Personnel Management

Personnel management, also known as human resources management (HRM), is an

administrative function that manages an organization's employees to help the company achieve
its goals.
Personnel management is an administrative function within an organization that oversees the
hiring, organization and support of employee positions.
The primary aim of personnel management is to help organizations achieve their goals by
leveraging the skills of their employees. Besides matching the candidates with the right
positions based on their skills and expertise, personnel management teams ensure they allocate
the right resources to the right jobs.

Operative Functions of a Personnel Manager (Management)

Some of the major operative functions of a personnel manager are as follows: A. Procurement
B. Development C. Compensation (Wages and Incentives) D. Integration E. Maintenance
(Health, Safety and Security)
A. Procurement:
1. Determination of Manpower Need:

(i) To analyse each job to determine the nature of the work; the qualifications necessary; the
nature and amount of training required; the amount of supervision necessary; etc.
(ii) To derive from the job analysis job specifications containing in condensed form the most
pertinent points relating to the position and the worker, to be used by employment interviews
to facilitate the work of selection and placement.
(iii) To determine the manpower needs of the organisation.

2. Recruitment and Selection:

Recruitment and selection are two fundamental processes within human resource
management that involve attracting, assessing, and choosing the most suitable individuals to
fill job positions within an organization. These processes are integral to building a capable and
effective workforce, as they ensure that the right people with the necessary skills,
qualifications, and attributes are brought on board to contribute to the organization's
goals
A process of actively searching and hiring applicants for a job role is known as recruitment.
Recruitment is the process of attracting qualified candidates to apply for the job. This can be
done through a variety of methods, such as job postings, online advertising, employee referrals,
and networking.
A process of choosing suitable applicants from the shortlisted candidates is known as
selection. Selection is the process of evaluating the candidates and choosing the best one for
the job. This can involve screening resumes, conducting interviews, and administering tests
and assessments.

3. Placement:
(i) To assign employees to jobs for which they appear best qualified on the basis of the selection
techniques.
(ii) To introduce a uniform procedure for introducing new employees to the company and to
the respective departments.
(iii) Copy of rules and regulations is to be given to each employees, supplemented by a short
discussion about the company, its products, etc.
(iv) Department head or supervisor is to designate a fellow employee to escort newcomer
during first several days and to act as his ‘sponsor’.
B. Development:
1. Training and Education:
(i) To develop pre-job and in-service training programmes for operatives.
(ii) To develop programme for the training of understudies—junior executives.
(iii) To develop programmes of lectures and classes for clerical personnel.
(iv) To organize supervisory training programmes with emphasis on techniques of handling
relationships. Topics in these programmes can be ‘Management of men’, ‘Production and
costs’, ‘Wage plans and incentives’, ‘Quality control’ and ‘Energy economy’.
(v) To develop company library to include books, pamphlets, magazines, etc., of interest to all
classes of personnel.
2. Suggestions System:

(i) To organize a suggestions system which attracts, offers rewards commensurate with the
value of suggestions, and in general serves as a clearing house for ideas. (Suggestions may be
for improvement of methods, machinery, processes, employee relations, etc.
(ii) To tie the suggestion system to the supervisory training programme and to “sell” it to the
supervisory personnel through that medium.
3. Communication:
(i) To compile and publish in tentative form an employee hand-book subject to periodic
revision, containing details of company history and a clear and concise outline of company
policy with respect to such items as “employment”, “security plans”, “vacations”, “wages”,
etc.
(ii) To prepare and publish employee magazine (called house organ).
In this respect the following points are to be considered:
(a) Specific objectives to be achieved through this medium,
b) who shall edit the magazine,
(c) its format,
(d) how often it shall be issued,
(e) to what type of content it will limit itself,
(f) periodic determination of the effectiveness of the contents.
(iii) To develop a company organisation chart showing the relationship of the departments and
divisions to each other and the lines of responsibility and authority.
(iv) To develop a detailed personnel department organisation chart.
4. Performance Appraisal and Promotion:
(i) To arrange for annual or semi-annual appraisals of all personnel.
(ii) To devise appropriate appraisal forms for each class of employees.
(iii) To work out promotional charts with lines of advancement clearly defined.
(iv) To develop a promotion policy based on periodic reviews of employees, records.
C. Compensation (Wages and Incentives):
(i) To grade jobs in relationships to each other, to some established base or to similar jobs in
other plants with frequent examination of results.
(ii) To formulate wage scales for each job classification.
(iii) To consider payment of bonus to supervisory personnel.
(iv) To consider effective means of stimulating and rewarding executives. iv) To provide for
stability of emplo3Tnent, in so far as possible, through careful scheduling of operations and
financial planning.
D. Integration:
1. Discipline and Grievances:
(i) To provide for uniformity in disciplinary action for similar infractions.
(ii) To render special assistance on problem cases referred to personnel department.
(iii) To establish an efficient mechanism for the adjustment of individual complaints and
grievances (the channels for settlement of a grievance should be clearly outlined.)
2. Discharges, “Quits”, Layoffs, Rehearing’s:
(i) To establish leaving or “exit” interview as standard practice to determine all the real facts
leading to involuntary termination,
(ii) To determine relative weight of factors (length of service, proficiency, etc.) in deciding of
layoffs,
(iii) To determine policy with respect to rehiring.
3. Labour-Management Relations:

(i) To establish a realistic, positive and clear-cut philosophy of labour-management relations,

(ii) To analyse thoroughly the existing labour agreement with measurements as precise as
possible of its costs, both actual and potential.
4. Industrial Relations:
To establish good relations with government agencies, citizens’, organisations, newspapers,
influential individuals and educational institutions.
E. Maintenance (Health, Safety and Security):
(i) To provide for adequate facilities in respect of legal advice, canteen, recreation, first- aid,
etc.
(ii) To introduce effective rest pauses.
(iii) To educate employees in safety and health.
(iv) To provide for sickness, disability, accident and retirement benefits through insurance and
other schemes.

