Financial Management as a Determinant of Profitability: A Study of Indian Pharma Sector

Article excerpt

This paper aims to examine the relationship between financial management and profitability of the enterprise. Financial management, invariably, has two aspects - mobilization of funds and deployment of funds. Both these aspects of financial management have immense potential to influence the profitability - the former through incurrence of costs and the latter through generation of revenue. The study uses six variables viz. Long-term Debt to Equity Ratio (LTDER), inventory Ratio (IR), Debtors Ratio (DR), Creditors Velocity (CRSV), Total Assets to Saks Ratio (TASR) and Profit After Tax to Sales Ratio (PATSR), covering both the aspects of financial management. These variables are studied for 64 public iimited pharmaceutical companies for a period of 10 years. The observations are analyzed using statistical techniques. The empirical results suggest that TASR and CRVS are the important variables to be paid greater attention while optimizing the profitability of the enterprise.

INTRODUCTION

As defined by Prof. Solomon (1963) "Financial management is properly viewed as an integral part of overall management rather than as a staff speciality concerned with fund-raising operations. In this broader view, the central issue of financial policy is the wise use of funds, and the central process involved is a rational matching of the advantages of potential uses against the cost of alternative potential sources so as to achieve the broad financial goals which an enterprise sets for itself. The underlying fund using proposals which originate within the operating departments of an enterprise are still assumed as given. So are the present and prospective conditions in technology and in the markets for goods, services and capital. Given these data, the function of financial management is to review and control decisions to commit or recommit funds to new or ongoing uses. Thus in addition to raising funds, financial management is directly concerned with production, marketing and other functions within an enterprise whenever decisions are made about the acquisition or destruction of assets."

Naturally management of finance has evinced keen interest both amongst the academicians and practicing managers primarily due to its immense potential to influence the profitability of the enterprise. This potential is engrossed in both the aspects of management of funds, be it mobilization of funds or deployment of funds. Appropriate costs have to be incurred irrespective of the magnitude, type and source from where funds are mobilized as there is no free lunch in finance. Mobilization of funds, thus, influences profitability of the enterprise through incurrence of costs. The deployment of funds too has to be carefully done in a manner that it results in to creation of assets, fixed and/or current, that are capable of providing desired stream of profits. Naturally, management of finance has to excel in both the aspects - mobilization of funds and deployment of funds. These aspects invariably involves several variables such as equity share capital, share premium, reserves and surplus, debenture and other long-term borrowings, current liabilities including creditors, bank advances, provisions and other current liabilities, fixed assets, investments, current assets including debtors, cash and marketable securities, inventories, advances made, deferred revenue expenditures, etc. Multiplicity of the variables and the varying degree of influence they exert on the profitability of the enterprise make the task of finance managers extremely difficult. They simply cannot concentrate on all the variables. They have to ascertain the important variables exerting substantial influence on the profitability. This problem of ascertaining the important variable can be better solved through a research-based approach, instead of mere reliance on historical practices.

LITERATURE REVIEW

Academicians have widely visited different aspects of financial management in order to postulate the corporate profitability. …