Capital Structure

Meaning of Capital Structure
Capital Structure is referred to as the ratio of different kinds of securities raised by a firm as long-term finance. The capital structure involves two decisions-

• Type of securities to be issued are equity shares, preference shares and long term borrowings (Debentures).
• Relative ratio of securities can be determined by process of capital gearing. On this basis, the companies are divided into two-
• Highly geared companies - Those companies whose proportion of equity capitalization is small.
• Low geared companies - Those companies whose equity capital dominates total capitalization.

For instance - There are two companies A and B. Total capitalization amounts to be USD 200,000 in each case. The ratio of equity capital to total capitalization in company A is USD 50,000, while in company B, ratio of equity capital is USD 150,000 to total capitalization, i.e, in Company A, proportion is 25% and in company B, proportion is 75%. In such cases, company A is considered to be a highly geared company and company B is low geared company.

Role of a Financial Manager

Overview
Financial managers perform data analysis and advise senior managers on profit-maximizing ideas. Financial managers are responsible for the financial health of an organization. They produce financial reports, direct investment activities, and develop strategies and plans for the long-term financial goals of their organization. Financial managers typically:

• Prepare financial statements, business activity reports, and forecasts,
• Monitor financial details to ensure that legal requirements are met,
• Supervise employees who do financial reporting and budgeting,
• Review company financial reports and seek ways to reduce costs,
• Analyze market trends to find opportunities for expansion or for acquiring other companies,
• Help management make financial decisions.

The role of the financial manager, particularly in business, is changing in response to technological advances that have significantly reduced the amount of time it takes to produce financial reports. Financial managers' main responsibility used to be monitoring a company's finances, but they now do more data analysis and advise senior managers on ideas to maximize profits. They often work on teams, acting as business advisors to top executives.

Finance Functions

The following explanation will help in understanding each finance function in detail

Investment Decision
One of the most important finance functions is to intelligently allocate capital to long term assets. This activity is also known as capital budgeting. It is important to allocate capital in those long term assets so as to get maximum yield in future. Following are the two aspects of investment decision

1. Evaluation of new investment in terms of profitability
2. Comparison of cut off rate against new investment and prevailing investment.

Since the future is uncertain therefore there are difficulties in calculation of expected return. Along with uncertainty comes the risk factor which has to be taken into consideration. This risk factor plays a very significant role in calculating the expected return of the prospective investment. Therefore while considering investment proposal it is important to take into consideration both expected return and the risk involved.

Investment decision not only involves allocating capital to long term assets but also involves decisions of using funds which are obtained by selling those assets which become less profitable and less productive. It wise decisions to decompose depreciated assets which are not adding value and utilize those funds in securing other beneficial assets. An opportunity cost of capital needs to be calculating while dissolving such assets. The correct cut off rate is calculated by using this opportunity cost of the required rate of return (RRR)

Financial Decision
Financial decision is yet another important function which a financial manger must perform. It is important to make wise decisions about when, where and how should a business acquire funds. Funds can be acquired through many ways and channels. Broadly speaking a correct ratio of an equity and debt has to be maintained. This mix of equity capital and debt is known as a firm’s capital structure.

A firm tends to benefit most when the market value of a company’s share maximizes this not only is a sign of growth for the firm but also maximizes shareholders wealth. On the other hand the use of debt affects the risk and return of a shareholder. It is more risky though it may increase the return on equity funds.

A sound financial structure is said to be one which aims at maximizing shareholders return with minimum risk. In such a scenario the market value of the firm will maximize and hence an optimum capital structure would be achieved. Other than equity and debt there are several other tools which are used in deciding a firm capital structure.

Dividend Decision
Earning profit or a positive return is a common aim of all the businesses. But the key function a financial manger performs in case of profitability is to decide whether to distribute all the profits to the shareholder or retain all the profits or distribute part of the profits to the shareholder and retain the other half in the business.

It’s the financial manager’s responsibility to decide a optimum dividend policy which maximizes the market value of the firm. Hence an optimum dividend payout ratio is calculated. It is a common practice to pay regular dividends in case of profitability Another way is to issue bonus shares to existing shareholders.

Liquidity Decision
It is very important to maintain a liquidity position of a firm to avoid insolvency. Firm’s profitability, liquidity and risk all are associated with the investment in current assets. In order to maintain a tradeoff between profitability and liquidity it is important to invest sufficient funds in current assets. But since current assets do not earn anything for business therefore a proper calculation must be done before investing in current assets.

Current assets should properly be valued and disposed of from time to time once they become non profitable. Currents assets must be used in times of liquidity problems and times of insolvency.