 Developing a Comprehensive HR plan

Developing a Comprehensive HR Plan: Example from Infosys Limited
A comprehensive HR plan is a strategic roadmap that aligns human resource policies and
practices with the overall business goals of an organization. It covers aspects such as talent
acquisition, employee engagement, training, compensation, and performance management.
Let's consider Infosys Limited, a leading Indian IT services company, and how it develops a
comprehensive HR plan.
Steps in Developing a Comprehensive HR Plan with Infosys Example:
1. Workforce Planning and Analysis
 Objective: Ensure that the company has the right number of employees with the
required skills to meet current and future business needs.
 Infosys Example: Infosys regularly conducts workforce planning to forecast future
talent needs based on market demand and business goals. The company uses analytics
to assess skill gaps, emerging trends (such as AI and machine learning), and the
potential need for reskilling employees.
 Outcome: By forecasting its workforce needs, Infosys is able to plan ahead, ensuring
it hires and trains employees in high-demand areas, such as data analytics and cloud
computing.
2. Talent Acquisition and Recruitment

 Objective: Attract, select, and retain the best talent to achieve organizational goals.
 Infosys Example: Infosys follows a rigorous recruitment process, targeting top
universities for campus recruitment, as well as lateral hiring for experienced
professionals. Their recruitment strategy includes innovative tools like Hackathons
and coding challenges to evaluate technical skills.
 Outcome: Infosys’s focus on recruiting fresh graduates through initiatives like InfyTQ
(a learning platform for students) and providing them with training ensures a steady
pipeline of skilled employees.
3. Employee Onboarding and Orientation
 Objective: Effectively integrate new employees into the organization to ensure they
understand the company’s culture and expectations.
 Infosys Example: Infosys has a well-structured onboarding program known as
InfyMe, which introduces new hires to the company’s culture, policies, and procedures.
It includes immersive training in Infosys's Global Education Centre, which covers
both technical and soft skills.
 Outcome: Infosys’s onboarding process reduces the learning curve for new hires,
enabling them to contribute effectively and quickly to the organization.
4. Training and Development
  Objective: Continuously develop employees’ skills and competencies to improve
performance and adapt to changes in the industry.
 Infosys Example: Infosys emphasizes continuous learning and development through
its Lex platform, offering a variety of online courses in emerging technologies. The
company also has specialized training programs for leadership development, called
Infosys Leadership Institute (ILI), to groom future leaders.
 Outcome: By investing in continuous learning and leadership development, Infosys
ensures that its employees are well-equipped with cutting-edge skills, enhancing both
individual and organizational performance.
5. Performance Management
 Objective: Set clear expectations, provide ongoing feedback, and measure performance
to align employee objectives with business goals.
 Infosys Example: Infosys follows a 360-degree performance appraisal system,
where feedback is collected from multiple sources including peers, managers, and
subordinates. The company has a comprehensive evaluation process that focuses on
both individual performance and contribution to team objectives.
 Outcome: The multi-dimensional feedback system at Infosys promotes accountability,
continuous improvement, and better alignment of employee performance with
organizational goals.
6. Compensation and Benefits
 Objective: Design competitive compensation packages to attract, motivate, and retain
top talent.
 Infosys Example: Infosys offers a competitive compensation package that includes
base salary, performance-based bonuses, stock options, and comprehensive benefits
such as health insurance, retirement plans, and flexible working arrangements.
 Outcome: Competitive compensation and benefits ensure that Infosys remains an
attractive employer in the IT industry, reducing employee turnover and increasing job
satisfaction.
7. Employee Engagement and Retention
 Objective: Foster a positive and inclusive work environment that encourages employee
loyalty and reduces turnover.
 Infosys Example: Infosys focuses on employee engagement through initiatives like
wellness programs, career development opportunities, and open communication forums
such as Connect Sessions, where senior management interacts with employees. Infosys
also emphasizes diversity and inclusion through policies that promote gender diversity,
such as its Women Leadership Program.
  Outcome: Infosys’s focus on employee engagement and inclusion helps in maintaining
high levels of employee satisfaction and retention, fostering a collaborative and
innovative work environment.
8. Compliance with Legal and Ethical Standards
 Objective: Ensure that HR policies comply with labor laws and ethical standards.
 Infosys Example: Infosys ensures that its HR policies are in compliance with Indian
labor laws and international standards. The company follows strict guidelines related to
anti-harassment, workplace safety, and equal employment opportunities. Infosys also
has an ethics helpline for employees to report any violations of the company's Code of
Conduct.
 Outcome: By ensuring compliance with legal and ethical standards, Infosys maintains
a transparent and ethical workplace, avoiding legal disputes and fostering a positive
work culture.
9. Succession Planning
 Objective: Prepare for leadership transitions by identifying and developing future
leaders within the organization.
 Infosys Example: Through its Leadership Development Program, Infosys identifies
high-potential employees and prepares them for leadership roles. The company focuses
on internal promotions for key positions, ensuring continuity in leadership and smooth
transitions.
 Outcome: Infosys’s succession planning ensures a steady pipeline of leaders who are
ready to step into critical roles, reducing the risk of leadership gaps.
HR Strategy

• HR Strategy is the strategy adopted by an organization, which aims at integrating

an organization’s culture, its employees, and system by coordinating a set of
actions to get the required business goals.

