.M. With financial transactions – 9.30 A.M. to 4.00 P.M. Phones 011-41504444, 45341000 Fax 011-24626727 Website www.icsi.edu E-mail [email protected] Laser Typesetting by MP Printers, Phase-II, Noida 201305, and Printed at SAP Print Solutions Pvt. Ltd. Mumbai - 400013 / November, 2021 ii  EXECUTIVE PROGRAMME FINANCIAL AND STRATEGIC MANAGEMENT The company secretaries by virtue of their expertise in the corporate laws and procedure are in eminently suitable position to: (a) Present to the Board of Directors, the financial, legal and personnel aspects of modernisation, expansion, diversification of the existing projects of new projects; (b) Obtain the decision from the Board; and (c) Interact effectively with the financial institutions in the process of procuring the finance. The legal aspects of finance are becoming increasingly important and a Company Secretary is expected to successfully and effectively handle, amongst other things, important aspects such as management of public issues, syndication of loans, obtaining project approvals, raising of finance through public deposits and debentures or bonds etc. All these essentials require expert knowledge of diverse and complex procedures involved. Realising that the services of a Company Secretary could be of immense use in this important area, it was thought necessary to include this paper with a view to equip the students with the requisite fundamentals of the Financial and Strategic Management. It has been the endeavour to provide a blend of theoretical concepts and practical orientation. Topics, such as, raising finance from financial institutions, dividend policies, etc. requiring legal expertise and procedural knowledge have been written. Topics such as, project appraisal, financial planning, portfolio management and securities analysis, working capital management and capital budgeting decisions, strategic management, business policy; strategic analysis & planning have been written keeping in view the financial and strategic management principles and the practical utility. Ample number of practical problems and case studies have been added to aid the student in their learning process. Strategy is a broad concept that covers a multitude of different issues, concepts and methods. Strategy requires a significant amount of work to understand and even the experts often find themselves searching for new ways to research and think about the topic. For managers and leaders, strategy is at the centre of the effort to create value for customers to respond to competitive challenges and to build strong organizations. All this leads to make optimum utilization of organization’s material and human resources in order to achieve better financial performance, improved qualitative decisions, employee motivation, minimum resistance to change, etc. by using various theories, models and management techniques. An organization always operates in the environment of risk and uncertainty which is the result of operation of multiple forces i.e. economic, technological, legal, political, social and global. Strategic management helps the organization to develop set of decisions and actions resulting in formulation and implementation of strategies designed to achieve the objectives of an organization in a given frame work. Though efforts have been made to provide a self-contained study material yet it may require regular supplementation as the subject is of a dynamic and fast changing nature. Students are advised to update their knowledge continuously by reading economic dailies, financial magazines and journal and other relevant literature including reference and suggested readings on the subject. Students are expected to learn the art of applying the principles of financial management and strategic management to real business situations and for this case studies in these area would prove to be of immense use. Besides, as per the Company Secretaries Regulations, 1982, students are expected to be conversant with the amendments to the laws made upto six months preceding the date of examination. The legislative/conceptual changes made upto August, 2021 have been incorporated in the study material. However, it may so happen that some developments might have taken place during the printing of the study material andits supply to the students. The students are therefore, advised to refer to the e-bulletin and other iii publications for updation of the study material. Although care has been taken in publishing this study material, yet the possibility of errors, omissions and/or discrepancies cannot be ruled out. This publication is released with an understanding that the Institute shall not be responsible for any errors, omissions and/or discrepancies or any action taken in that behalf. In case of any discrepancy, error or omission are found in the study material, the Institute shall be obliged if the same are brought to its notice for issue of corrigendum in the Student Company Secretary e-bulletin. For any doubt, students may write to the Directorate of Academics in the Institute for clarification at academics@icsi. edu. iv  EXECUTIVE PROGRAMME Module 2 Paper 8 Financial and Strategic Management (Max Marks 100) Syllabus Objective: Part I: To provide knowledge of practical aspects of financial management so as to develop skills in taking financial and investment decisions. Part II: To enable students to acquire multidimensional skills as to equip them to comprehend the process of strategy formulation. Part I Financial Management (60 marks) Detailed Contents 1. Nature and Scope of Financial Management: Nature, Scope and Objectives of Financial Management; Risk- Return and Value of the Firm; Objectives of the firm; Profit Maximisation vs. Wealth Maximisation; Emerging roles of Finance Managers. 2. Capital Budgeting: Compounding and Discounting techniques – Concepts of Annuity and Perpetuity; Capital Budgeting Process; Techniques of Capital Budgeting- Discounted and Non- Discounted Cash Flow Methods; Capital Rationing; Risk Evaluation and Sensitivity Analysis. 3. Capital Structure: Introduction- Meaning and Significance; Optimal Capital Structure; Determinants of Capital Structure; Theories of Capital Structure; EBIT - EPS Analysis; EBITDA Analysis; Risk and Leverage; Effects of Leverage on Shareholders’ Returns. 4. Sources of raising long-term finance and Cost of Capital: Sources, Meaning, Factors Affecting Cost of Capital; Methods for Calculating cost of capital; Weighted Average Cost of Capital (WACC); Marginal Cost of Capital. 5. Project Finance : Project Planning - Preparation of Project Report, Project Appraisal under Normal Inflationary and Deflationary Conditions; Project Appraisal by Financial Institutions - Lending Policies and Appraisal Norms by Financial Institutions and Banks; Project Review and Control; Social Cost and Benefit Analysis of Project. Term loans from Financial institutions and Banks; Lease and Hire Purchase Finance; Venture Capital Funds; Private Equity; International Finance and Syndication of Loans, Deferred Payment Arrangements; Corporate Taxation and its Impact on Corporate Financing; Financing Cost Escalation. 