The Roll of Finance Functions in Organizational Process
The Finance Function and the Project Office
Contemporary organizations need to practice cost control if they are to survive the recessionary times. Given the fact that many top tier companies are currently mired in low growth and less activity situations, it is imperative that they control their costs as much as possible. This can happen only when the finance function in these companies is diligent and has a hawk eye towards the costs being incurred. Apart from this, companies also have to introduce efficiencies in the way their processes operate and this is another role for the finance function in modern day organizations.

There must be synergies between the various processes and this is where the finance function can play a critical role. Lest one thinks that the finance function, which is essentially a support function, has to do this all by themselves, it is useful to note that, many contemporary organizations have dedicated project office teams for each division, which perform this function.

In other words, whereas the finance function oversees the organizational processes at a macro level, the project office teams indulge in the same at the micro level. This is the reason why finance and project budgeting and cost control have assumed significance because after all, companies exist to make profits and finance is the lifeblood that determines whether organizations are profitable or failures.

The Pension Fund Management and Tax Activities of the Finance Function
The next role of the finance function is in payroll, claims processing, and acting as the repository of pension schemes and gratuity. If the US follow the 401(k) rule and the finance function manages the defined benefit and defined contribution schemes, in India it is the EPF or the Employee Provident Funds that are managed by the finance function. Of course, only large organizations have dedicated EPF trusts to take care of these aspects and the norm in most other organizations is to act as facilitators for the EPF scheme with the local or regional PF (Provident Fund) commissioner.

The third aspect of the role of the finance function is to manage the taxes and their collection at source from the employees. Whereas in the US, TDS or Tax Deduction at Source works differently from other countries, in India and much of the Western world, it is mandatory for organizations to deduct tax at source from the employees commensurate with their pay and benefits.

The finance function also has to coordinate with the tax authorities and hand out the annual tax statements that form the basis of the employee’s tax returns. Often, this is a sensitive and critical process since the tax rules mandate very strict principles for generating the tax statements.

Payroll, Claims Processing, and Automation
We have discussed the pension fund management and the tax deduction. The other role of the finance function is to process payroll and associated benefits in time and in tune with the regulatory requirements.

Claims made by the employees with respect to medical, and transport allowances have to be processed by the finance function. Often, many organizations automate this routine activity wherein the use of ERP (Enterprise Resource Planning) software and financial workflow automation software make the job and the task of claims processing easier. Having said that, it must be remembered that the finance function has to do its due diligence on the claims being submitted to ensure that bogus claims and suspicious activities are found out and stopped. This is the reason why many organizations have experienced chartered accountants and financial professionals in charge of the finance function so that these aspects can be managed professionally and in a trustworthy manner.


The key aspect here is that the finance function must be headed by persons of high integrity and trust that the management reposes in them must not be misused. In conclusion, the finance function though a non-core process in many organizations has come to occupy a place of prominence because of these aspects.

Financial Planning and Resources

Financial Planning is the process of estimating the capital required and determining it’s competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise.

Objectives of Financial Planning
Financial Planning has got many objectives to look forward to:

1. Determining capital requirements- This will depend upon factors like cost of current and fixed assets, promotional expenses and long- range planning. Capital requirements have to be looked with both aspects: short- term and long- term requirements.
2. Determining capital structure- The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required in the business. This includes decisions of debt- equity ratio- both short-term and long- term.
3. Framing financial policies with regards to cash control, lending, borrowings, etc.
4. A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner at least cost in order to get maximum returns on investment.
   

Importance of Financial Planning
Financial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of a concern. This ensures effective and adequate financial and investment policies. The importance can be outlined as-

1. Adequate funds have to be ensured.
2. Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained.
3. Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning.
4. Financial Planning helps in making growth and expansion programmes which helps in long-run survival of the company.
5. Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds.
6. Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the company. This helps in ensuring stability an d profitability in concern.

Characteristics of a Financial planning

The success of a business very much depends upon a financial plan (capital plan) based upon certain basic principles of corporation finance.