• HR strategy is all about creating alignment around an organization’s people, processes,

and operating philosophies. It’s a way to position strategic human resources
management as the catalyst for amplifying broader business or organizational goals.
The ability for organizations to define and achieve their objectives, therefore, becomes
tied directly to the internal HR strategies enabling them to take shape.
Example:

Google: The Silicon Valley tech giant is known for its engaging, yet competitive culture, one
that’s focused on driving the long-term success and happiness of its employees. “As Google
sees it, to hire the best talent, they must focus on building a great working culture.” And that it
has certainly done, providing its employees around the world with a work environment and
culture— filled with cafés, sports complexes, wellness resources, and other one-of-a-kind
perks—that make it one of the most desirable places to work. But it goes beyond just offering
perks alone. “Knowing that HR can make or break a company means that senior management
ensures it is tightly integrated so it not only protects its employees as a high-end investment
but does everything possible to make sure they have happy employees that are productive for
the company.”
Nissan: When it comes to the automobile industry, Nissan is certainly an outlier. The
company’s entire culture, built around a concept called Kaizen, empowers its employees to
constantly improve, grow their skills, and make a marked impact on the business. This forms
the backbone of the company’s HR strategy. “The HR practices at Nissan include transparent
salary scales and full autonomy for leaders to recruit and build their own teams. It is a practice
not seen in the automobile industry. But, at Nissan, it is the key to production and
manufacturing success.”

Development of HR strategy
1. Understanding Business Objectives
Wipro’s HR strategy starts with aligning HR goals with the company’s broader business
objectives. The company focuses on digital transformation, global expansion, and innovation
in IT services, cloud computing, and AI.
HR Focus: To drive innovation and digital transformation, Wipro’s HR strategy emphasizes
attracting tech talent, fostering a culture of continuous learning, and developing leadership
skills.
2. Workforce Analysis and Planning
The HR team conducts an in-depth analysis of the workforce by examining skills, experience,
and diversity. This analysis helps identify talent gaps and areas for improvement.
Workforce Data: Wipro employs over 250,000 people globally, with significant operations in
India, the US, and Europe. Workforce analysis includes reviewing attrition rates, skills in
emerging technologies, and diversity in leadership.
3. Talent Acquisition and Employer Branding
Wipro has developed a structured recruitment strategy to attract the best talent. It utilizes
multiple channels like university hiring, lateral hires, and global talent acquisition programs.
 Wipro STAR Program: A special program targeting fresh graduates from leading
universities, offering them fast-tracked career growth.
 Wipro Elite National Talent Hunt: A global talent acquisition initiative to hire the
best tech talent from different regions.
Data: Wipro hired over 17,000 fresh graduates in FY2022 as part of its global talent acquisition
drive.
4. Training and Development
Wipro has an extensive focus on continuous learning and skill development. The company
offers training on emerging technologies like AI, data analytics, and cloud computing.
 Wipro School of Learning: A comprehensive internal learning platform offering
courses in technical skills, leadership, and industry-specific certifications.
 Top Gear Program: A digital skilling program that focuses on upskilling employees
in emerging tech areas. Employees are encouraged to complete self-paced courses and
earn certifications.
Data: Wipro invested more than $130 million in employee training in FY2022, offering over
1 million training hours across various levels.
5. Performance Management and Employee Engagement
Wipro uses a robust performance management system, incorporating continuous feedback,
360-degree reviews, and quarterly evaluations.
 Wipro Value Partnership (WVP): A performance management framework that aligns
employee goals with the company’s strategic vision. Employees are assessed on key
metrics such as innovation, teamwork, and client satisfaction.
 Wipro Mentoring Circles: These aim to build engagement through regular interaction
between leadership and employees, focusing on career development and performance
coaching.
Data: Wipro's annual employee engagement surveys show that 85% of employees feel
engaged, with an emphasis on collaboration and innovation in work.
6. Leadership Development and Succession Planning
Leadership development is critical to Wipro’s HR strategy. The company invests in programs
that nurture future leaders who can manage global operations and drive innovation.
 Wipro's Global Leadership Program (GLP): A tailored leadership program that
prepares high-potential employees for senior leadership roles through cross-functional
exposure and strategic projects.
 Wipro’s Accelerated Leadership Track (ALT): An internal leadership pipeline
program, focusing on fast-tracking mid-level managers into senior roles.
Data: In 2022, Wipro promoted 35% of its leadership positions internally, showcasing its
strong leadership pipeline.
7. Diversity and Inclusion

Wipro is committed to building a diverse workforce and inclusive work environment.

 Wipro Inclusion Framework (WIF): The framework focuses on increasing the
representation of women, individuals with disabilities, and people from different
cultural and geographic backgrounds. They aim to have 35% women employees by
2025.
  Wipro Women of Wipro (WoW): A platform that promotes gender diversity by
supporting women leaders and creating opportunities for women to grow within the
company.
Data: As of FY2022, Wipro has achieved 33% female workforce representation, and the
company aims to increase this further through specific D&I initiatives.
8. Compensation and Benefits
Wipro offers competitive compensation and benefits packages to its employees, ensuring they
remain engaged and motivated.
 Performance-Linked Incentive Plans: Employees receive bonuses based on their
performance and the company's financial results.
 Flexible Benefits Program: Employees can choose from a wide range of benefits
including health insurance, wellness programs, retirement plans, and education
assistance.
Data: In FY2022, Wipro’s average salary increase was 7-8%, with higher increments for top
performers and employees in critical roles.
9. Employee Retention and Attrition Management

Wipro uses multiple strategies to reduce attrition and retain top talent. This includes career
development plans, mentorship programs, and competitive compensation.
 Career Path Framework (CPF): A structured career progression model that helps
employees plan their growth within the company. Employees have clear visibility on
the skills and competencies required to progress in their careers.
 Exit Interviews and Stay Interviews: These are conducted to understand employee
concerns and design retention strategies accordingly.
Data: Wipro’s attrition rate was around 23% in FY2022, but the company has implemented
new retention measures, targeting high-potential and critical talent.
10. HR Technology and Innovation
Wipro leverages HR technology and analytics to make data-driven decisions in talent
management.
 Wipro PeopleSoft: An HR management system that integrates employee data, payroll,
performance management, and workforce analytics into a single platform.
 AI-Powered Recruitment: Wipro uses AI tools to streamline its recruitment process,
improving the quality of hires and reducing time-to-hire.
Data: Wipro has reduced its recruitment cycle by 20% using AI and automation tools.
 Financial management
According to the Financial Experts Guthman and Dougal, “Financial management is the
activity concerned with planning, raising, controlling and administering of funds used in the
business. Financial management is all about properly utilizing funds to increase the value plus
profit of the business
 Objectives of Financial Management
1. Profit Maximization.
2. Wealth Maximization.