6. Dividend Policy: Introduction- Types; Determinants and Constraints of Dividend Policy; Forms of Dividend; Different Dividend Theories. 7. Working Capital : Meaning, Types, Determinants and Assessment of Working Capital Requirements, Negative Working Capital; Operating Cycle Concept and Applications of Quantitative Techniques; Management of Working Capital - Cash Receivables Inventories; Financing of Working Capital; Banking Norms and Macro Aspects; Factoring and Forfaiting. v 8. Security Analysis: Measuring of Systematic and Unsystematic Risk; Fundamental Analysis (Economic, Industry and Company); Technical Analysis and Efficient Market Hypothesis. 9. Portfolio Management: Meaning, Objectives; Portfolio Theory -Traditional Approach; Markowitz Portfolio Theory; Modern Approach - CAPM Model; Economic Value Added; Sharpe Single & Multi Index Model; Risk Adjusted Measure of Performance. 10. Practical Questions and Case Studies Part II Strategic Management (40 Marks) 11. Introduction to Management: An Overview of functions of management. 12. Introduction to Strategic Management: An Overview- Meaning & Process; Strategic Leadership; Functions and Importance for Professionals like Company Secretaries; Environmental Influences of Business- Characteristics and Components of Business Environment, Factors of Micro & Macro Environment of Business; Competitive Environment and Porter’s Five Force Model. 13. Business Policy and Formulation of Functional Strategy: Introduction to Business Policy; Framework of Strategic Management; Strategic Decision Model; Vision; Mission; Objectives and Goals; Strategic Levels of the Organization; Formulation of Functional Strategy-Formulation of Financial; Marketing; Production; Human Resource and Logistics strategies. 14. Strategic Analysis and Planning: Situational Analysis, Strategic Choices-SWOT and TOWS Analysis; PERT (Programme Evaluation Review Technique) and CPM (Critical Path Method); Portfolio analysis-Boston Consulting Group (BCG) growth-share Matrix, Ansoff’s Product Growth Matrix, ADL Matrix and General Electric (GE) Model; Strategic Planning; Strategic Alternatives-Glueck and Jauch and Michael Porter’s Generic Strategies. 15. Strategic Implementation and Control: Issues in Strategy Implementation; Various Organizational Structures and Strategy Implementation; Leadership and its forms ; Strategic Change and Control. 16. Analysing Strategic Edge : Introduction to Business Process Reengineering; Concept of Benchmarking; Introduction to Total Quality Management and Six Sigma. vi  LESSON WISE SUMMARY Financial and Strategic Management PART I – FINANCIAL MANAGEMENT Lesson 1: Nature, Significance and Scope of Financial Management Lesson 1 covers the nature, scope and objectives of Financial Management, risk-return and value of the firm, objective of the firm: profit maximisation vs. wealth maximisation and emerging role of finance managers. Financial Management deals with procurement of funds and its effective utilizations in the business. It is concerned with investment, financing and dividend decisions in relation to objectives of the company. Financial management is very important for an organisation as it brings economic growth and development through investment, financing, dividend and risk management decision which help companies to undertake better projects. Lack of financial management in business will lead to losses and closure of business. Lesson 2: Capital Budgeting This lesson covers time value of money, capital budgeting process, its need and importance, kinds of capital budgeting decisions, capital expenditure control, capital rationing, various methods of capital budgeting- non- discounted and discounted cash flow techniques, risk evaluation and sensitivity analysis, simulation for risk evaluation and some case studies on capital budgeting. Capital budgeting refers to long-term planning for proposed capital outlays and their financing. Thus, it includes both raising of long-term funds as well as their utilisation. It may, thus, be defined as the firm’s formal process for acquisition and investment of capital. Capital budgeting requires use of various methods including statistical techniques which have been discussed in the chapter. Lesson 3: Capital Structure Capital Structure of a firm is a reflection of the overall investment and financing strategy of the firm. It shows how much reliance is being placed by the firm on external sources of finance and how much internal accruals are being used to finance expansions. Optimal capital structure means arrangement of various components of the structure in tune with both the long-term and short term objectives of the firm. This chapter comprises of nature, scope and significance of capital structure, factors affecting capital structure, capital structure vis a vis financial structure, planning and designing of capital structure, optimal capital structure, capital structure & valuation, theories of capital structure, types of leverage – operating leverage, financial leverage, combined leverage, EBIT-EPS analysis and effect of leverages on return on equity. Lesson 4: Sources of Raising Long Term Finance and Cost of Capital A business requires funds to purchase fixed assets like land and building, plant and machinery, furniture etc. These assets may be regarded as the foundation of a business. The cost of capital is the required rate of return that a firm must achieve in order to cover the cost of generating funds in the marketplace. It is used as a discount rate in determining the present value of future cash flows associated with capital projects. In this lesson we will study Sources of Long Term Finance, cost of capital, factors affecting the cost of capital, calculation of cost of capital of for different sources of finance, calculation of weighted cost of capital and marginal cost of capital. Lesson 5: Project Finance Project decisions are taken by the management with basic objective to maximize returns on the investment being made in a project. Project financing is a loan structure that relies primarily on the project’s cash flow for repayment, with the project’s assets, rights and interests held as secondary security or collateral. In this lesson we will understand the meaning of Project Planning, Project Appraisal by various Financial Institutions, Project Evaluation Technique, Loan Documentation, Loan Syndication – Bridge Loans against Sanctioned Loan, Monitoring the progress of units assisted by the Financial Institutions, Social Cost – Benefit Analysis, Project Review and Control and Follow-up Reports and Procedures. vii  Lesson 6: Dividend Policy Dividend policy determines what portion of earnings will be paid out to stock holders and what portion will be retained in the business to finance long-term growth. Dividend decision is one of the crucial parts of the financial manager, as it determines the amount available for