Financial management - Business studies

              Financial management

Financial Management is concerned with optimal requirement as well as the uses of finance

Business Finance - money required for the carrying out business activities is called A Business Finance

 Finance = blood of the business

Almost all business activities require some Finance. finance is need to establish a business, to run it ,to modernize it, to expand it, or diversification it. it required for buying a variety the of assets ,which may be tangible like machinery,factory, building, offices or intangible such as Trademark, patent, technical expertise, etc. also ,finance is central to running the day-to-day operations of the business like buying materials,payable salaries,collecting cash from customers etc.

● Financial management

   It concerned with efficient use and the distribution  of funds


Management is concerned with optimal procurement as well as usage of finance. for optimal procurement, different available sources of finance are identified and compared in terms of their cost and associated risk.

Objectives of financial management

   To maximize the wealth of equity shareholders

● Role and importance of financial management

1. The size and the composition of fixed assets of  business: 

for example,a capital budgeting decision to invest a sum of Rs. 100 crores in fixed assets would raise the size of fixed asset blocked by the amount.

2. The quantum of current assets and its break up into cash, inventory and receivable:

With an increase in the investment in fixed assets, there is a commensurate increase in the working capital requirement. the quantum of current assets is also influenced by financial management decision.

3. The amount of long term and short term fund to be used:

Financial management, among others, involves decisions about the proportion of long term and short term funds. An Organisation wanting to have more liquid assets would raise relatively more amount on a long-term basis. there is a choice between liquidity and profitability.

4. Breakup of long-term financing into Debt, equity etc:

Of the total long term finance, the proportions to be raised by way of Debt and or equity is also a financial management decisions. the amount of debt, equity share capital, preference share capital are affected by the financing decision, which is a part of Financing Management.

5. All items in the profit and loss account eg- interest ,expense, depreciation, etc:

Higher amount of Debt means higher interest expenses in future. similarly, use of higher equity may enitial higher payment of dividends. similarly, an expansion of business which is a result of capital budgeting decisions is likely to affect Virtually all items in the profit and loss account of the business

                Financial decision

Decision regarding financial activities

1. Investment decision

2. Financing decision

3. Dividend decision

1. Investment decision

  Investment decision can be long term or short-term. A long term investment decision is also called a capital budgeting decision.

• investment decision choose between the fixed asset and a current asset

● Factors affecting the investment decision

1. Cash flow of the project

2. Return on investment

3. Risk involved

4. Investment criteria

2. Financing decision

It involves identification of various available sources. The main sources of funds for a firm are shareholders' funds and borrowed funds. the shareholders funds refers to the equity capital and the retained earning. borrowed funds refers to the finance raised through debentures or other forms of debt.

• The risk of default on payment is known as financial risk

• financing decision choose between the debt or equity

• The fund raising exercise also costs something. this cost is called floatation cost.

● Factors affecting the financing decision

1. Cost

2. Risk

3. Cash flow of the position

4. Floating cost (preliminary expenses)

5. Fixed operating cost

6. State of capital market

7. Control considerations

3. Dividend decision

● Factors affecting the dividend decision

1. Amount of earning

2. Cash flow of the position

3. Growth opportunities

4. Stability of dividend

5. Preferencence of shareholders

6. Taxation policy

7. Stock market reaction

8. Contractual constraints (at first loan paid)

              Financial planning

 it means deciding in advance how much to spend and what to spend according to the fund at our disposal

● Objectives of financial planning

1. To ensure timely availability of

2. To reduce wastage of funds

3. Covers both short-term and long-term Finance

● Importance of financial planning

1. Facilitate collection of optimum funds

2. Help in proper investing

3. Financial control

4. Link present with future

5. Help in coordination

6. Help in fixing structure

● Capital structure

   It means proportion of debt and equity used for financing the operation of business

  Capital structure= Debt(loan)/Equity(shares)

• factors affecting the capital structure

1. Cash flow of the position

2. Return on investment

3. Cost of Debt

4. Tax rate

5. Cost of equity

6. Risk consideration

7. Control

8. Interest coverage ratio (ICR)

    ICR = Earning before interest and tax/Interest

● financial leverage

   Population of Debt in overall capital is called financial leverage

         Fixed and working capital

A. Fixed capital

    It related with the long term investment decision

● factors affecting the requirement of fixed capital

1. Nature of business

2. Scale of operations

3. Choice of technique

   a. Labour intensive     b. Capital intensive

4. Technology upgradation

5. Growth prospectus

6. Financing alternative

B. Working capital

    The cash available for dairy to daily operation of an organisation

● factors affecting the working capital

1. Nature of business

2. Scale of operation

3. Business cycle

4. Seasonal factors

5. Production cycle

6. Credit allowed

7. Credit availed

8. Operating efficiency

9. Availability of raw material

10. Growth prospectus

11. Level of competitors

12. Inflation


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