1. Profit Maximization refers to increasing the company’s profit, while Wealth Maximization
aims to accelerate the entity’s value. Profit maximization is the primary goal since profit is
the measure of efficiency, while wealth maximization aims to increase stakeholder value.
Profit Maximization is the firm’s ability to produce the maximum return with limited input or
use the minimum input to produce the claimed result. It is termed the main objective of the
company.
Profit maximization is a company’s economic objective to increase the company’s value. This
increase in the company’s value is what shareholders and investors seek, who expect their
investment to be profitable.
In the business world, profit maximization involves considering the level of production of
goods or services faced by a particular firm and its costs. This production should be directly
related to the sales price and the company’s profits from selling these goods or services to the
public.

The profit is calculated by deducting the total cost from the total revenue. Through profit
maximization, a company may be able to determine the input-output levels, which give a
tremendous amount of profit.
Definition:
Profit maximization refers to the process or objective of increasing a company's earnings as
much as possible in the short term. The primary focus is on maximizing net profit (the
difference between total revenue and total expenses).
Key Features:
 Short-Term Focus: The primary goal is to achieve the highest possible profit in the
shortest time. This often involves increasing sales, reducing costs, or both.
 Measurement: Profit maximization is measured in absolute terms, such as net income
or profit after taxes.
 Decisions: Decisions are often geared towards immediate financial gain, sometimes at
the expense of long-term sustainability.
 Risk Considerations: It may involve higher risks if it prioritizes short-term gains over
the long-term health of the business.
 Limitations:

 Ignores the timing and risk of returns.

 May lead to unethical practices if the sole focus is on increasing profits.

 Can harm long-term growth and stakeholder relationships.

Example:
A company might choose to cut down on research and development expenses to boost short-
term profits, even if it means sacrificing future innovation and long-term growth.
2. Wealth Maximization
Wealth maximization is a company’s ability to increase the market value of its common stock
over time. The company’s market value is based on many factors, such as goodwill, sales,
services, product quality, etc.
The primary objective of the company and the highly recommended criteria is to evaluate the
organization’s performance. This will help the company increase its market share, achieve
leadership, and maintain consumer satisfaction, among other benefits.
The company is also expected to increase the wealth of its shareholders, who invest in its shares
with the expectation that it will give some return after one year. This states that the company’s
financial decisions should be made in such a way as to increase the Present Net Value of the
company’s earnings. The value is based on two factors:
 Earning rate per share
 capitalization rate

Wealth maximization means maximization of the market price of the company’s shares.
Definition:
Wealth maximization, also known as value maximization, is a broader and more comprehensive
goal that focuses on increasing the overall value of the firm in the long term. This value is
reflected in the market price of the company’s shares, which represents the wealth of
shareholders.
Key Features:
 Long-Term Focus: The objective is to enhance the long-term value of the firm,
ensuring sustainable growth and profitability.
 Measurement: Wealth maximization is measured by the market value of the firm’s
equity (i.e., stock prices) and the overall value of the firm in the eyes of investors.
 Decisions: Decisions are made with a focus on creating long-term value, considering
factors like sustainable growth, ethical practices, and risk management.
  Risk Considerations: Emphasizes risk management and the timing of returns, ensuring
that the company is well-positioned for future challenges.

Advantages:
 Considers the time value of money, recognizing that cash flows in the future are worth
less than those received today.

 Aligns with the interests of shareholders and stakeholders, fostering a positive company
image and ethical business practices.

 Supports long-term growth and sustainability.

Example:
A company might invest in sustainable energy solutions, which might not provide immediate
returns but is expected to enhance the company’s market value and reputation in the long run,
leading to increased shareholder wealth.
Comparison:
 Scope: Profit maximization focuses on short-term earnings, while wealth maximization
focuses on the long-term increase in shareholder value.
 Risk: Profit maximization may involve higher risk and short-term thinking, whereas
wealth maximization emphasizes risk management and sustainable growth.
 Ethics and Stakeholders: Wealth maximization tends to align more with ethical
considerations and the interests of a broader range of stakeholders, including
employees, customers, and the community, while profit maximization might neglect
these aspects.
 Time Value of Money: Wealth maximization takes into account the time value of
money, whereas profit maximization typically does not.

Aspect Profit Maximization Wealth Maximization

Primary Goal Maximize short-term profits Maximize long-term shareholder wealth
Time Horizon Short-term focus Long-term focus
Measurement of
Focuses on immediate profits Considers overall financial well-being
Success
Takes into account future income and
Emphasis Primarily on current income
capital gains
Risk Tolerance May prioritize riskier strategies Tends to be more risk-averse
May lead to decisions that sacrifice
Focuses on sustainable growth and
Decision Making long-term sustainability for short-term
value creation
gains
 Aspect Profit Maximization Wealth Maximization
Stakeholder May not prioritize the interests of all Considers the interests of shareholders,
Consideration stakeholders employees, and other stakeholders
Flexibility in May not be flexible in adapting to Adapts strategies to achieve long-term
Strategy changing market conditions success
Considers economic value added
Accounting Often relies on accounting profits and
(EVA) and total shareholder return
Methods short-term financial metrics
(TSR)
May focus on metrics like Return on Considers metrics like Price-to-
Use of Financial
Investment (ROI) and Net Profit Earnings (P/E) ratio and Price-to-Book
Ratios
Margin (P/B) ratio
Approach to Risk May involve risk-taking for Emphasizes risk mitigation and
Management immediate gains sustainability
Impact on
May lead to short-termism and a Generally promotes responsible and
Corporate
negative public perception ethical business practices
Reputation