financing the organisation long term growth and it plays very important part in the financial management. This lesson includes types of dividend policies, determinants and constraints of dividend policy, type/ forms of dividend, different dividend theories – Walter’s Model, Gordon’s Model, Modigliani-Miller Hypothesis of Dividend Irrelevance Policy etc. Lesson 7: Working Capital The capital which is required to finance current assets is called working capital. It is the capital of a business which is used to carry out day-to-day business operations of a firm. Working capital is vital for the proper and smooth functioning of an organisation. Therefore, it is very necessary for a corporate professional to know about management of different constituents of working capital. In this lesson we will study the meaning, types, determinants and assessment of working capital requirements, concept of negative working capital, operating cycle concept and applications of quantitative techniques, financing of working capital; Banking norms and macro aspects, cash management, inventories management, receivables management, factoring and forfeiting. Lesson 8: Security Analysis Investment may be defined as a conscious act on the part of a person that involves deployment of money in securities issued by firms with a view to obtain a target rate of return over a specified period of time. Securities are the instruments issued by seekers of funds in the investment market to the providers of funds in lieu of funds. Security analysis is about valuing the securities using publicly available information. In this chapter we will cover the concept of investment and security analysis, investment vs. speculation, risks and its types, approaches to valuation of a security, fundamental analysis, technical analysis and efficient market theory. Lesson 9: Portfolio Management Portfolio Management is the art and science of making decision about investment mix and policy matching investment to objectives, asset allocation and balancing risk against performance. Portfolio Analysis seeks to analyze the pattern of returns emanating from a portfolio of securities, i.e. a number of securities that absorb a proportion of total amount of investment. This chapter covers meaning, objectives; portfolio theory, Traditional Approach; Fixed and Variable Income Securities, Markowitz Portfolio Theory, Modern Approach - CAPM Model, Sharpe Single & Multi Index Model, Arbitrage Pricing Theory (APT), Risk Adjusted Measure of Performance and Economic Value Added. Lesson 10: Practical Questions and Case Studies This lesson includes various practical questions and case studies on lessons covered. Ample solved illustrations have been provided in this chapter to provide the students with the methodology for solving the questions efficiently. viii  PART II – STRATEGIC MANAGEMENT Chapter 11 : Introduction to Management Management is an indispensable facet of the economic life of all human beings and of every business organisation too. This is so because, it is concerned with leading and effective utilization of financial resources of aof human, physical and business, so that the set objectives and goals may be accomplished in a desired manner. The object of this chapter is to enable the students to understand the concept and features of management, its various theories propounded by management researchers from time to time and most importantly, the functions of management. Chapter 12 : Introduction to Strategic Management Strategic Management is a discipline that deals with long-term development of an organisation with a clear-cut vision about organisational purpose, scope of activities and objectives. It provides overall direction to the organisation and includes specifying the organization’s objectives, developing policies and plans designed to accomplish these objectives, allocating resources to for the implementation of such plans. The purpose of this chapter is to understand the concept of strategic management and its process. This chapter also enables the reader to understand the functions performed by a strategic leader and the environmental influences of business. Chapter 13 : Business Policy and Formulation of Functional Strategy This chapter throws a light on the core concepts of business policy. Business Policy is the study of the functions and responsibilities of senior management, the crucial problems that affect success in the total enterprise and the decisions that determine the direction of the organisation and shape its future. It describes in detail about the roles and responsibilities of top level management, significant issues affecting organizational success and the decisions affecting organization in long-run. The objective of this chapter is to enable the students to understand the concepts related to business policy. Chapter 14 : Strategic Analysis and Planning This chapter studies strategic analysis and planning for providing overall direction to the organisation and specifying the organization’s objectives, developing policies and plans designed to achieve these objectives, and then allocating resources to implement the plans. All this requires a careful analysis of the vision, mission, objectives, goals and resources of the organisation and in-depth analysis of the external environment. Chapter 15 : Strategic Implementation and Control The implementation of policies and strategies is concerned with the design and management of systems to achieve the best integration of people, structures, processes and resources in reaching organization objectives. Strategy implementation may also consist of securing resources, organizing these resources and directing the use of these resources within and outside the organization. A good strategy without effective implementation can hardly be expected to succeed in the performance. Implementation of strategy in an organization covers a number of inter-related decisions, choices, and a broad range of activities such as the commitments and cooperation of all units, sections and departments. The objective of this chapter is to assist the students to understand the issues in Strategy Implementation; various organizational structures and strategy implementation; and concepts of strategic change and control. Chapter 16 : Analysing Strategic Edge In order to boost effectiveness and produce higher quality products for end customer, it is important to analyse strategic edge. This is also important for enabling new business growth and expansion and also to save cost by improving efficiency in the production process. The objective of this chapter is to assist the students to understand the tools and techniques of strategic management such as Business Process Reengineering, Benchmarking, Total Quality Management and Six Sigma etc. ix  LIST OF RECOMMENDED BOOKS PAPER 8 : FINANCIAL AND STRATEGIC MANAGEMENT 1. M Y Khan & P K Jain : Basic Financial Management ; McGraw Hill Education (India) Pvt Ltd. 2. R. P. Rustagi : Financial Managem ent – Theory, Concepts