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FINANCIAL MANAGEMENT PRACTICES AND ECONOMIC GROWTH A STUDY OF ESBS ENUGU STATE

Project topic for Business Administration department.

CHAPTER ONE

INTRODUCTION

1.0       Background of the Study

According to Eugene F. Brigham and Michael C. Ehrhardt (2013), 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. 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, Evaluation of new investment in terms of profitability and comparison of cut off rate against new investment and prevailing investment,John Meriwether(2012).

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, Roger Lowenstein (2015). 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 is yet another important function which a financial manager 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.

Earning profit or a positive return is a common aim of all the businesses. But the key function a financial manager 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 an 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.

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.

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 not.

Financial activities of a firm is one of the most important and complex activities of a firm. Therefore in order to take care of these activities a financial manager performs all the requisite financial activities.

A financial manager is a person who takes care of all the important financial functions of an organization. The person in charge should maintain a far sightedness in order to ensure that the funds are utilized in the most efficient manner.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 work in many places, including banks and insurance companies. His actions directly affect the Profitability, growth and goodwill of the firm. In order to meet the obligation of the business it is important to have enough cash and liquidity. A firm can raise funds by the way of equity and debt, it is the responsibility of a financial manager to decide the ratio between debt and equity. It is important to maintain a good balance between equity and debt, James Montier (2010).

Once the funds are raised through different channels the next important function is to allocate the funds. The funds should be allocated in such a manner that they are optimally used. In order to allocate funds in the best possible manner the following point must be considered

  • The size of the firm and its growth capability
  • Status of assets whether they are long-term or short-term
  • Mode by which the funds are raised

These financial decisions directly and indirectly influence other managerial activities. Hence formation of a good asset mix and proper allocation of funds is one of the most important activity.

Profit earning is one of the prime functions of any business organization. Profit earning is important for survival and sustenance of any organization. Profit planning refers to proper usage of the profit generated by the firm.

Profit arises due to many factors such as pricing, industry competition, state of the economy, mechanism of demand and supply, cost and output. A healthy mix of variable and fixed factors of production can lead to an increase in the profitability of the firm.

Fixed costs are incurred by the use of fixed factors of production such as land and machinery. In order to maintain a tandem, it is important to continuously value the depreciation cost of fixed cost of production. An opportunity cost must be calculated in order to replace those factors of production which has gone thrown wear and tear. If this is not noted then these fixed cost can cause huge fluctuations in profit.

Shares of a company are traded on stock exchange and there is a continuous sale and purchase of securities. Hence a clear understanding of capital market is an important function of a financial manager. When securities are traded on stock market there involves a huge amount of risk involved, Raymond M. Brooks (2014). Therefore a financial manager understands and calculates the risk involved in this trading of shares and debentures.

Its on the discretion of a financial manager as to how to distribute the profits. Many investors do not like the firm to distribute the profits amongst share holders as dividend instead invest in the business itself to enhance growth. The practices of a financial manager directly impact the operation in capital market.

Financial Management is a vital activity in any organization. It is an ideal practice for controlling the financial activities of an organization such as procurement of funds, utilization of funds, accounting, payments, risk assessment and every other thing related to money. The financial management system underpins good government and good business. There are four main practices of financial management:

budget management;

financial controls;

value management; and.

governance and accountability

The long-term objective of financial management is ultimately to help the company maximize profits. In order to do that, a financial manager needs to focus on smaller, more specific goals of financial management: planning, cost containment, cash flow management and legal compliance.

The three main functions of Financial Manager according to my understanding based on Ross - Corporate Finance Book are pertain to Treasury, Capital Budgeting and Capital Structure. Treasury, financial manager has responsibility in daily cash or operational cash arrangement. The four main areas of finance are corporate finance, investments, financial institutions and markets, and international finance.

Economic growth is an increase in the the production of economic goods and services, compared from one period of time to another, Carl Richards (2015). It can be measured in nominal or real (adjusted for inflation) terms. Traditionally, aggregate economic growth is measured in terms of gross national product (GNP) or gross domestic product (GDP), although alternative metrics are sometimes used.

Economic growth creates more profit for businesses. As a result, stock prices rise. That gives companies capital to invest and hire more employees. As more jobs are created, incomes rise. Consumers have more money to buy additional products and services. Purchases drive higher economic growth. For this reason, all countries want positive economic growth. This makes economic growth the most-watched economic indicator. Gross domestic product is the best way to measure economic growth. It takes into account the country's entire economic output. It includes all goods and services that businesses in the country produce for sale. It doesn't matter whether they are sold domestically or overseas.