 Functions of Financial Management

1. Investment Decisions:
 Capital Budgeting: Deciding how to allocate resources to long-term investments, such
as projects, acquisitions, or new product development.
 Risk Assessment: Evaluating the potential returns and risks associated with investment
opportunities.
2. Financing Decisions:
 Capital Structure: Determining the optimal mix of debt and equity to finance the
company’s operations and growth.
 Funding Sources: Choosing appropriate sources of finance, such as issuing shares,
taking loans, or using retained earnings.
3. Dividend Decisions:
 Dividend Policy: Deciding how much profit to return to shareholders as dividends
versus how much to reinvest in the business.
 Retained Earnings: Balancing the need for dividends with the need to retain earnings
for future growth and investment.
4. Working Capital Management:
 Current Assets and Liabilities: Managing the company’s short-term assets (like
inventory, receivables) and liabilities (like payables) to ensure smooth operations.
  Cash Management: Ensuring the company has sufficient cash on hand to meet its
obligations while minimizing idle cash

Ratio Analysis
Introduction
Ratio analysis is a quantitative procedure of obtaining a look into a firm’s functional efficiency,
liquidity, revenues, and profitability by analysing its financial records and statements. Ratio
analysis is a very important factor that will help in doing an analysis of the fundamentals of
equity.
Analysts and investors make use of the methods for ratio analysis to study and evaluate the
fiscal wellbeing of businesses by closely examining the historical performance and monetary
statements.
Comparative data and analysis can give an insight into the performance of the business over a
given period of time by comparing it with the industry standards. At the same time, it also
measures how well a business racks up against other businesses functioning in the same sector.
Ratio analysis is a powerful tool for understanding the financial health and performance of a
company. By calculating and interpreting various financial ratios, you can assess profitability,
liquidity, efficiency, and solvency.
1. Liquidity Ratios
These ratios evaluate a business’ efficiency to settle its debts as and when they become due,
with its revenues or assets in the disposal. Liquidity ratios cover quick ratio, current ratio, and
the working capital ratio. These ratios measure a company's ability to meet its short-term
obligations.
a. Current Ratio
 Formula: Current Ratio=Current Liabilities Current Assets
 Explanation: Measures the ability of a company to pay off its short-term liabilities
with its short-term assets.
 Interpretation: A ratio above 1 indicates that the company has more current assets than
current liabilities, which is generally a positive sign. However, too high a ratio might
suggest inefficient use of assets.
b. Quick Ratio (Acid-Test Ratio)
 Formula: Quick Ratio= (Current Assets - Inventory) / Current Liabili es
 Explanation: Similar to the current ratio but excludes inventory, which may not be
easily converted to cash.
 Interpretation: A ratio above 1 is generally favorable, indicating that the company can
cover its short-term liabilities without relying on the sale of inventory.
c. Cash Ratio

 Formula: Cash Ratio=Current Liabilities / Cash and Cash Equivalents

 Explanation: The most conservative liquidity ratio, focusing only on cash and cash
equivalents.
 Interpretation: A ratio of 1 or higher indicates a strong liquidity position, though too
high a ratio could suggest underutilized cash.
2. Profitability Ratios
Profitability ratios indicate how efficiently a business will be able to generate revenues and
profits through its operations. Profit margins, return on equity, return on assets, gross margin
ratios, and return on capital employed are good examples of profitability ratios. These ratios
assess a company's ability to generate profits relative to sales, assets, or equity.
a. Gross Profit Margin
 Formula: Gross Profit Margin= Net Sales Gross Profit×100
 Explanation: Measures the percentage of revenue that exceeds the cost of goods sold
(COGS).
 Interpretation: A higher margin indicates a better ability to cover operating and other
expenses, leading to higher profitability.

b. Operating Profit Margin

 Formula: Operating Profit Margin= Operating Profit / Net Sales×100
 Explanation: Indicates the percentage of revenue remaining after covering operating
expenses.
 Interpretation: A higher margin suggests better control over operating costs relative
to sales.
c. Net Profit Margin
 Formula: Net Profit Margin =Net Profit / Net Sales ×100
 Explanation: Shows the percentage of revenue that results in net income after all
expenses.
 Interpretation: A higher net profit margin indicates a more profitable company.
d. Return on Assets (ROA)
 Formula: ROA= EBIT / Total Assets
 Explanation: Measures how effectively a company uses its assets to generate profit.
 Interpretation: A higher ROA indicates efficient use of assets to generate earnings.
e. Return on Equity (ROE)
  Formula: ROE= PAT / Shareholder's Equity

 Explanation: Measures the return generated on shareholders' equity.

 Interpretation: A higher ROE indicates a better return on the shareholders' investment.
3. Efficiency Ratios
Efficiency ratios are also called as the activity ratios. These ratios determine the efficiency of
a business by using its liabilities and assets to boost sales and optimise profits. Inventory
turnover and turnover ratios are examples of efficiency ratios. These ratios evaluate how well
a company uses its assets and manages its operations.
a. Inventory Turnover Ratio
 Formula: Inventory Turnover=Cost of Goods Sold / Average Inventory
 Explanation: Measures how many times a company’s inventory is sold and replaced
over a period.
 Interpretation: A higher turnover indicates efficient inventory management, but too
high might suggest inadequate inventory levels.
b. Receivables Turnover Ratio
 Formula: Receivables Turnover= Net Credit Sales / Average Accounts Receivable

 Explanation: Measures how effectively a company collects its receivables.