and Problem s; Taxmann Publications (P) Ltd. 3. Prasanna Chandra : Investment Analysis and Portfolio Management ; McGraw Hill Education (India) Pvt Ltd. 4. I M Pandey : Financial Management; Vikas Publication House Ltd. 5. Eugene F Brigham & : Financial Management – Theory and Practice; Cengage Learning (India) Michael C Ehrhardt Pvt Ltd. 6. J Van Horne & : Fundamentals of Financial Management ; Pearson Education Ltd. John M. Wachowicz 7. L.M. Prasad : Strategic Management; Sultan Chand & Sons, New Delhi 8. Upendra Kachru : Strategic Management; McGraw Hill Education (India) Pvt Ltd. 9. S N Chary : Production and Operations Management; McGraw Hill Education (India) Pvt. Ltd. x  ARRANGEMENT OF STUDY LESSONS Module-2 Paper 8 FINANCIAL AND STRATEGIC MANAGEMENT Sl. No. Lesson Title Part I: Financial Management 1. Nature, Significance and Scope of Financial Management 2. Capital Budgeting 3. Capital Structure 4. Sources of raising Long term Finance and Cost of Capital 5. Project Finance 6. Dividend Policy 7. Working Capital 8. Security Analysis 9. Portfolio Management 10. Practical Problems and Case Studies Part II: Strategic Management 11. Introduction to Management 12. Introduction to Strategic Management 13. Business Policy and Formulation of Functional Strategy 14. Strategic Analysis and Planning 15. Strategic Implementation and Control 16. Analysing Strategic Edge xi  CONTENTS PART I – FINANCIAL MANAGEMENT LESSON 1 NATURE, SIGNIFICANCE AND SCOPE OF FINANCIAL MANAGEMENT Page Introduction 2 Meaning of finance 2 Meaning of business finance 2 Definition of financial management 2 Nature, scope and objectives of financial management 3 Types of Fianncial Decisions 4 Investment decisions 4 Financing decisions 6 Dividend decisions 7 Decision criteria 7 Value of firm-risk and return 9 Liquidity 10 Profitability 12 Costing and risk 13 Objectives of a firm 16 (a) Profit Maximisation 16 (b) Shareholder Wealth Maximisation 17 Profit maximisation versus shareholder wealth maximisation 18 Economic Value-Added (EVA) – Criterion to Gauge Shareholder's Value 19 Market Value Added (MVA)-Another Criterion to gauge Wealth Maximisation 20 Financial distress and insolvency 21 Financial management as a science or an art 22 Emerging roles of financial manager 22 LESSON ROUND-UP 24 GLOSSARY 24 TEST YOURSELF 25 LIST OF FURTHER READINGS 26 OTHER REFERENCES  26 xii  LESSON 2 CAPITAL BUDGETING Page Time value of money 28 Introduction 28 Why Rs. 1 received today is worth more than Rs. 1 received after a time period 28 Use of Time Value of Money 28 Future Value of a lump sum 29 Present Value of a Lump Sum 30 Annuity 31 Perpetuity 33 Sinking Fund 34 Net Present Value 35 Capital budgeting 36 Definitions 36 Introduction 36 Capital budgeting- planning and control of capital expenses 36 Need for capital investment 37 Investment decisions – management perspective 37 Importance of capital budgeting 38 Factors influencing investment decision 38 Rationale of capital budgeting decisions 38 Kinds of capital budgeting decisions 39 Planning of capital expenditure 40 Capital expenditure control 41 Capital budgeting process 41 Investment criteria 43 Capital Budgeting Techniques 43 Traditional or Non- Discounted Cash Flow Techniques 44 1. The Payback Period Method 44 2. The Average Rate of Return (ARR) OR Accounting Rate of Return Method 47 Discounted Cash Flow (DCF) Method 49 A. Net Present Value Method (NPV) 51 B. Internal Rate of Return (IRR) 55 Modified IRR 59 Advantages and Disadvantages of the MIRR Method 61 Unequal lives of the Projects or LIFE DISPARITY 61 Equivalent Annual Annuity Approach (EAA) 63 Formula for Equivalent Annual Annuity Approach 63 C. Profitability Index (PI) Method 64 Comparison of net present value and internal rate of return methods 64 xiii  Page Points of Differences 64 Points of Similarities 65 Choice of methods 66 Limits on Investment 67 Capital rationing 67 Types of capital rationing 68 Risk and Uncertainty 69 Risk Evaluation and Sensitivity analysis 69 Standard Deviation and Coefficient of Variation 69 Risk Adjusted Discount Rate (RADR) Method 70 Certainty Equivalent Approach (CE Approach) 70 Decision Tree Analysis 71 Sensitivity Analysis in Capital Budgeting 72 Simulation for risk evaluation 73 Capital budgeting Techniques under uncertainty 74 SOME CASE STUDIES 80 LESSON ROUND-UP 95 GLOSSARY 96 TEST YOURSELF 96 LIST OF FURTHER READINGS 98 OTHER REFERENCES 98 LESSON 3 CAPITAL STRUCTURE AND LEVERAGE ANALYSIS Introduction, definition and significance of capital structure 100 Introduction 100 Definition of Capital Structure 100 Type of Capital Structure 100 Significance of Capital Structure 101 Capital structure vis-a-vis financial structure 101 Planning and designing of capital structure 102 Attributes of a Well Planned Capital Structure 103 Designing a Capital Structure 103 Optimal capital structure 103 Factors influencing capital structure 104 Capital structure and valuation 106 Capital structure theories 106 Criticism of MM hypothesis 113 MM Hypothesis with Corporate Taxes 113 Empirical evidence against MM Hypothesis 113 Pecking Order Theory 114 xiv  Page EBIT - EPS analysis 114 EBITDA analysis (earnings before interest, tax, depreciation and amortization), 116 Analysis with EBITDA 116 Limitations of EBITDA 116 Measures of operating and financial leverage 117 Definition of Leverage 117 Types of Leverage 117 Operating leverage 118 Degree of Operating Leverage 118 Uses of Operating Leverage 119 Financial leverage 119 Degree of Financial Leverage 119 Alternative Definition of Financial Leverage 119 Financial leverage helps to examine the relationship beetween EBIT and EPS 120 Difference between operating leverage and financial leverage 121 Financial Break Even Point 122 Indifference Point 122 COMBINED LEVERAGE 124 Degree of Combined Leverage 124 Working capital leverage 125 Effects of leverage on shareholders’ returns 126 1. Operating Leverage Effect : % Change in EBIT is more than % Change in Sale 126 2. Effect of Financial Leverage on ROE 126 3. Effect of High Operating leverage and High Financial Leverage 126 4. Effect of Low Operating leverage and High Financial Leverage 126 RISK AND LEVERAGE 126 Relationship between Financial Risk and Financial Leverage 129 SOME CASE STUDIES 130 LESSON ROUND-UP 132 GLOSSARY 133 TEST YOURSELF 133 LIST OF FURTHER READINGS 134 OTHER REFERENCES 134 LESSON 4 SOURCES OF LONG TERM FINANCE AND COST OF CAPITAL Introduction 136 Features of Long-term finance 136 Long term finance – its meaning and purpose 136 Factors determining long-term financial requirements 136 Sources of long term finance 137 xv  Page Owner’s capital 137 Borrowed Capital 138 Cost of capital 138 Meaning of Cost of Capital 139 Assumption of Cost of Capital 139 Importance of cost of capital 139 Factors determining the firm’s cost of capital 139 1. General Economic Conditions 139 2. Market Conditions 140 3. Operating and Financing Decisions 140 4. Amount of Financing 140 Controllable Factors affecting Cost of Capital 140 Uncontrollable Factors affecting the Cost of Capital 141 Measurement of cost of capital 141 Cost of Debt (Kd) 141 Cost of debt which are issued at premium 141 Cost of debt which are issued at Discount 142 Cost of Bond/Debentures redeemable after certain period 142 After tax cost of Redeemable debt :- 142 Cost of preference share capital 143 (1) Cost of Irredeemable preference shares 144 (2) Cost of Redeemable preference shares 144 Cost of equity capital 144 1. CAPM model 145 2. Bond Yield Plus Risk Premium Approach 146 3. Dividend Growth Model Approach 146 4. Earnings-Price Ratio approach 147 Cost of Retained Earnings 147 Weighted Average Cost of Capital 147 Book Value vs. Market Value weights 149 Marginal Cost of Capital (MCC) 149 Cost of capital and its implications in budgeting decisions 150 Implications in budgeting decisions 150 Some Case Study 151 LESSON ROUND-UP 156 GLOSSARY 158 TEST YOURSELF 158 LIST OF FURTHER READINGS 159 OTHER REFERENCES 159 xvi  LESSON 5 PROJECT FINANCE Page Introduction 162 What is Project Finance? 