Financial information systems encompass all of the applications of the computer in finance functions, that is, acquisition and

management of funds, management control, supported by accounting and financial; intelligence system. Thus like other information systems, a financing information system has input, output, and database Model of a financial information system? Input subsystems use financial data from both internal and external sources. Accounting subsystem captures transaction data and processes these to prepare various account books. Financial intelligence subsystem gathers relevant data from external sources, such as shareholders, financial illustrations, government etc. All these data go to database. Output subsystems of a financial information system consist of funds management subsystem and control subsystem. Funds management subsystem tracks information flow related to acquisition, distribution, and administration of funds. Control subsystem helps in exercising control related to financial aspects of organisational operations. FINANCIAL INTELLIGENCE SYSTEM Since the finance functions control the money flow throughout an organisation, information is needed to expedite this flow. The basic objective of the finance functions is to raise funds at the lowest possible cost and to investment these funds to maximise returns from them. In order to achieve this objective, financial intelligence system gathers information about the most desirable sources of funds and investment opportunities for surplus funds. Financial intelligence system gathers relevant information from financial environment comprising specialised financial institutions, common banks, investing public, stock exchanges, etc. for raising funds. It also monitors the monetary policy of the central bank of the country (Reserve Bank of India in the case of India) as this policy has direct impact on interest rates and availability of funds. For investing surplus funds that may be available with the organisation, financial intelligence system tries to gather information about the investment opportunities that may be available. Information may be collected from stock exchanges, mutual funds and other financial market intermediaries. WHAT ARE THE DIFFERENT TYPE OF FINANCIAL SOFTWARE PACKAGES? More prewritten software has been developed in finance area as compared to any other business functional area. The most probable reason for this is the pattern of computer usage in business. The computer was first used in business to process accounting data like payroll, accounts receivable payable, etc. Subsequently, computer use spread in other areas. Financial software packages may be classified into four major categories accounting data processing, personal productivity software, decision model packages, and financial database service. Accounting Data Processing: Prewritten accounting data processing packages perform a number of activities ranging from transaction recording and processing to preparation of final financial statements in the forms of profit and loss account and balance sheet. Various types of accounts that can be prepared with these packages include accounts payable, account receivable, general ledger, job accounting, job costing, payroll processing, tax accounting, etc. Most commonly used accounting package in India is Tally, developed by Bangalore-based Tally Solutions (formerly Peutronics). Tally is able to perform most of the accounting functions.

Personal Productivity Software: Personal productivity software has the capability to be used in different business functions. For example, electronic spreadsheet can be used in many areas including finance. When spreadsheet is used in finance area, it shows various financial data such as cost of production with detailed break-up in rows and various periods, such as monthly, quarterly, yearly, etc. are shown in columns. Thus, spreadsheet can be used to make comparative analysis of a financial phenomenon over a period of time. Decision Model Packages: There are number of packages that produce different models which can be used for financial decision making. Areas which are covered include profit planning, evaluation of economic feasibility of a project, forecasting funds requirement, deciding optimum financing mix, financial ratio analysis, etc. Some of the packages that are available include Minitab, IDA SAS, SPSS, etc. Financial Database Service: Financial database service is provided by different organisations in different forms. First, financial database is provided in the form of CDROM which can be used by the buying organisation, Such a CD-ROM includes industry analysis, financial performance of various companies in the industry, etc. Second, financial database created by service providers can be accessed through local/wide area network or Internet after paying certain prescribed fee. In India, many organisations provide financial database services which are relevant mostly for investment purposes. For example, Cyberboltz provides financial information of companies listed on stock exchanges that includes profit and loss accounts and balance sheet of each company for the last five years, financial ratios, share price movements, charts, news headlines, etc. for an annual subscription fee of Rs. 30,000 annually (as on September 30, 2001) INFORMATION ABOUT HOW A PROJECT CAN BE SELECTED? The project is selected after conducting feasibility study. Feasibility analysis warrants a detailed analysis of technical, financial and other aspects. Feasibility analysis includes various evaluations such technical, commercial, financial, social, environmental, managerial, etc. It is needless to say that each of these dimensions is important and be analysed carefully. For this purpose, detailed information and data are collected, analysed and interpreted. If more than on projects are identified, then analysis is required for all such projects To carry out these analyses different kinds of information are required. For example market analysis requires following information 1) What is the total size of the market (demand)? 2) What is the existing level of capacity installed by competitors? 3) What is the growth pattern of the demand? 4) What is the expected market share to be captured by the project under way To answer the above questions require in depth study of various factors like consumption pattern, elasticity of demand, nature of competition, government policies. This information may be gathered from 1) Situational analysis by way of informal talks to customers, retailers, wholesalers and other participants of market. 2) Secondary sources such as economic surveys, industry reports, newspapers, periodicals, National Sample surveys, Annual Reports of companies, RBI reports, Publications of advertising agencies etc. 3) Primary sources, i.e. preparing a questionnaire, and getting necessary information