 Interpretation: A higher ratio indicates effective collection processes.
c. Payable Turnover:
 Formula: Net Credit Purchase / Average Accounts Payable
 Purpose: Measures how efficiently a company pay money to supplier. A higher ratio
indicates delay in payment.
4. Solvency Ratios
Solvency ratios are also referred to as the financial leverage ratios. These ratios will compare
an organisation’s level of debt with assets, earnings, and equity in order to determine the
possibility of an organisation to stay in operation over an extended period of time by settling
all its short and long-term debts and by paying coupon/interest regularly. Solvency ratios
include interest coverage ratios, debt-asset ratios, and debt-equity ratios. These ratios measure
a company's ability to meet its long-term obligations.
a. Debt to Equity Ratio
 Formula: Debt to Equity Ratio= Total Liabili es / Shareholder's Equity
 Explanation: Compares a company’s total liabilities to its shareholders' equity.
  Interpretation: A lower ratio is generally preferable as it suggests less reliance on debt
financing, though too low might indicate a conservative capital structure.
b. Interest Coverage Ratio
 Formula: Interest Coverage Ratio= Earnings Before Interest and Taxes (EBIT) / Interest
Expense

 Explanation: Measures the ability to cover interest payments with operating income.
 Interpretation: A higher ratio indicates better ability to meet interest obligations.
5. Market Value Ratios
These ratios assess the market perception of a company's stock.
a. Price to Earnings (P/E) Ratio
 Formula: P/E Ratio=Market Price per Share / Earnings per Share (EPS)
 Explanation: Indicates how much investors are willing to pay for each dollar of
earnings.
 Interpretation: A higher P/E suggests higher expectations for future growth, while a
lower P/E may indicate undervaluation or concerns about future performance.
b. Earnings Per Share (EPS)

 Formula:
EPS=Net Income−Preferred Dividends/Weighted Average Shares Outstanding
 Explanation: Measures the profit allocated to each share of common stock.
 Interpretation: Higher EPS indicates greater profitability per share.
c. Dividend Yield
 Formula: Dividend Yield=Annual Dividends per Share / Market Price per Share×100
 Explanation: Shows the dividend income relative to the share price.
 Interpretation: A higher yield may attract income-focused investors, but too high a
yield might suggest risk.

Capital Budgeting
Capital budgeting is a process that businesses use to evaluate potential major projects or
investments. Building a new plant or taking a large stake in an outside venture are examples of
initiatives that typically require capital budgeting before they are approved or rejected by
management.
As part of capital budgeting, a company might assess a prospective project's lifetime cash
inflows and outflows to determine whether the potential returns it would generate meet a
sufficient target benchmark. The capital budgeting process is also known as investment
appraisal.
Capital budgeting is the process that companies use to evaluate and decide on significant
investments in long-term assets, such as new machinery, buildings, technology, or projects. The
main goal of capital budgeting is to determine whether a particular investment or project will
generate a return that exceeds the cost of the investment and aligns with the company’s strategic
objectives.

Since the capital budgeting is related to the long-term investments whose returns will be
fetched in the future, certain traditional and modern capital budgeting techniques are
employed by the firm to judge the feasibility of these projects.
1. Traditional methods
The traditional method relies on the non-discounting criteria that do not consider the time
value of money, whereas the modern method includes the discounting criteria where the
time value of money is taken into the consideration
The traditional methods comprise of the following evaluation techniques:
1. Payback Period Method
2. Average Rate of Return or Accounting Rate of Return Method
2. Modern Methods
The modern methods comprise of the following evaluation techniques:
 1. Net Present Value Method
2. Internal Rate of Return
3. Modified Internal Rate of Return
4. Profitability Index
1. Payback Period
Definition: The Payback Period helps to determine the length of time required to recover the
initial cash outlay in the project. Simply, it is the method used to calculate the time required to
earn back the cost incurred in the investments through the successive cash inflows.
The formula to calculate it:
Payback Period = Initial Outlay/Cash Inflows
Accept-Reject Criteria: The projects with the lesser payback are preferred.
2. Average Rate of Return
Definition: The Average Rate of Return or ARR, measures the profitability of the
investments on the basis of the information taken from the financial statements rather than the
cash flows. It is also called as Accounting Rate of Return.
The formula for calculating the average rate of return is:

Average Rate of Return = Average Income / Average Investment over the life of the project
Where, Average Income = Average of post-tax operating profit
Average Investment = (Book value of investment in the beginning + book value of
investments at the end) / 2
Accept-Reject Criteria: The projects having the rate of return higher than the minimum
desired returns are accepted.
3. Net Present Value
Definition: The Net Present Value or NPV is a discounting technique of capital
budgeting wherein the profitability of investment is measured through the difference
between the cash inflows generated out of the cash outflows or the investments made in
the project.
The formula to calculate the Net Present value is:
Net present value = n∑t=1 Ct / (1+r)t – C0
Where, Ct = cash inflow at the end of year t
n= life of the project
r= discount rate or the cost of capital
Co= cash outflow
Accept – Reject Criteria: If the NPV is positive, the project is accepted.
 4. Internal Rate of Return

Definition: The Internal Rate of Return or IRR is a rate that makes the net present value of
any project equal to zero. In other words, the interest rate that equates the present value of
cash inflow with the present value of cash outflow of any project is called as Internal Rate of
Return.
Unlike the Net present value method where we assume that the discount rate is known, in the
case of Internal rate of return method, we put the value of NPV zero and then find out the
discount rate that satisfies this condition.
The formula to calculate IRR is:
CFo = n∑t=1 Ct / (1+r)t
Where, CFo = Investment
Ct = Cash flow at the end of year t
r = internal rate of return
n= life of the project
Accept- Reject criteria: If the project’s internal rate of return is greater than the firm’s cost
of capital, accept the proposal.
5. Modified Internal Rate of Return
Definition: The Modified Internal Rate of Return or MIRR is a distinct improvement over
the internal rate of return that assumes the cash flows generated from the project are reinvested
at the firm’s cost of capital rather that at the company’s internal rate of return.
The formula to calculate the Modified Internal Rate of Return is:

Where, n= no. of periods

Terminal value is the future net cash inflows that are reinvested at the cost of capital.
Accept-Reject Criteria: If the project’s MIRR is greater than the firm’s cost of capital, accept
the proposal.