The essential characteristics of an ideal capital plan ae as follows:-

1. Simplicity:  The capital plan of a company should be as simple as possible. By 'simplicity' we mean that the plan should be easily understandable to all and it should be free from complications, and/or suspicion-arising statements. At the time of formulating capital structure of a company or issuing various securities to the public, it should be borne in mind that there would be no confusion in the mind of investors about their nature and profitability. 
2. Foresight: The planner should always keep in mind not only the needs of 'today' but also the needs of 'tomorrow' so that a sound capital structure (financial plan) may be formed. Capital requirements of a company can be estimated by the scope of operations and it must be planned in such a way that needs for capital may be predicted as accurately as possible. Although, it is difficult to predict the demand of the product yet it cannot b an excuse for the promoters to use foresight to the best advantage in building the capital structure of the company. 
3. Flexibility: The capital structure of a company must be flexible enough to meet the capital requirements of the company. The financial plan should be chalked out in such a way that both increase and decrease in capital may be feasible. The company may require additional capital for financing scheme of modernisation, automation, betterment of employees etc. It is not difficult to increase the capital. It may be done by issuing fresh shares or debentures to the public or raising loans from special financial institutions, but reduction of capital is really a ticklish problem and needs statesman like dexterity. 
4. Intensive use: Effective use of capital is as much necessary as its procurement. Every resource should be used properly for the prosperity of the enterprise. Wasteful use of capital is as bad as inadequate capital. There must be 'fair capitalisation' i.e., company must procure as much capital as requires nothing more and nothing less. Over-capitalisation and under capitalisation are both danger signals. Hence, there should neither be surplus nor deficit capital but procurement of adequate capital should be aimed at and every effort be made to make best use of it. 
5. Liquidity: Liquidity means that a reasonable amount of current assets must be kept in the form of liquid cash so that business operations may be carried on smoothly without any shock to term due to shortage of funds. This cash ratio to current ratio to current assets depends upon a number of factors, e.g., the nature and size of the business, credit standing, goodwill and money market conditions etc. 
6. Economy: The cost of capital procurement should always be kept in mind while formulating the financial plan. It should be the minimum possible. Dividend or interests to be paid to share holder (ordinary and preference) should not be a burden

Introduction to Financial Management

Meaning of Financial Management
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.

Scope/Elements
Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets are also a part of investment decisions called as working capital decisions.
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.
Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two:

1. Dividend for shareholders- Dividend and the rate of it has to be decided.
2. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.

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

1. To ensure regular and adequate supply of funds to the concern.
2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.
4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved.
5. To 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.

Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise.
2. Determination of capital composition: Once the estimation have been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.
3. Choice of sources of funds: For additional funds to be procured, a company has many choices like-
   1. Issue of shares and debentures
   2. Loans to be taken from banks and financial institutions
   3. Public deposits to be drawn like in form of bonds.
   Choice of factor will depend on relative merits and demerits of each source and period of financing.
4. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible.
5. Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done in two ways:
   1. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.
   2. Retained profits - The volume has to be decided which will depend upon expansional, innovational, diversification plans of the company.
6. Management of cash: Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintenance of enough stock, purchase of raw materials, etc.
7. Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.

History of Quality Evolution

The Evolution of Quality

Over the past few decades there have been several leaders who have been instrumental to developing the concept of quality as understood today.

Joseph M Juran is one of these key figures. Using eastern philosophies learnt in Japan, he advocated the idea that quality related to "fitness for use".

Juran believed that this definition of quality fell into two key areas. Higher quality products had a greater number of features which fit with the requirements of the consumer and also had fewer defects.

His book "Managerial Breakthrough" published in the 1960s was the first to offer a step-by-step sequence for improvement, while the Juran Trilogy, published in the 1980s, produced the three definitive quality management processes; quality planning, quality improvement and quality control.

World‐Class Quality: ISO 9000 Certification

With the highly competitive nature of the current business world, customers can dictate who, what, when, where, why, and how much regarding market commodities and services. In other words, quality has never counted more. As a result, management and organizations must heed these calls and specifically cater to the ever‐changing expectations of their international clientele.

Globally, customers expect quality whether they are buying a consumer product or receiving a service. As a result, many countries have adopted the quality standards set by the International Standards Organization (ISO) in Geneva, Switzerland.

Businesses that want to compete as world‐class companies are increasingly expected to have ISO 9000 Certification at various levels. To gain certification in this family of quality standards, businesses must undergo a rigorous assessment by outside auditors to determine whether they meet ISO requirements. Increasingly, the ISO stamp of approval is viewed as a necessity in international business; the ISO certification provides customers with an assurance that a set of solid quality standards and processes are in place.

Productivity and Quality

After companies determine customer needs, they must concentrate on meeting those needs by yielding high quality products at an efficient rate. Companies can improve quality and productivity by securing the commitments of all three levels of management and employees as follows:

• Top‐level management: Implement sound management practices, use research and development effectively, adopt modern manufacturing techniques, and improve time management.
• Middle management: Plan and coordinate quality and productivity efforts.
• Low‐level management: Work with employees to improve productivity through acceptance of change, commitment to quality, and continually improving all facets of their work.