162 Project planning 162 What is Project Planning? 162 Importance of the Project Plan 163 Preparation of project report 165 Format of project report 166 Project appraisal under normal conditions 167 Project appraisal under inflationary conditions 168 Project appraisal under deflationary conditions 169 Project appraisal by financial institutions 169 1. The Project 170 2. The Promoters: Capacity and competence 170 3. Viability Tests 170 A. Technical Aspects of Project Appraisal 170 B. The Financial Aspects of Project Appraisal 171 C. Economic Appraisal 172 D. Social/distributive Appraisal 172 E. Environmental Aspects 173 F. Organizational and Managerial Aspects 173 G. Commercial Aspects including Marketing 173 Lending policies and appraisal norms by financial institutions and banks 173 (1) Safety 174 (2) Liquidity 174 (3) Profitability 174 (4) Risk diversification 174 Loan Policy 174 Loan documentation 175 Loan Agreement of Financial Institutions 175 Usual conditions in Loan Agreement 176 Project review and control 180 Project review is a very important aspect of entire project life. 180 Differentiating Monitoring, Evaluation and Control 180 Examples of Monitoring Indicators 180 Examples of Evaluation Indicators 181 Social cost and benefit analysis (SCBA) of project 182 Different Sources of Finance 183 Term Loans from Financial Institutions and Banks 183 xvii  Page Financial Leverage and Term Loan 183 Features of a Term Loan: 183 Lease Finance 184 Finance Lease 184 Operating Lease 184 Hire-Purchase 185 Venture Capital 185 Private Equity 186 Types of Private Equity 186 Structure of Private Equity 186 Characteristics of Private Equity 187 Deferred Payment Arrangements 187 International finance and syndication of loans 188 New International Instruments 188 Syndicated Euro Currency Loans 188 Main Objectives of Syndication (Borrowers’ point of view) 188 Lenders’ point of view 188 Corporate taxation and the impact on corporate financing 189 Tax incentives for SEZs 189 Tax incentives in Northeast, Himalayan states in India 190 Tax incentives for startups 190 Tax incentives for new companies 190 Financing cost escalation 190 LESSON ROUND UP 191 GLOSSARY 192 TEST YOURSELF 193 LIST OF FURTHER READINGS 193 OTHER REFERENCES 193 LESSON 6 DIVIDEND POLICY Introduction 196 Types of dividend policies 196 Determinants/constraints of dividend policy 197 Types of dividend/forms of dividend 198 (1) Cash Dividend 198 (2) Stock Dividend 198 (3) Bond Dividend 198 (4) Property Dividend 198 Theories of Dividend 199 Relevance of dividend 199 xviii  Page 1. Walter’s Model 199 Computation of Market Value of Company’s Shares 201 Criticism of Walter’s Model 202 2. Gordon’s Model 203 Dividend and uncertainty: the bird-in-hand argument 206 Dividend irrelevance: Modigliani – Miller Model 207 Marginal Analysis and Residual Theory of Dividend 209 LESSON ROUND-UP 216 GLOSSARY 216 TEST YOURSELF 218 LIST OF FURTHER READINGS 218 OTHER REFERENCES  218 LESSON 7 WORKING CAPITAL Meaning of working capital -the basic concept 220 Significance of working capital 221 Importance of Adequate Working Capital 221 Optimum Working Capital 221 Types of working capital 221 Determinants of working capital 223 Investment and financing of working capital 224 Investment of working capital 225 Approaches of working capital investment 225 Current Assets to Fixed Assets Ratio 225 Estimating working capital needs 226 Current assets and fixed assets financing 226 Operating or working capital cycle : concept and application of quantitative techniques 227 Assessment of Working capital 230 Working capital requirement assessment 230 Financing of Working Capital 231 Working Capital – A Policy Decision 232 Working Capital Leverage 233 Ways to Improve Working Capital Position 233 Control of Working Capital 235 Banking Norms and Macro Aspect of Working Capital Management 235 Different Committee of RBI for working capital management 236 1. Daheja Study Group 236 2. Tandon Committee 236 3. Chore Committee 238 4. Marathe Committee 238 xix  Page 5. Chakraborty Committee 238 6. Kannan Committee 238 Present scenario of working capital 239 Credit Monitoring Arrangements (CMA) 239 Statements covered in the CMA report 239 Documents/Information required to prepare CMA 240 Other issues involved in the management of working capital 240 (A) The Concept of Negative Working Capital 241 (B) The Myth of Adequate Current Assets 244 (C) Does the balance sheet give a true picture of current assets? 244 (D) The various forms of cash holding 244 Inventory Management 247 Benefits versus Costs 247 Extent and Quantum of Inventory Management 247 Strategy for Inventory Management 248 How cost of inventory can be lowered: 248 Managing the Inventory Level 249 Receivables Management 253 Illustration 253 How do firms ensure realisations? 254 Desirable Level of receivables 254 Factors determining credit policy 255 Evaluation of credit policies (format) 256 Control of bad debts 258 Cash management 258 The various forms of cash holding 258 Motives for holding cash 259 Level of cash holding 259 Components of cash and bank balances 261 William J. Baumal Model for Optimal Cash Balance Management 261 Strategy for effective cash management 261 Factoring services 263 Definition and functions – Factoring Services 263 Factoring vs. Accounts Receivable Loans 264 Factoring vs. Bill Discounting 264 Mechanics of Factoring 264 Other Techniques for Control of Working Capital 266 1. Fund Flow Statement 266 2. Forfaiting Services 266 3. Ratio Analysis 267 Case studies 267 xx  Page A Case Study on Working Capital Management 273 Background 273 LESSON ROUND-UP 275 GLOSSARY 276 TEST YOURSELF 276 LIST OF FURTHER READINGS 277 OTHER REFERENCES 277 LESSON 8 SECURITY ANALYSIS Introduction 280 What are securities 280 Investment 281 Investment Vs. Speculation 282 Investment Vs. Gambling 282 Security analysis 282 Fundamental Analysis can be segregated into economic analysis, industry analysis and company analysis 283 Analysis of the economy 283 Industry Level Analysis 283 Company