6. Profitability Index
Definition: The Profitability Index measures the present value of returns derived from per
rupee invested. It shows the relationship between the benefits and cost of the project and
therefore, it is also called as, Benefit-Cost Ratio.
The profitability Index helps in giving ranks to the projects on the basis of its value, the higher
the value the top rank the project gets. Therefore, this method helps in the Capital Rationing.
The formula to calculate the Profitability Index is:
PI = Present value of future cash inflows/ Present value of cash outflows

Accept-Reject Criteria: The project is accepted when the value of PI exceeds 1. If the value
is equal to 1, then the firm is indifferent towards the project and in case the value is less than 1
the proposal is rejected.

 Working capital management

Working capital management is the process of managing a company's short-term assets and
liabilities to ensure its smooth operations and financial health. It involves managing the cash,
inventory, accounts receivable, and accounts payable of a business to maintain an optimal level
of working capital.
Effective working capital management is essential for a company's success as it ensures that
there is enough cash available to cover day-to-day expenses and operations, meet short-term
obligations, and fund growth initiatives. Poor working capital management can lead to cash
flow problems, missed payments to suppliers and creditors, and even bankruptcy.
The key elements of working capital management include managing the cash conversion cycle,
optimizing inventory levels, managing accounts receivable and accounts payable, and
financing working capital needs. It requires a careful balance between liquidity and
profitability, as excessive working capital can tie up valuable resources, while insufficient
working capital can lead to missed opportunities and operational difficulties. Thus, effective
working capital management is critical for the financial stability and success of any business.
By maintaining an appropriate level of working capital, a company can ensure that it can meet
its short-term obligations while investing in growth and maximizing profitability.

 Concept of Gross and Net Working Capital

Working capital is the amount of money required by a company to run its day-to-day
operations. It is the excess of current assets over current liabilities of a company.
There are two types of working capital: gross working capital and net working capital.
1. Gross Working Capital:
Gross working capital refers to the total amount of current assets that a company possesses.
It includes cash, bank balance, inventories, debtors, and other short-term assets. The gross
working capital represents the company's ability to meet its shortterm obligations. Gross
working capital can be further classified into two categories:
a) Permanent or fixed working capital: This refers to the minimum amount of current assets
that a company requires to carry out its day-to-day operations. It is also known as core working
capital, and it is needed to maintain the company's operating cycle.
b) Temporary or variable working capital: This refers to the additional working capital
required by a company to meet its seasonal or special demands. It is also known as fluctuating
working capital.
 2. Net Working Capital: Net working capital is the difference between current assets and
current liabilities. It represents the liquidity position of a company and its ability to meet its
short-term obligations.
Net working capital can be further classified into two categories:
a) Positive net working capital: This refers to a situation where current assets are higher than
current liabilities. It indicates that the company has sufficient liquidity to meet its short-term
obligations.
b) Negative net working capital: This refers to a situation where current liabilities are higher
than current assets. It indicates that the company may face difficulty in meeting its short-term
obligations.

 Need and Significance of Working Capital Management (WCM)

Working capital management is the process of managing a company's short-term assets and
liabilities to ensure its daily operations run smoothly. The need and significance of working
capital management can be explained as follows:
a) Meeting day-to-day expenses: Working capital management helps a company meet its day-
to-day operating expenses, such as payment of salaries, purchase of raw materials, payment of
utility bills, etc. Without adequate working capital, a company may not be able to operate
smoothly.
b) Efficient utilization of resources: Effective working capital management ensures that a
company's resources are utilized efficiently. It helps a company minimize idle resources, avoid
overstocking of inventory, and reduce unnecessary debt.

c) Smooth production process: Adequate working capital helps a company maintain a smooth
production process. It ensures that raw materials and other inputs are available when required,
and there are no interruptions due to shortage of funds.
d) Cash flow management: Working capital management helps a company manage its cash
flow effectively. It helps a company maintain a balance between inflows and outflows of cash,
and avoid situations where there is excess cash or cash shortage.
e) Creditworthiness: A company's ability to manage its working capital efficiently is an
indicator of its creditworthiness. Banks and other financial institutions consider a company's
working capital position when deciding whether to lend money to the company.
f) Maximizing profitability: Effective working capital management can help a company
maximize its profitability. By minimizing idle resources, reducing debt, and optimizing
inventory levels, a company can increase its profits. Thus, working capital management is
critical for a company's short-term and long-term success. It helps a company maintain a
healthy cash flow, avoid unnecessary debt, maximize profitability, and remain competitive in
the market.
  FACTORS REQUIREMENTS AFFECTING WORKING CAPITAL