1.2       Statement of the Problem

            However, modern-day financial management still poses specific challenges to department heads. These operating obstacles include record keeping, financial reporting and regulatory compliance. Other financial hurdles relate to borrowing arrangements, financial analysis and operational funding.Some of the problems of financial management in public understandings are as follows: Lack of proper planning, Unfavorable input-output ratio, Cost of capital, Problem of pricing, Problem of surpluses, Problem of raising loans, Problem of budgeting, Problem of delegation of authority. Poor budgeting is one of the most common causes of financial problems. If a person is spending more than he is earning, he is setting himself up for money trouble. Many people start using credit cards and loans to offset their high expenses. As interest piles up, these debts become larger and more difficult to pay off. The solution to financial problems is often to reduce expenses, increase income, or do some combination of both. This might not be something you want to do, and you're not alone.

1.3       Objective of the Study

            The broad objectives for the study is to determine the impact of financial management practices and economic growth a study of ESBS Enugu.

The objectives of the study are to:

1). To ascertain the level of employee’s participation in goal settings in enhancing the achievement of corporate objectives of financial management in Enugu state.

2). To determine the extent to which employee’s delegation of authority to employees ensure the attainment of corporate objectives of financial management in Enugu state.

3). To Determine the extent to which financial management in Enugu state motivates it’s employees for attainment of its objectives.

4). To Highlight what constitutes organization performance in financial management in Enugu state.

1.4       Research Questions

  • What is the level of employee’s participation in goal setting in enhancing the achievement of corporate objectives of financial management in Enugu state?
  • What is the extent to which employee’s delegation of authority to employee’s to attainment of corporate objectives of financial management in Enugu state?
  • What is the extent to which financial management in Enugu state motivates its employee’s ?
  • What constitutes organizational performance in financial management in Enugu state?

Research Hypotheses

  • H01: there is no significant level of employee’s participation in goal settings in enhancing the achievement of cooperate objectives of financial management in Enugu state.
  • H02: there is no significant extent to which employee’s delegate authority to the cooperate objective of financial management in Enugu state.
  • H03: there is no significant extent to which financial management in Enugu state motivate its employee’s.
  • H04: there is no significant difference between the organizational performance of financial management in Enugu state.

1.6         Significant of the Study

1. The Researcher: It will enable the researcher to fulfill the partial requirement for the award of the award of B.Sc Degree in Management.

2 The Firm (Enugu state Broadcasting service, ESBS.): The firm will through this study see the need to involve the subordinates in setting objectives as it will elicit higher productivity, profitability growth, sustainability of the organization as well as customer and employee satisfaction.

3. The Future Researchers: The study will be useful to those who will carry out studies in related areas in future. It will serve as a reference material to them. Even, the findings can provide the bases for further studies.

4.         To provide a detailed analysis of the concept of financial management practices as it could be applied in situation of organizations employee poor performance.

1.8         Scope of the study

The study provides detail analysis of the concept of financial management practices and economics growth in Enugu State, its process and significance. It also expands on the nature of organizational performance with a view of determining the impact of financial management practices on organizational performance by studying Enugu State Broadcasting service,( ESBS), in Enugu state.

1.9       Definition of Terms

Terminologies used in this study are defined for clarity purpose to have insight of the subject matter. Hence, the key terms used in this study are conceptually defined as follows:
Accountability: This is the responsibility of rendering an account of what must have transpired in the implementation of budget proposals including administration, development programmes and projects.

Budget: A budget is a quantitative plan for a forthcoming accounting period. Its purpose is multifaceted and intended to: (1) help with planning; (2) co-ordinate activities of the state; (3) communicate objectives to the relevant people; (4) monitor the performance against the plan; (5) control activities; and (6) evaluate performance (Hughes, 2003).

Development: This means the improvement of people’s life styles through improved education, incomes, skill development. It also means that people should have decent housing, and that they should have security within those houses and people should be able to read and write.
Financial Management: Is that managerial activity which is concerned with the planning and controlling of the firms’ financial resources (Pandy, 2005:3).
Financial Planning and Control: According to Weston and Copeland (1989:211), financial planning and control involve the use of projective based on standards and the development of a feedback and adjustment process to improve performance.

Fiscal Policy: Fiscal policy is the use of government tax (revenue) and spending powers to alter economic outcomes. In other words, it refers to public tax (revenue) and expenditure activities. This can be used to pursue any economic goals of a nation (Schiller, 1986:112,207).
Project: Project is a one-time activity with well-defined set of desired results (Hellriegel and Slocum, 1996:189).

Public Financial Management: This is a system that involves the budget and budgeting process, the payment system, procurement, the accounting system, auditing and taxation. Hence, well-functioning systems for public financial management are pre-requisites for improved effectiveness of development cooperation in general.

Sustainable Development: Sustainable Development is the development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs.

Transparency: The quality of showing the true picture of a situation for easy understanding. This means that the revenue and expenditure of public finance should be disclosed of the true position of what has transpired.


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