from the potential customers and other parties. Sometimes, the secondary information is to be supplemented with the information collected from primary sources. The technical analysis is concerned with the details regarding input; production technology, location, site and capacity of the plant; civil work; plant charts and layout. The financial analysis requires information about cost of project, estimation of revenues and costs, projected earnings, projected balance sheet, projected cash flow statement, Break even analysis. To make all the above analysis, the firm requires lot of information. The information should be adequate and correct. If there is no information then decision can not made, and if the information is not correct then decision will not be right one, which will end up in project failure. Some of the information may be available within the company database and some have to be collected from outside sources

WHAT ARE THE DIFFERENT TYPES OF DIVERSIFICATION STRATEGIES? The strategies of diversification can include internal development of new products or markets, acquisition of a firm, alliance with a complementary company, licensing of new technologies, and distributing or importing a products line manufactured by another firm. Generally, the final strategy involves a combination of these options. This combination is determined in function of available opportunities and consistency with the objectives and the resources of the company. There are three types of diversification: concentric, horizontal and conglomerate: Concentric Diversification This means that there is a technological similarity between the industries, which means that the firm is able to leverage its technical know-how to gain some advantage. For example, a company that manufactures industrial adhesives might decide to diversify into adhesives to be sold via retailers. The technology would be the same but the marketing effort would need to change. It also seems to increase its market share to launch a new product which helps the particular company to earn profit. Horizontal Diversification The company adds new products or services that are technologically or commercially unrelated (but not always) to current products, but which may appeal to current customers. In a competitive environment, this form of diversification is desirable if the present customers are loyal to the current products and if the new products have a good quality and are well promoted and priced. Moreover, the new products are marketed to the same economic environment as the existing products, which may lead to rigidity and instability. In other words, this strategy tends to increase the firms dependence on certain market segments. For example company was making note books earlier now they are also entering into pen market through its new product. Horizontal integration occurs when a firm enters a new business (either related or unrelated) at the same stage of production as its current operations. For example, Avons move to market jewelry through its door-to-door sales force involved marketing new products through existing channels of distribution. An alternative form of that Avon has also undertaken is selling its products by mail order (e.g., clothing, plastic products) and through

retail stores (e.g., Tiffanys). In both cases, Avon is still at the retail stage of the production process. Horizontal diversification is when a portfolio is diversified between same-type investments. It can be a broad diversification (like investing in several NASDAQ companies) or more narrowed (investing in several stocks of the same branch or sector). In the example above, the move to invest in both umbrellas and sunscreen is an example of horizontal diversification. As usual, the broader the diversification the lower the risk from any one investment. Conglomerate Diversification (or lateral diversification) The company markets new products or services that have no technological or commercial synergies with current products, but which may appeal to new groups of customers. The conglomerate diversification has very little relationship with the firms current business. Therefore, the main reasons of adopting such a strategy are first to improve the profitability and the flexibility of the company, and second to get a better reception in capital markets as the company gets bigger. Even if this strategy is very risky, it could also, if successful, provide increased growth and profitability. Vertical Diversification Vertical diversification is investment between different types of securities. Again, it can be a very broad diversification, like diversifying between bonds and stocks, or a more narrowed diversification, like diversifying between stocks of different branches. Continuing the example from the introduction, a vertical diversification would be taking some money from umbrella and sunscreen stock and investing it instead in bonds issued the government of the island. While horizontal diversification lessens the risk of investing entirely in one security, vertical diversification goes beyond that and protects against market and/or economical changes. What are the types of capital rationing? 1) Internal Capital Rationing. It is a situation where the firm has imposed limit on the funds allocated for fresh investment though (i) the funds might otherwise be available within the firm, or (ii) additional funds can be procured by the firm from the capital market. Some firms may follow a policy of using only internally generated funds (by ploughing back of profits) for new investments. Some firms avoid debt capital because of the associated financial risk and avoid external equity because of a desire not to loose control. This type of capital rationing implies that the firm is not willing to grow further. 2) External Capital Rationing. It is a situation when the firm is willing to undertake the financially viable proposals but is unable to do so because either it is not having sufficient funds available at its disposal or the capital market conditions are not conducive enough to let the firm raise the required funds form the market. The external capital rationing may occur because of several reasons. a) The Lack of Credibility. The capacity of the firm to raise funds and avoid a capital rationing depends largely on the firms credibility with the capital market. Obviously, a firm with good standing in the capital market is less likely to face capital rationing constraints than a firm with credibility problems.