Factors affecting working capital requirements can be broadly classified into two categories:
Internal and external.
1) Internal factors include:
a) Nature of the business: The nature of the business plays an important role in determining
the working capital requirements. For example, a manufacturing company that produces goods
in large quantities requires a higher amount of working capital compared to a service-oriented
business that does not hold inventory.
b) Size of the business: The size of the business also affects the working capital requirements.
A large business with multiple units and a diverse range of products may require more working
capital than a small business.
c) Production cycle: The length of the production cycle determines the level of working
capital required. For example, if a company's production cycle is long, it may need more
working capital to cover the expenses during the production process.
d) Sales cycle: The sales cycle of a business is the time between the sale of a product and the
receipt of payment from the customer. If the sales cycle is long, the business may require more
working capital to finance its operations.
e) Inventory management: The way a company manages its inventory affects its working
capital requirements. For example, if a company maintains a large inventory, it may require
more working capital to finance the purchase of inventory.
2) External factors include:
a) Economic conditions: The general economic conditions in the market affect the working
capital requirements. During a recession, businesses may require more working capital to
manage their cash flow.
b) Competition: The level of competition in the market affects the working capital
requirements. If the competition is high, businesses may need to invest more in marketing and
advertising, which increases the working capital requirements.
c) Interest rates: The interest rates charged by financial institutions affect the cost of
borrowing, which in turn affects the working capital requirements.
d) Government regulations: The regulations imposed by the government also affect the
working capital requirements. For example, if the government imposes stricter regulations on
businesses, they may need more working capital to comply with these regulations. Thus,
understanding the factors affecting working capital requirements is essential for businesses to
manage their finances effectively and ensure they have the necessary funds to operate smoothly.
CASH FLOW MANAGEMENT
Cash flow management is tracking and controlling how much money comes in and out of a
business in order to accurately forecast cash flow needs. It’s the day-to-day process of
monitoring, analyzing, and optimizing the net amount of cash receipts—minus the expenses.
It’s all about managing your business finances responsibly, so there’s enough cash to grow.
Effective cash management strategies help to predict how much money will be available to
cover things like debt, payroll, and vendor invoices.
Cash Flow Categories
Cash can flow from and through several parts of an organization, such as:
1. Selling their products and services (cash from operations)
2. Taking loans or selling shares in the business (cash from finance)
3. Selling assets (cash from investing)
Cash Flows from Operations (CFO)
Operating cash flow describes money flows from ordinary operations, like production and the
sale of goods. This is the figure that determines whether or not a company has enough funds
coming in to pay bills and operating expenses. There must be more operating cash inflows
(CFO) than outflows to have long-term viability.
Cash Flows from Investing (CFI)
Investing cash flow (CFI) is a figure that represents how much cash has been generated or spent
from investment-related activities in a specific time period.
Cash Flows from Financing (CFF)
Financing cash flow (CFF) demonstrates the net flows of cash that are used to fund the business
and its working capital. Activities can include transactions that involve issuing debt or equity
and paying dividends. CFF provides investors with insight into an organization’s cash position
and how well the capital structure is managed.
 Cash flow management strategies for when money is low
When cash flow presents a risk, businesses can respond by changing how they manage inflows
and outflows.
Managing inflows
 Making inflows smoother and more predictable: Send invoices faster. Give
customers less time to pay. Follow up on overdue payments. Offer more convenient
payment methods like card payments or direct debit. Put customers on retainers.
 Increasing inflows: Businesses with persistent cash flow issues may need to explore
pricing to ensure their margins are sustainable.
  Borrowing money: Loans can help businesses keep trading through quiet times. Some
seasonal businesses may even have a permanent layer of financing to get through the
year.
Managing outflows
 Making outflows smoother and more predictable: Delay expenditure to coincide
with stronger cash flow. Negotiate to pay suppliers via instalments rather than in lump
sums. Lease rather than buy.
 Reducing outflows: Businesses may be able to cut back on discretionary spending,
shop around for lower cost supplies, or explore bulk-buying deals.

 Break-even analysis
A break-even analysis is an economic tool that is used to determine the cost structure of a
company or the number of units that need to be sold to cover the cost. Break-even is a
circumstance where a company neither makes a profit nor loss but recovers all the money spent.
The break-even analysis is used to examine the relation between the fixed cost, variable cost,
and revenue. Usually, an organisation with a low fixed cost will have a low break-even point
of sale.
 Importance of Break-Even Analysis
 Manages the size of units to be sold: With the help of break-even analysis, the
company or the owner comes to know how many units need to be sold to cover the cost.
The variable cost and the selling price of an individual product and the total cost are
required to evaluate the break-even analysis.

 Budgeting and setting targets: Since the company or the owner knows at which point
a company can break-even, it is easy for them to fix a goal and set a budget for the firm
accordingly. This analysis can also be practised in establishing a realistic target for a
company.
 Manage the margin of safety: In a financial breakdown, the sales of a company tend
to decrease. The break-even analysis helps the company to decide the least number of
sales required to make profits. With the margin of safety reports, the management can
execute a high business decision.
 Monitors and controls cost: Companies’ profit margin can be affected by the fixed
and variable cost. Therefore, with break-even analysis, the management can detect if
any effects are changing the cost.
 Helps to design pricing strategy: The break-even point can be affected if there is any
change in the pricing of a product. For example, if the selling price is raised, then the
quantity of the product to be sold to break-even will be reduced. Similarly, if the selling
price is reduced, then a company needs to sell extra to break-even.
 Components of Break-Even Analysis

 Fixed costs: These costs are also known as overhead costs. These costs materialise
once the financial activity of a business starts. The fixed prices include taxes, salaries,
rents, depreciation cost, labour cost, interests, energy cost, etc.
 Variable costs: These costs fluctuate and will decrease or increase according to the
volume of the production. These costs include packaging cost, cost of raw material,
fuel, and other materials related to production.
 Uses of Break-Even Analysis
 New business: For a new venture, a break-even analysis is essential. It guides the
management with pricing strategy and is practical about the cost. This analysis also
gives an idea if the new business is productive.
 Manufacture new products: If an existing company is going to launch a new product,
then they still have to focus on a break-even analysis before starting and see if the
product adds necessary expenditure to the company.
 Change in business model: The break-even analysis works even if there is a change
in any business model like shifting from retail business to wholesale business. This
analysis will help the company to determine if the selling price of a product needs to
change.
Break-Even Analysis Formula
Break-even point = Fixed cost/-Price per cost – Variable cost
Example of break-even analysis
Company X sells a pen. The company first determined the fixed costs, which include a lease,
property tax, and salaries. They sum up to ₹1,00,000. The variable cost linked with
manufacturing one pen is ₹2 per unit. So, the pen is sold at a premium price of ₹10.
Therefore, to determine the break-even point of Company X, the premium pen will be:
Break-even point = Fixed cost/Price per cost – Variable cost (FC/Contribution per unit)
Contribution per unit = Sales – Variable
Sale -VC= contribution – FC = profit.
= ₹1,00,000/(₹12 – ₹2)
= 1, 00,000/10
= 10,000

Therefore, given the variable costs, fixed costs, and selling price of the pen, company X would
need to sell 10,000 units of pens to break-even.
Graphical Presentation of Break-even point

In the above graph, X-axis shows units being sold and Y-axis shows the revenue made. The
cost line shows the total cost that occurs during the production process, the fixed cost line
shows the occurrence of fixed costs, and the revenue line shows the total sales being made. The
intersection of the revenue curve and cost curve determines the break-even point; i.e., point E.