Question

1. Why is the study of financial management important? Offer examples of how poor financial management can ruin a company. Provide specific real-life examples to back up your assertions.

2. Pick a decade (from 1920’s to today) and discuss the market performance in that 10 year period. What were some of the major drivers of performance during that decade?

Answer 1

Financial Management is important for every firm or business. It looks after the finance of the business that is funding, planning, organising, directing, controlling of finance.

Below are the some reasons for importance of financial management-

• Helps in financial planning
• Assists in the planning and acquisition of funds
• Helps in effectively utilising and allocating the fund
• Assists in making critical financial decisions
• Helps in improving the profitability
• Increases the overall value of the firms
• Provides economic stability
• Encourages employees to save money
• Best example of a company that failed due to poor financial management is kingfisher airlines
• Kingfisher has started it’s airline services in May 2005 with huge expectations, investors also had faith on Vijay Mallya because he is running United beverages group(Kingfisher Beer) successfully, he has a good relationship with top politicians in India, his personal wealth is more than 7000 crore at that time.

  Frequent Changes On Focus

  Kingfisher first launched all economy class with food and entertainment system, later on, they shifted focus to luxury business class on their aircraft, a lot of air travelers appreciated the hospitality, aircraft condition and it’s ambiance when Kingfisher focus was on luxury.

  After acquiring the Air Deccan they suddenly shifted focus on low-cost air traveling, frequent changes in the hospitality and aircraft ambience made travelers lose their interest in the brand, they didn’t focus on highly profitable routes in domestic area, acquired Air Deccan air crafts(Kingfisher Lite) use to run at the same time as Kingfisher airlines, there was no proper syndication between Kingfisher Lite & Kingfisher Airlines.

• Lack of Management

  There was no single CEO continued for one year in Kingfisher airlines, there was a frequent change in the top level management, Mr. Vijay Mallya never taken any serious interference in day-to-day operations, Kingfisher was a gift to Siddarth Mallya(son of Vijay Mallya) by his father on his birthday, Siddarth Mallya doesn’t have the maturity age to run the airlines business because he is so busy in making Kingfisher Calendar.

  The company not even thought of making Mr. Gopinath (Ex founder of Air Deccan) as CEO of the Kingfisher airlines to bring the company into a profitable business, lack of proper expertise and experience in the airline industry, lack of management caused the downfall of kingfisher airlines.

• High Operational Cost

  Operational costs of the airline industry are very high compared to any industry, companies have to buy the licenses for the routes, companies should invest in the aircraft maintenance, salaries for the employees are very high.

  Airports charges fees for landing and parking, aircraft fuel frequently changes as per the international crude oil rates, the government collects huge taxes from the airline companies, there is a lot of competition between airline companies, all these high operational costs without good profit margin caused the Kingfisher to downfall.