FINANCE INFORMATION SYSTEMS

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5/27/12

Vidya Panicker Session : 7

Financial aspects of business activities deal primarily with raising, distributing and administering funds by an organisation for purpose of business operations.

Determination of total amount of funds to be used by the organisation the organisation should acquire allocation of funds amount various assets in an efficient manner. fund requirement will be financed ?

What specific assets How the

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Model of Financial Information System

Accounting subsystem

Funds management subsystem

Databa se
Financial intelligence subsystem
Control subsystem

USER S

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Accounting system
Maintains

and analyses book keeping records

Financial

statements are prepared P&L , balance sheet (measures the impact of financial transactions on business) the cumulative effect of transactions in the form of financial statements. audit is conducted by the internal staff of 5/27/12 the firm.

Measures

Internal

Financial Intelligence system

Objective of finance function is to raise funds at lowest possible cost of these funds and maximise returns from them. achieve this objective the FIS gathers information regarding

Investment To

- most desirable sources of funds - investment opportunities for surplus funds.

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FIS gathers relevant information from environment - specialised financial institutions, commercial banks, investing publics, stock exchanges etc. for raising funds. Monitors the monetary policy of central banks as this policy has a direct impact on the interest rates and availability of funds.
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Funds Management Sources of funds

Long

term equity shares, preference shares, debentures, long term loans, retained earnings term loans from banks, others, public deposits, trade credits, customers 5/27/12 advances, leased assets

Short

A financing mix is the combination of various sources through which funds are raised. It may be a combination of long term or short term funds. The combination depends on the following factors :
1. 2. 3. 4. 5. 6.

Cost of capital Financial leverage Control and Interference in management Nature of business Purpose of financing Organisational capabilities

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Usage of funds Eg. A manufacturing firm Fixed assets Land buildings Electrical installation Furniture and fixtures Vehicles Others Current Assets Inventories RM, WIP, FG Trade credits Loans and advances

Plant and machineries

Current investments Cash-in-hand, with 5/27/12 bank/s

Investment in fixed assets

Acquisition

of new fixed assets for expansion for enhancing present plant capacity

Equipments To

create R&D facilities

Investment in fixed assets are beneficial only if :

It

generates more returns than cost of capital of appropriate technology implementation is managed effectively
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Choice There

is a proper mix of various fixed assets

project

Investment in working capital the basic principle of investing in working capital is to maintain the same at a level which facilitates business operations and minimises cost of working capital. To minimize investment in working capital or to use it more effectively, following steps can be taken :
Inventory

to be maintained at a proper level in debtors should be minimised 5/27/12

Investment

Management of Earnings Involves decision about how the earnings should be utilised. Distribution or retaining of earnings depends upon :
1. 2. 3.

Future needs of funds Shareholders needs Dividend stabilisation 5/27/12

Control system
1. 2. 3. 4.

Setting performance stds for control Measuring actual performance against std. Analysing variance between actual & std. Taking corrective action

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Budgetary control Budgetary control is a system which uses budgets as a means for planning and controlling entire aspects of organisational activities. BC as a tool for planning :
BC

forces managers to plan their activities

Plans

are defined in numerical terms which helps for appraisal of managerial performance. use of organisational resources higher 5/27/12 stds of performance and efficiency.

Rational

BC as a tool for control

BC It

provides standards of performance

pinpoints any deviation between budgeted standards and actual achievement. also pinpoints the reasons responsible for any deviations.

BC

Budget preparation :
1. 2. 3.

Top Down approach Bottom-up approach Participative approach

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THANKS

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