Materials and methods 1 Suppl iers used in this chapter

There are some principles (a) you must have a plan and a budget which must be quite adequate, accurate and conservative (b) you must look at all possible sources of funds, every agreement on the funds must be in written document. (c) Automatic repayment net worth should be considered. (d) Short term funds should be used to buy liquid and current assets for easy repayment, while long term funds can be used to buy fixed and semi-fixed assets which are not easily transferable. There are factors that borrowers should consider in borrowing (3R‟s) :- (a) Returns:- Managers should ensure that returns exceed cost of investment, so that the loan can show a profit. Future returns should show future cost, which can be discounted to present terms. The quickest returns is usually gained from short term production credit for seasonal inputs like seeds, fertilizer, chemicals, feeds etc. (b) Repayment Capacity: The issue is whether the cash flow on investment will be such that agreed loan or repayment terms can be met. An investment may yield a profitable long term returns, but the borrower may not be able to pay when due, because at that point in time he does not have cash. (c) Risk Bearing Ability:- A borrower must have a good plan, the borrower consider its risk bearing ability, its level of reserve, its position in business, equity ratio.

Exercises for Chapter Ten 1. Write short note on Risk.

2. Enumerate types of risks in agricultural lending

3. Loan default is major risk in lending especially to farmers and small scale entrepreneurs, how do you think this could be reduced to the barest minimum.

4. As a credit officer in a microfinance bank covering twenty cooperatives, what criteria will you consider before recommending or otherwise granting/reject their loan applications?

5. What is meant by the term loan security? Why do lenders consider it desirable to require security for loans?

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CHAPTER ELEVEN FINANCIAL MANAGEMENT 11.1 Definitions and Goals of Financial Management Definition 1

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.

Definition 2

Financial Management is the scientific manipulation and exploitation of our business and financial environment, using a range of statistical, mathematical, and economic tools, with the aim of making the best economic decision, under prevailing circumstances and availability of information and scarce resources.

Definition 3

Financial Management simply put is an intelligent quest for optimal use of financial and economic resources at our disposal. Tax matters are also considered.

Definition 4

Financial Management entails planning for the future for a person or a business enterprise to ensure a positive cash flow. It includes the administration and maintenance of financial assets. Financial management covers the process of identifying and managing risk.

Goals and Objectives of Financial Management

(a) The goal of financial management is to maximize the current value per share of existing stock.

(b) The primary financial goal is shareholder wealth maximization, which translates to maximizing stock price.

The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be to:-

(a) Ensure Regular and Adequate Supply of Funds to the Concern.

(b) Ensure Adequate Returns to the Shareholder which will depend upon the earning capacity, market price of the share, expectations of the shareholders.

(c) Ensure Optimum Funds Utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.

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(d) Ensure Safety on Investment i.e. funds should be invested in safe ventures so that adequate rate of return can be achieved.

(e) Plan a Sound Capital Structure. There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.

Scope of Financial Management

(1) Investment Decisions:- Which focuses on the decisions made by both individual and institutional investors as they choose securities for their investment portfolios. Investment decisions includes investment in fixed assets called as Capital budgeting. Investment in current assets is also a part of investment decisions called as working capital decisions.

(2) Financial Decisions: They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby.

(3) Money and Capital Markets : which deals with securities markets and financial institutions. Dividend decision – The finance manager has to take decision with regard to the net profit distribution. Net profits are generally divided into two:-

(a) Dividend for Shareholders – Dividend and the rate of it has to be decided.

(b) Retained Profits:- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.

Financial management cut across wide range of sectors today in fact, all sectors.

Government agencies for instance make use of cost-benefit analysis to determine the economic wisdom in certain projects. Financial management has so advanced that many behavioural factors now play significant role in certain aspect of financial management, the legal practitioners rely on time value of money to same claims that involve financial compensation. The significance and particular position of investment appraisal may be still better appreciated by an examination of the broad functions of financial management. Five (5) principal areas of financial management responsibility include:-

(a) Converting a business plan into a financial plan.

(b) Appraising the viability and suitability of the financial plan in the light of firm‟s objectives

(c) The choice of financing with respect to the plan.

(d) Controlling the plan‟s implementation

(e) Presenting the result and outcome of the plan to interested parties such as the Board of Governors and Shareholders.

Investment appraisal intercedes between the stage where a business plan is translated into its equivalent financial plan and the decision to finance its implementation.

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