Analysis 284 Technical analysis 284 Dow Jones Theory 284 Primary Trends 285 Graph of Bullish Phase 285 Graph of a Bearish Phase 285 Secondary Trends 286 Minor Trend 286 Tools of Technical Analysis 286 1. Technical Charts 286 Line Chart 286 Bar Chart 287 Candlestick Charts 288 Point and Figure Charts 288 Patterns created by charts 289 Limitations of charts 290 2. Technical indicators 290 (a) Advance-Decline Ratio 291 (b) Market Breadth Index 291 (c) Moving Averages 291 Risk and its types 291 A. Systematic Risk 291 xxi  Page B. Unsystematic Risk 292 Return of the Security 293 Measuring Return 294 Approaches to valuation of security 295 Case study 296 Fundamental approach to valuation 298 Alternative approaches to valuation 300 1. Random walk theory 300 2. Efficient – Market Theory 300 3. Capital Asset Pricing Mode (CAPM) 302 LESSON ROUND-UP 302 GLOSSARY 303 TEST YOURSELF 305 LIST OF FURTHER READINGS 305 OTHER REFERENCES 305 LESSON 9 PORTFOLIO MANAGEMENT Portfolio management 308 Objectives of portfolio management 308 Portfolio analysis 308 Risk in investment situation 310 Components of Risk 310 Standard Deviation of a Portfolio 311 Co-Variance as a Measure of Risk 311 Coefficient of Correlation 312 Calculation of Portfolio Risk 312 Changing the proportion of amount invested 313 Changing the Coefficient of Correlation 314 Case Study 315 Markowitz model 316 Simple Markowitz Portfolio Optimization 316 The Risk Penalty 316 Standard Deviation 317 Limitation of Markowitz Model 318 Capital asset pricing model 318 CAPM assumptions 321 Problems with the CAPM 322 Security Market Line 322 xxii  Page Calculation of Beta 323 Beta of a portfolio 324 Capital Market Line (CML) 325 Difference between Capital Market Line (CML) and Security Market Line (SML) 327 Arbitrage pricing theory 327 Sharpe single and multi index models 328 Sharpe Index Model 328 Single-Index Model 328 Multi-Index Model 329 SIMPLE SHARPE PORTFOLIO OPTIMIZATION 329 RISK ADJUSTED MEASURE OF PERFORMANCE 330 The Ratio Defined 330 Return (rx) 331 Risk-Free Rate of Return (rf) 331 Standard Deviation [StdDev(x)] 331 Using the Sharpe Ratio 331 ECONOMIC VALUE ADDED 332 Profits allocate resources 332 Definition of Economic Value Added 333 CASE STUDIES 333 Risk Premium for Equity 333 LESSON ROUND-UP 337 GLOSSARY 338 TEST YOURSELF 339 LIST OF FURTHER READINGS 340 OTHER REFERENCES  340 LESSON 10 PRACTICAL QUESTIONS AND CASE STUDIES Capital budgeting 342 LESSON ROUND-UP 433 GLOSSARY 433 TEST YOURSELF 434 LIST OF FURTHER READINGS 435 OTHER REFERENCES  435 xxiii  PART II – STRATEGIC MANAGEMENT LESSON 11 INTRODUCTION TO MANAGEMENT Page Concept of Management 438 Definitions of Management 439 Theories on the Functions of Management 439 Scientific theory by Frederick W. Taylor 439 Classical theory by Henri Fayol 440 Bureaucratic theory by Max Weber 441 Human relations theory by Elton Mayo 441 Systems Theory by Ludwig von Bertalanffy 441 X&Y Theory by Douglas McGregor 441 George R. Terry 442 Harold Koontz and Cyril O’Donnell 442 The five functions of management 442 Planning 442 Organizing 445 Staffing 447 Directing 448 Case Studies on Leadership 450 Types of Leadership 450 Theories of Motivation 453 Case Study on Motivation 455 Controlling 456 Features of Controlling Function 457 Importance of Controlling 457 How to control? 458 Case study 459 Conclusion 460 LESSON ROUND UP 461 GLOSSARY 461 TEST YOURSELF 462 LIST OF FURTHER READINGS 462 OTHER REFERENCES 462 LESSON 12 INTRODUCTION TO STRATEGIC MANAGEMENT Strategic Management : Meaning 464 Strategic Management: Process 464 Four Phases of Strategic management process 464 xxiv  Page Strategic Leadership 465 Strategic Management: Functions and Importance for Professionals like Company Secretaries 466 Strategic Planning 468 The Strategic Planning Cycle 468 Benefits of Strategic Planning 469 Limitations of Strategic Planning 469 Porter’s Five Forces 469 Definition 469 Implementing the model 471 Porter’s Five Forces Model – Pizza Hut Case study 474 Apple in the Marketplace From a 5 Forces Perspective 475 LESSON ROUND UP 476 GLOSSARY 477 TEST YOURSELF 478 LIST OF FURTHER READINGS 478 OTHER REFERENCES 478 LESSON 13 BUSINESS POLICY AND FORMULATION OF FUNCTIONAL STRATEGY Business Policy – Introduction 480 Features of Business Policy 480 Evolution of Business Policy 480 The Indian Scenario 481 Importance of Business Policy 481 Framework of Strategic Management 482 Vision 482 Mission 483 Comparison Chart 483 Vision and Mission Statements of Various Companies 484 Strategic Levels of the Organization 487 Corporate Level Strategy 488 Business-Level Strategy 489 Comparison Chart 490 Key Differences between Business Strategy and Corporate Strategy 491 Formulation of Functional Strategy 492 Finance Strategy 492 Formulation of Finance Strategy 493 Financial Strategy 493 Investment decision 493 Financing decision 494 Dividend decision 494 Marketing Strategy 494 xxv  Page Definitions of Marketing Strategy 495 Strategic marketing planning: An overview 495 The Strategic Gap 495 Market Position and Strategy 495 Entry strategies 496 Formulation of Human Resource Strategies 497 Implementing HR strategy 498 1. Assessing the current HR capacity 498 2. Forecasting HR requirements 498 3. Gap analysis 498 4. Developing HR strategies to support the strategies of the organization 498 Case Study: HR Strategy Adidas Group 500 Formulation of Production Strategy 501 Formulation of Logistics strategy 503 Elements of the Logistics Strategy plan 505 Case Studies 505 LESSON ROUND UP 510 GLOSSARY 510 TEST YOURSELF 511 LIST OF FURTHER READINGS 511 OTHER REFERENCES  511 LESSON 14 STRATEGIC ANALYSIS AND PLANNING Strategic Analysis and Planning 514 Situation Analysis 514 Effectiveness of Situation Analysis 515 SWOT/ TOWS Analysis 515 Case Study 1: Amazon SWOT Analysis 516 2. Coca-Cola SWOT Analysis 517 3. Skoda SWOT Analysis 518 TOWS 521 Four TOWS strategies: product of Trade-off between Internal and External factors 522 Strategies in TOWS 523 Aggressive Strategy (maxi-maxi) 524 Conservative Strategy (maxi-mini) 524 Competitive Strategy (mini-maxi) 524 Defensive Strategy (mini-mini) 524 Case Study TOWS Matrix for Apple Inc. 524 Apple TOWS MATRIX 525 Nike TOWS Matrix 525 xxvi  Page TOWS MATRIX OF PEPSI 526 PERT (Programme evaluation Review Technique)and PM (Critical Path Method): Techniques of Project Management 528 CPM: Key Points 528 Steps in PERT and CPM 529 PORTFOLIO ANALYSIS 532 BCG MATRIX 532 1) Cash Cows 532 2) Stars 533 3) Question Marks 533 4) Dogs 533 Sequences in BCG Matrix 534 Steps in BCG Matrix 534 THE ORIGINAL BCG MATRIX 535 Criticism of the BCG Matrix 536 BCG’s Response to Criticism : Matrix 2.0 536 BCG Matrix- Samsung’s Product Portfolio 537 Ansoff Growth Matrix – Four Ways To Grow A Business 537 What is the Ansoff Growth Matrix? 537 Option 1 Market Penetration 538 Option 2 Product Development 539 Option 3 In the Ansoff Growth Strategy Matrix – Market Development 539 Option 4 In The Ansoff Growth Matrix – Diversification 539 How to Use Ansoff Growth Matrix 540 Developments to the Ansoff Growth Matrix 540 ADL MATRIX 540 Industry Maturity or Life Cycle stage 541 Competitive Position 541 How to use ADL Matrix? 