BST Notes (Class 12)

CBSE Class 12 Business Studies Business Finance and Marketing Chapter 1 Financial Management

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Financial Management

Financial Management

Financial Management


Important Notes

1. Business Finance Money required for carrying out business activities is called Business Finance.

2. Financial  Management It refers to the efficient acquisition of finance, efficient utilisation of finance and effectively distributing and disposal of surplus for the smooth working of the company.
According to Howard and Upton, “Financial management involves the application of general management principles to a particular financial operation.

3. Role of Financial Management

  1. Size and composition of fixed assets
  2. Amount and composition of current assets
  3. The amount of long-term and short financing
  4. Fixing the debt-equity ratio in the capital
  5. All items in Profit and Loss account

4. Objectives of Financial Management

5. Financial Decisions
The financial functions relate to three major decisions which very finance manager has to take

  1. Investment decision
  2. Financing decision
  3. Dividend decision

6. Investment Decision (Capital Budgeting Decision)
This decision relates to the careful selection of assets in which funds will be invested by the firms.
Factors affecting investment/capital budgeting decisions are

  1. Cash flow of the project
  2. Return on investment
  3. Risk involved
  4. Investment criteria

7. Financing Decision This relates to the composition of various securities in the capital structure of the company. Mainly sources of finance can be divided into two categories

  1. Owners fund
  2. Borrowed fund

Factors affecting financing decisions are

  1. Cost
  2. Risk
  3. Cash flow position
  4. Control consideration
  5. Floatation cost
  6. Fixed operating cost
  7. State of the capital market

8. Dividend Decision This relates earned. The major alternatives are to the distribution to retain the earnings profit or to distribute to the shareholders.
Factors affecting dividend decisions are

  1. Earning
  2. Stability of earning
  3. Cash flow position
  4. Growth opportunities
  5. Stability of dividend
  6. Preference of shareholders
  7. Taxation policy
  8. Access to capital market consideration
  9. Legal restrictions
  10. Contractual constraints
  11. Stock market reaction

9. Financial Planning It means deciding in advance how much to spend, on what to spend according to the funds at your disposal.
10. Objectives of Financial Planning

  1. To ensure availability of funds whenever these are required.
  2. To see that firm does not raise resources unnecessarily.

11. Importance of Financial Planning

  1. It facilitates the collection of optimum funds.
  2. It helps in fixing the most appropriate capital structure.
  3. Helps in investing finance in right projects.
  4. Helps in operational activities.
  5. The base for financial control.
  6. Helps in proper utilisation of finance.
  7. Helps in avoiding business shocks and surprises.
  8. The link between investment and financing decisions.
  9. Helps in co-ordination.
  10. It links present with future.

12. Capital Structure Capital structure means the proportion of debt and equity used for financing the operations of the business.
Capital Structure = (Debt/Equity)
13. Financial Leverage It refers to the proportion of debt in the overall capital
Financial Leverage = (D/E)
Where, D = Debt, E = Equity
14. Factors Determining the Capital Structure

  1. Cash flow position
  2. Interest Coverage Ratio (ACR) = (EBIT/Interest)
  3. Debt Service Coverage Ratio (DSCR)
  4. Return on investment
  5. Cost of debt
  6. Tax rate
  7. Cost of equity
  8. Floatation cost
  9. Risk consideration
  10. Flexibility
  11. Control
  12. Regulatory framework
  13. Stock market condition
  14. The capital structure of other companies

15. Fixed Capital Fixed Capital involves the allocation of the firm’s capital to long-term assets or projects.
16. Importance or Scope of Capital Budgeting Decision

  1. Long-term growth
  2. A large number of funds involved
  3. Risk involved
  4. Irreversible decision

17. Factors Affecting Requirement of Fixed Capital

  1. Nature of business
  2. Scale of operation
  3. Technique of production
  4. Technology upgrades
  5. Growth prospects
  6. Diversification
  7. Availability of finance and leasing facility
  8. Level of collaboration/joint ventures

18. Working Capital Working Capital refers to the excess of Current assets over Current liabilities.
There are two types of working capital

  1. Gross working capital
  2. Net working capital

19. Operating Cycle

20. Factors Affecting the Working Capital

  1. Length of operating cycle
  2. Nature of business
  3. Scale of operation
  4. Business cycle fluctuation
  5. Seasonal factors
  6. Credit allowed
  7. Credit avail cycle
  8. Technology and production
  9. Operating efficiency
  10. Availability of raw materials
  11. Level of competition
  12. Inflation
  13. Growth prospects

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