Major Contributors to TQM

Total quality management is a much broader concept than just controlling the quality of the product itself. Total quality management is the coordination of efforts directed at improving customer satisfaction, increasing employee participation, strengthening supplier partnerships, and facilitating an organizational atmosphere of continuous quality improvement. TQM is a way of thinking about organizations and how people should relate and work in them. TQM is not merely a technique, but a philosophy anchored in the belief that long‐term success depends on a uniform commitment to quality in all sectors of an organization.

W. Edwards Deming

The concept of quality started in Japan when the country began to rebuild after World War II. Amidst the bomb rubble, Japan embraced the ideas of W. Edwards Deming, an American whose methods and theories are credited for Japan's postwar recovery. Ironically enough, Deming's ideas were initially scoffed at in the U.S. As a result, TQM took root in Japan 30 years earlier than in the United States. American companies took interest in Deming's ideas only when they began having trouble competing with the Japanese in the 1980s.

TQM Tools

Total quality management (TQM) tools help organizations to identify, analyze and assess qualitative and quantitative data that is relevant to their business. These tools can identify procedures, ideas, statistics, cause and effect concerns and other issues relevant to their organizations. Each of which can be examined and used to enhance the effectiveness, efficiency, standardization and overall quality of procedures, products or work environment, in accordance with ISO 9000 standards (SQ, 2004). According to Quality America, Inc. the number of TQM tools is close to 100 and come in various forms, such as brainstorming, focus groups, check lists, charts and graphs, diagrams and other analysis tools. In a different vein, manuals and standards are TQM tools as well, as they give direction and best practice guidelines to you and/or your staff. TQM tools illustrate and aid in the assimilation of complicated information such as: 

1. Identification of your target audience
2. Assessment of customer needs
3. Competition analysis
4. Market analysis
5. Brainstorming ideas  
6. Productivity changes 

Benefits of Total Quality Management

Total Quality Management aims to optimize the performance of an organization via continual improvement in the products and services provided, the operation of the internal and external processes, equipment, utilities and most of all the people involved in an organization.

The net result is a relentless positive improvement in all aspects of an organization’s performance, for example, product reliability improvements, greater employee motivation, improved operational efficiency, waste reduction achievements, fewer safety incidents and overall organizational profit increases (where profit is an objective of the organization).

Total Quality Management Techniques

Total Quality Management (TQM) is an integrative management philosophy for continuous improvement of the quality of an organization's products and processes in order to meet or exceed customer expectations. There are several TMQ strategies used to improve business management systems. Considering the practices of TQM as discussed in six empirical studies, Cua, McKone, and Schroeder (2001) identified the nine most common TQM practices as:

1. Cross-functional product design
2. Process management
3. Supplier quality management
4. Customer involvement
5. Information and feedback
6. Committed leadership
7. Strategic planning
8. Cross-functional training
9. Employee involvement

TQM and Strategic Planning

Total Quality Management and strategic planning provide an organization with the tools to gain a competitive advantage in the marketplace. Total Quality Management focuses the organization's goals on a system of quality and meeting the needs of the customer. Strategic planning is a tool that helps to prioritize the efforts of the organization in the implementation of a Total Quality Management approach.

TQM Implementation

Successful organizations have figured out that customer satisfaction has a direct impact on the bottom line. Creating an environment which supports a quality culture requires a structured, systematic process. Following are steps to implementing a quality management system that will help to bring the process full circle.

Let’s begin by defining the word quality.

Quality Defined:“A subjective term for which each person has his or her own definition. In technical usage, quality can have two meanings: (1) the characteristics of a product or service that bear on its ability to satisfy stated or implied needs and (2) a product or service free of deficiencies.” American Society for Quality (ASQ)

A Quality Management System is “The organizational structure, processes, procedures and resources needed to implement, maintain and continually improve the management of quality.” American Society for Quality (ASQ)

Principles of Total Quality Management

Total Quality Management (TQM) is a management approach focusing on the improvement of quality and performance in all functions, departments, and processes across the company to provide quality services which exceed customer expectations. TQM expands the scope of quality of every department from top management to lower level employees. It enables management to adopt a strategic approach to quality and put more effort on prevention rather than on inspection. Through TQM, all employees are trained in a professional manner and encouraged to make decisions on their own to improve the overall quality and attain higher standards. This is key to achieving the TQM results desired, because without your employees on board and feeling empowered, you might as well be swimming upstream.

Through TQM, companies increase customer satisfaction, reduce costs, and foster team work. Companies can also gain higher returns on sales and investment. The ability to provide quality services allow for higher prices to be charged. Total quality means better access to global markets, greater customer loyalty, wider recognition as a quality brand, etc.