Unit 5 Industrial Engineering & Management Notes in English

 These are short notes for revision purpose. please refer you Reference book & College study materials for complete study.

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5. Financial Management

Financial management involves planning, organizing, directing, and controlling the financial activities of an organization. The aim is to ensure that the company’s financial resources are efficiently utilized and managed for growth and profitability.

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5.1 Fixed and Working Capital

• Fixed Capital:

  • This is the capital needed for long-term investments, such as land, machinery, and buildings. Fixed capital is used to purchase assets that are needed for the company’s operations and will be used for several years.

• Working Capital:

  • This refers to the capital needed for the day-to-day functioning of a business, like purchasing raw materials, paying wages, and managing inventories. Working capital is a measure of the company’s short-term financial health and efficiency.

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5.2 Resources of Capital

• Equity Capital:

  • Capital raised by issuing shares to the public or private investors. Equity shareholders own a portion of the company and have voting rights in the company’s decisions.

• Debt Capital:

  • Capital raised by borrowing money, such as bank loans or issuing debentures. Companies pay interest on this capital and must repay it within a specific period.

• Internal Resources:

  • These come from within the company, such as retained earnings (profits reinvested in the business) or selling off assets.

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5.3 Shares: Preference and Equity Shares

• Preference Shares:

  • Shareholders receive a fixed dividend before equity shareholders. They have a preference over equity shareholders when dividends are paid, but they do not have voting rights in the company.

• Equity Shares:

  • These shares represent ownership in the company. Equity shareholders receive dividends based on the company’s profits, but their dividend is not fixed. They also have voting rights in company decisions.

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5.4 Debentures

• Debentures are long-term debt instruments issued by companies to raise capital. Debenture holders are creditors of the company and receive fixed interest payments, but they don’t have ownership in the company. At maturity, the principal amount of debentures is repaid to the holders.

5.4.1 Types of Debentures

1. Convertible Debentures:

   • These debentures can be converted into equity shares after a certain period. This option provides debenture holders with the opportunity to convert debt into ownership.

2. Non-Convertible Debentures:

   • These cannot be converted into shares. They are only repaid in cash with interest.

3. Secured Debentures:

   • These are backed by company assets. In case the company defaults, the assets are sold to repay debenture holders.

4. Unsecured Debentures:

   • These are not backed by any security. They carry a higher risk as there is no collateral to back the investment.

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5.5 Public Deposits

Public deposits refer to funds collected by a company from the public, typically offering higher interest rates than bank savings accounts. Companies use this method to raise short-term funds. However, there are risks involved, and public deposits are generally unsecured.

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5.6 Factory Costing

Factory costing is the method of determining the total cost involved in producing goods in a factory. It helps in setting product prices, managing finances, and ensuring profitability.

5.6.1 Direct Cost

• Direct costs are expenses that can be traced directly to the production of a specific product, such as raw materials and labor.

5.6.2 Indirect Cost

• Indirect costs are those expenses that are not directly tied to production, such as administrative expenses, rent, utilities, and factory maintenance.

5.6.3 Factory Overhead

• Factory overhead includes all the indirect costs associated with production. It covers expenses like electricity, factory rent, and salaries of supervisory staff. These costs are distributed across all products manufactured.

5.6.4 Selling Price of a Product

• The selling price is the amount at which a product is sold to customers. It should cover the production cost and provide a margin for profit.

5.6.5 Profit

• Profit is the financial gain after subtracting the total cost from total revenue. It is a key indicator of a company’s financial health and success.

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5.7 Numerical Problems

Numerical problems in financial management typically deal with calculating costs, profits, break-even points, and financial ratios. These problems help in making informed decisions about pricing, capital investment, and cost management.

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5.8 Depreciation; Causes

Depreciation refers to the decrease in value of an asset over time due to usage, wear and tear, and obsolescence.

Causes of Depreciation:

1. Wear and Tear:

   • As assets like machines and equipment are used, they naturally degrade over time, leading to depreciation.

2. Obsolescence:

   • Technological advancements may render assets outdated, which also contributes to depreciation.

3. Accidents and Damage:

   • If an asset is damaged in an accident, its value may decrease.

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5.9 Methods of Depreciation

1. Straight-Line Method:

   • This is the simplest method where the same amount of depreciation is deducted every year over the asset’s useful life.
   • Formula:
   $$\text{Annual Depreciation} = \frac{\text{Cost of Asset} - \text{Salvage Value}}{\text{Useful Life}}$$

2. Sinking Fund Method:

   • In this method, a company sets aside a fixed amount of money each year in a fund to replace the asset at the end of its useful life.

3. Percentage on Diminishing Value Method:

   • In this method, depreciation is calculated as a fixed percentage of the asset’s book value each year. As the value decreases, the depreciation amount also decreases.

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5.10 Numerical Problems on Depreciation

Numerical problems on depreciation involve calculating the depreciation charge using different methods (straight-line, sinking fund, or diminishing balance). These calculations help businesses plan for asset replacement and manage tax liabilities.

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5.11 Material Management

Material management ensures that the right materials are available at the right time in the right quantity for production, without overstocking or understocking.

5.11.1 Objectives of a Good Stock Control System

• Cost Control: Minimize inventory holding costs while maintaining sufficient stock levels.
• Availability of Materials: Ensure that materials are available when needed for production, avoiding delays.
• Efficient Use of Space: Efficient storage of materials helps reduce wastage and unnecessary costs.

5.11.2 ABC Analysis of Inventory

ABC analysis divides inventory into three categories:

• A Items: High-value items that are crucial for production. These require tight control.
• B Items: Moderate value items that need regular tracking.
• C Items: Low-value items that can be ordered in bulk and need less control.

5.11.3 Procurement and Consumption Cycle

• Procurement Cycle: The process of purchasing materials, from identifying the need to receiving and storing the materials.
• Consumption Cycle: The use of materials in production and their gradual depletion as products are made.

5.11.4 Minimum Stock, Lead Time, Reorder Level

• Minimum Stock: The lowest level of stock that should be maintained to avoid shortages.
• Lead Time: The time taken from ordering materials to receiving them.
• Reorder Level: The point at which a new order should be placed to replenish stock before it runs out.

5.11.5 Economic Order Quantity (EOQ) Problems

EOQ is the ideal order quantity that minimizes the total inventory costs (ordering cost and holding cost). The EOQ formula is:

$$EOQ=\sqrt{\frac{2DS}{\mathrm{H}}}$$

Where:

• D = Demand for the material
• S = Ordering cost per order
• H = Holding cost per unit per year

5.11.6 Supply Chain

The supply chain is the network of organizations involved in the production and distribution of a product, from raw material suppliers to end customers. Efficient supply chain management ensures timely production and delivery while reducing costs.