542 GE McKinsey Matrix 542 Understanding the tool 542 Industry Attractiveness 543 Competitive strength of a Strategic business unit or a product 543 Using the tool 544 Strategic alternatives 546 Glueck & Jauch Generic Strategic Alternative 546 Stability 547 An internal growth (expansion) strategy 547 External expansion 547 Retrenchment 547 Combination Strategies 548 Porter’s Generic Strategies 548 xxvii  Page The Cost Leadership Strategy 548 The Differentiation Strategy 549 The Focus Strategy 549 Environmental Influences of Business 549 Importance of Environmental Study 550 Characteristics and Components of Business Environment 550 EXTERNAL ENVIRONMENT 550 A. External Micro- Environment 551 B. External Macro Environment 552 INTERNAL ENVIRONMENT 553 Mission 554 Vision 554 Values 554 LESSON ROUND UP 555 GLOSSARY 556 TEST YOURSELF 556 LIST OF FURTHER READINGS 557 OTHER REFERENCES 557 LESSON ROUND UP 554 LESSON 15 TEST YOURSELF 554 STRATEGIC IMPLEMENTATION AND CONTROL Strategic implementation concept 560 Strategy formulation and implementation 560 Strategy Implementation – Supporting Factors 561 Issues in Strategy Implementation 562 McKINSEYS 7-S Framework 563 Activating strategy 565 Structural implementation 566 Forms of organisation structure 566 (i) Functional Structure 566 (ii) Divisional Structure 568 (iii) Matrix Organization Structure 569 (iv) Free Form Organization 572 Procedural implementation 572 (i) Licensing Requirements 572 (ii) FEMA Requirements 573 (iii) Foreign Collaboration Procedures 573 (iv) Capital Issue Requirements 573 (v) Import and Export Requirements 573 Behavioural implementation 573 (i) Leadership 573 xxviii  Page (ii) Organizational Culture 574 (iii) Values and Ethics 574 Functional implementation 574 Strategic control 575 Application of Strategic Control 575 Role of Strategic Control 575 Role of Organisational Systems in Strategic Control 575 Control Process 576 Strategic control techniques 577 Employees Responses to Control 578 Balance Scorecard 578 The Basics of Balanced Scorecard 578 Features of Balanced Scorecard 579 A Tool of Strategic Management 579 Strategic change management 580 Managing strategic changes 581 Leadership and its forms 582 LESSON ROUND UP 583 GLOSSARY 583 TEST YOURSELF 583 LIST OF FURTHER READINGS 584 OTHER REFERENCES 584 LESSON 16 ANALYSING STRATEGIC EDGE Business Process Re-engineering (BPR) 586 BPR: Definition 586 Origin 586 Objectives of Business Process Reengineering 586 Typology of BPR Projects 587 Factors for Successful Implementation of BPR 587 Steps for Business Process Reengineering 588 Case Study- Infosys :Business process re-engineering for the commissions process 590 Business Process Reengineering – Ford’s Accounts Payable Case Study 590 Ford Accounts Payable Process – Before Business Process Reengineering 590 Ford Accounts Payable Process – After Business Process Reengineering 590 Reengineering of the Product Development Process of Airbnb 591 Benchmarking 592 Benchmarking : Definition 592 Understanding the tool 592 Types of Benchmarking 592 xxix  Page Approaches 593 Advantages 593 Disadvantages 594 Benchmarking Wheel 594 Case study in Benchmarking: Xerox Process 594 TQM Defined 595 Principles of TQM 596 Characteristics of Total Quality Management 597 Principles of Total Quality Management 598 The Concept of Continuous Improvement by TQM 599 Implementation Principles and Processes 599 Conclusion 599 Ford Motor Company Total Quality Management 600 Six Sigma 601 Why Six Sigma 602 How does 6 Sigma work? 602 The Six Sigma Training and Certification Levels 604 Champion 604 A Yellow Belt 604 Green Belt 604 Black Belt 604 Master Black Belt 604 Six Sigma Implementation in Ford Motor Company 604 Carrying Out the Six Sigma Approach 605 Reasons to adopt Six Sigma in Ford Motor Company 605 Roadblocks in Implementing Six Sigma 605 FORD’s improvement after implementation of Six Sigma 605 A Comparison of Business Process Reengineering vs. Six Sigma 605 Enterprise Resource Planning 606 History of ERP 606 How ERP works 606 Importance of ERP 606 Benefits of ERP systems 607 Advantages and disadvantages 607 Industry 4.0 608 Artificial Intelligence 608 Nine Areas for developing AI Business Strategy: 609 Fintech 611 History 611 Fintech Users 612 Regulation and Fintech 612 xxx  Page Blockchain Technology 613 Importance of Blockchain 613 The Three Pillars of Blockchain Technology 614 Pillar #1: Decentralization 614 Pillar #2: Transparency 614 Pillar #3: Immutability 614 LESSON ROUND UP 615 GLOSSARY 615 TEST YOURSELF 616 LIST OF FURTHER READINGS 617 OTHER REFERENCES 617 TEST PAPER 619 xxxi xxxii  Nature, Significance and Scope of Lesson 1 Financial Management Key Concepts One Learning Objectives Should Know To understand: Business Finance Nature, Scope and Objectives of Financial Management Financial Risk and Return and its impact on the value of the firm Management Objectives of the firm- Profit Maximisation Vs. Wealth Capital Budgeting Maximisation Investment Emerging Role of the Finance decisions Financing decisions dividend decisions Shareholder Lesson Outline Wealth Maxi- Introduction misation Nature, Scope and Objectives of Financial Management Risk-Return and Value of the Firm Objective of the Firm : Profit Maximisation Vs. Wealth Maximisation Emerging role of Finance Managers LESSON ROuNd-uP GLOSSARY TEST YOuRSELF LIST OF FuRTHER REAdINGS OTHER REFERENCES  2 Lesson 1 EP-F&SM INTRODUCTION Meaning of Finance Finance is the backbone of any business. It helps in defining the feasible area of operation for any type of business activities and therefore is the foundation for any strategic planning. It may also be defined as an art or a science of managing money. Finance function is the procurement of funds and their effective utilization in business concerns. Webster’s Ninth New Collegiate dictionary defines finance as the ‘Science on study of the management of funds’ and the management of fund as the system that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities. Meaning of Business Finance The starting point and ending point of any buinsess is money. Efficient financial planning, budgeting, financial forecasting, cash management, credit administration, investment analysis and fund procurement of the business are important for sustainable development of the business organisations in the present dynamic global business environment. Definition of Financial Management Financial management is an integral part of overall management. The term financial management has been defined by different experts as under : “It is concerned with the efficient use of an important economic resource namely, capital funds”. – Solomon Financial management “as an application of general managerial principles to the area of financial decision-making. – Howard and Upton Financial management “is an area of financial decision-making, harmonizing individual motives and enterprise goals”. – Weston and