b) High Flotation cost. The larger the cost of issuing securities in the capital market, the greater the chances that a firm will face the capital rationing. The size of the flotation cost tends to vary inversely with the size of the issue, i.e., larger issues tend to have proportionately lower flotation cost. Smaller firms are more likely to face capital rationing constraints than the larger firms because the former have higher flotation cost. Further, the firms that are primarily dependent on equity financing are more likely to face capital rationing. c) Higher Marginal cost of Capital. A Firm faces a capital rationing because the additional funds can be raised only at a higher cost than that the cost of existing funds, and hence the firm faces an increasing marginal cost of funds. Capital funds in such a case are assumed to be available at the market rate of interest up to a certain limit only and thereafter for additional funds, the cost of funds will also increase. At this stage, it is also necessary to classify different projects into 2 classes, i.e., divisible projects and indivisible projects. 1) Divisible Projects : There are certain projects, which can either be taken in full or can be taken in parts. For example, a building (having 5 floors) can be constructed at a cost of Rs. 5 Crores. However, if the funds are not sufficiently available then only a part of the building, say only 2 floors, can be constructed for the time being. But all the proposals may not be divisible. 2) Indivisible Projects : There are certain proposals which are indivisible. These proposals have a feature that either the proposal, as a whole, be taken in its totality or not taken at all for example, a proposal to buy a helicopter cannot be taken parts. Similarly, a multi-stage plant can only be installed fully but not in parts. There can be many instances of indivisible projects

DIFFERENCE BETWEEN CAPITAL RATIONING AND PORTFOLIO: CAPITAL RATIONING: Capital rationing is allocation of available fund to list most profitable projects. In capital rationing projects are listed according to profitability then available funds are allotted to the projects to ensure maximum profitability. There may be lot of profitable projects but only few projects are selected according availability of funds PORTFOLIO: In the portfolio all the funds are not invested in one projects rather invested in few projects mainly to diversify the risk. In the portfolio selection minimizing the risk is more important whereas in capital rationing maximizing the profit is the main objective. In capital rationing capital constraint and other constraints are analysed in detail. In portfolio both systematic risk and unsystematic risk are considered. MEANING OF PORTFOLIO:

In finance, a portfolio is an appropriate mix of or collection of investments held by an institution or a private individual PORTFOLIO MANAGEMENT Portfolio management involves deciding what assets to include in the portfolio, given the goals of the portfolio owner and changing economic conditions. Selection involves deciding what assets to purchase, how many to purchase, when to purchase them, and what assets to divest. These decisions always involve some sort of performance measurement, most typically expected return on the portfolio, and the risk associated with this return (i.e. the standard deviation of the return). Typically the expected return from portfolios of different asset bundles is compared. TWO KINDS OF RISK Modern portfolio theory states that the risk for individual stock returns has two components: Systematic Risk - These are market risks that cannot be diversified away. Interest rates, recessions and wars are examples of systematic risks. Unsystematic Risk - Also known as specific risk, this risk is specific to individual stocks and can be diversified away as you increase the number of stocks in your portfolio. It represents the component of a stocks return that is not correlated with general market moves.

RISK AND RETURN The model assumes that investors are risk averse, meaning that given two assets that offer the same expected return, investors will prefer the less risky one. Thus, an investor will take on increased risk only if compensated by higher expected returns. Conversely, an

investor who wants higher returns must accept more risk. The exact trade-off will differ by investor based on individual risk aversion characteristics. The implication is that a rational investor will not invest in a portfolio if a second portfolio exists with a more favorable riskreturn profile i.e., if for that level of risk an alternative portfolio exists which has better expected returns

MEASURES OF PORTFOLIO RISK ( 2 ASSET MODEL) I M PANDEY (pg-92) N ASSET MODEL ( pg-101) Compare SML&CML (pg-108)