Brigham Financial management “is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations. – Joseph and Massie Thus, financial management is broadly concerned with raising of funds, creating value to the assets of the business enterprise by efficient allocation of funds. It is the study of integration of the flow of funds in the most optimal manner to maximize the returns of a firm by taking proper decisions in utilizing the funds. In other words, raising of funds should involve minimum cost and to bring maximum returns. KEY DEFINITIONS Business Finance Business finance, the raising and managing of funds by business organizations. Planning, analysis, and control operations are responsibilities of the financial manager, who is usually close to the top of the organizational structure of a firm. Business Finance means the funds and credit employed in the business. Finance is the foundation of a business. Finance requirements are to purchase assets, goods, raw materials and for the other flow of economic activities. Business Finance defined by various renowned Academicians / Experts Professor Gloss and Baker- “Business finance is concerned with the sources of funds available to enterprises of all sizes and the proper use of money or credit obtained from such sources.” E.W Walker- “Business finance is to planning, coordinating, controlling and implementing of financial activities of business institution.” Henry Hoagland- “Business Finance is concerned with the financing and investment decisions made by the management of companies in pursuit of corporate goals.”  Lesson 1 Nature, Significance and Scope of Financial Management 3 Wheeler- “Business finance is that business activity which concerns with the acquisition and conversation of capital funds in meeting financial needs and overall objectives of a business enterprise”. Guthumann and Dougall- “Business finance can broadly be defined as the activity concerned with planning, raising, controlling, administering of the funds used in the business”. Parhter and Wert- “Business finance deals primarily with raising, administering and disbursing funds by privately owned business units operating in non-financial fields of industry”. Financial Management S.C. Kuchal – “Financial Management deals with procurement of funds and their effective utilization in the business”. Solomon- “It is concerned with the efficient use of an important economic resource namely, capital funds”. Howard and Upton- Financial management “as an application of general managerial principles to the area of financial decision-making. Weston and Brigham- Financial management “is an area of financial decision-making, harmonizing individual motives and enterprise goals”. Joshep and Massie- Financial management “is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations. According to Guthman and Dougal, financial management means, “the activity concerned with the planning, raising, controlling and administering of funds used in the business.” It is concerned with the procurement and utilisation of funds in the proper manner. According to Ezra Solomon, “Financial Management is concerned with efficient use of an important economic resource namely – capital funds. It is the study of problems involved in the use and acquisition of funds”. Capital Budgeting According to the definition of Charles T. Hrongreen, “ arles T. Hrongreeninition of ned with efficient use of an important economic resource namely According to the definition of Richard and Green law, “ chard and Green lawnition of of probleith long-term return. (Note: More definitions on capital budgeting will be covered in Lesson 2- Capital Budgeting) Investment Decisions The Investment decision relates to the decision made by the investors or the top level management with respect to the amount of funds to be deployed in the investment opportunities. Investment decisions relates to the determination of where, when, how, and how much capital to spend and / or debt to acquire in the pursuit of making a profit. Financing Decisions Financing decisions are the financial decisions related to raising of finance. It involves identification of various sources of finance and the quantum of finance to be raised from long-term and short-term sources. A firm can raise long term finance either through shareholders› funds or borrowed capital. NATURE, SCOPE AND OBJECTIVES OF FINANCIAL MANAGEMENT In modern times, we cannot imagine a world without the use of money. In fact, money is the life-blood of business because all our economic activities are carried out through the use of money. For carrying on business, we need resources which are pooled in terms of money. It is used for obtaining physical and material resources for carrying out productive activities and business operations which affect sales and pay compensation to suppliers of resources, physical as well as monetary. Hence financial management is considered as an organic function of a business and has rightly become an important one.  4 Lesson 1 EP-F&SM Finance is an essential and indispensable part of any organization. It is difficult for organizations, whether profit- making or otherwise, to sustain themselves for long without proper finances. Not just that, the efficient management of these financial resources is essential to be sustainable and viable in the long-run. A group of experts defines Financial Management as simply the task of providing funds needed by the business or enterprise on terms that are most favourable in the light of its objectives. The approach, thus, is concerned almost exclusively with the procurement of funds and could be widened to include instruments, institutions and practices through which funds are raised. It also covers the legal and accounting relationship between a company and its sources of funds. Financial Management is certainly broader than procurement of funds. Financial management is strategic planning, organising, directing, and controlling of financial undertakings in an organisation. It also encompasses applying management principles to the financial assets of an organisation, while also playing a significant part in fiscal management. Financial management refers to the effective and efficient planning, organizing, directing and controlling the financial activities and processes of an organization. This includes but is not limited to fund procurement, allocation of financial resources, utilization of funds, etc. It is to be noted that financial management is pervasive and is applicable to all forms of organisations, i.e., business organisations, philanthropic organisations, educational organisations, religious organisations and so on and so forth. In nutshell, wherever finance is involved, financial management is crucial for effective planning, procurement and utilisation of funds. Thus, financial management is related not only to ‘fund-raising’ but encompasses wider perspective of managing the finances for the company efficiently. In the developed state of a capital market, raising funds