Chapter/Unit-9th : Financial Management

Chapter/Unit-9th : Financial Management

[A] Meaning of Finance:- Funds and investment needed for a new business establishment, its conduction and expansion, are called finance. [B] Meaning of Financial Management:- Managing (receipt and use) of financial resources of business is called financial management.

[C] Role/importance of financial management or Function of Financial management/manager:- 1.Determination of Fixed Assets:- Total investment in fixed assets and every separate fixed asset is determined, like land, building, machine, plant, etc. 2. Determination of Current Assets:- Total investment in current assets and every separate current asset is determined, like cash, stock, debtors, receivables etc. 3. Determination of ratio of long-term and short-term debts:- Out of total debts how much will be long-term debt and how much will be short-term debt. 4.Determination of various sources  for getting long-term finance & debt:- How much finance will be obtained through equity shares, preference shares, debentures, retained earnings, long-term bank loan.

[D] Types of Financial Decisions:-

[E] Meaning of Fixed Capital:- The capital needed for purchasing of fixed assets, is called fixed capital. Fixed assets are land, building, machine and furniture.	[F] Meaning of Working Capital:- The capital needed for payment of daily expenses and creating  current assets, is called working capital Current assets are cash, stock, debtors, bills receivable.
[G]Importance/Need of  Fixed Capital:- (i)These decisions affect long-term profitability of   business. (ii) In these decision large amount of funds are   invested. (iii)Because of investment of large funds for long-  term period, it creates high risk. (iv)These decision are normally irreversible or un-changeable decisions.		[H]Importance/Need of Working Capital:- (i)Timely payment of daily expenses. (ii)Timely  payment of current liabilities (iii)Timely payment of credit purchase and getting cash discount. (iv)Timely  payment of salary and wages to worker and employees.

[I]▼Factors affecting Dividend Decisions:-
Factor :-	Higher amount will be distributed as dividend to equity shareholders.	Lower amount will be distributed as dividend to equity shareholders.
1. Profit/Earning available.	If higher profits/earnings are available.	If lower profits/earnings are available.
2. Stability of earning/profits.	If profits/earnings are stable.	If profits/earnings are un-stable.
3.Growth targets/expectations	If business has no target/expectations for growth and expansion.	If business has  target/expectations for growth and expansion.
4.Cah Flow or availability	If sufficient/excess cash is available.	If in-sufficient/less cash is available.
5.Equity shareholders’ preference or liking.	If shareholders do not like retaining or re-investing of the earning/profit.	If shareholders  like retaining/re-investing of the earning/profit.
6.Taxation policy/rate	If rate of tax is lower.	If rate of tax is higher.
7.Stock market reaction	If price of shares increase because of cash dividend.	If price of shares is not affected because of cash dividend.
8. Availability of finance.	If finance is easily available.	If finance is not easily available.

[J]▼Factors affecting Financing Decisions	[K]▼Factors affecting Long-Term Investment decisions or Factors affecting requirement of fixed  capital.
Decisions:- Problem:-From which source finance should be obtained?- Ans:- Answer depends on various factors like- 1.Cost of Getting finance:- On this basis retained earning is best option. 2.Cost of using finance:- The option which has least interest or dividend rate, should be chosen 3.Risk:- Debt  or Loan ( on fixed interest) is most risky and equity share is least risky. 4.Availability of cash:- If enough cash is available, then debt/loan can be taken, otherwise not. 5.Control Sharing:- If present shareholders do not want to share their control on company, then only debt capital should be used. 6.Share market condition:- If share marked is recessed then debt/capital may be used, if share market is on boom share capital can be used.	Factor :-		Large amount, for investment in fixed assets,  is needed	Lesser amount, for investment in, fixed assets         is needed
	1. Nature of Business (means business is selling readymade goods of self-made goods.)		If Manufacturing Business	If Trading Business.
	2.Scale of Operation or Production(means quantity of produced units)		If Higher Production level	If Lower Production level
	3.Technology needed (means production is done mainly by machines or men’s efforts.)		If Mechanical	If Mannual
	4.Growth Possibility(means chances of growth)		If More possibility of growth	If Less possibility of growth.
	5.Diversification (means number of product produced)		If More products	IF Less/one product.
	6.Availability of Leasing (means hiring service of assets)		If not available	If available
	7.Level of collaboration(means help for fixed assets availability from other organizations)		If Collaboration or help is not available	If Collaboration or help is available
	▼Factors affecting Short-Term Investment decisions or Factors affecting requirement of Working capital..
	Factor :-	Large amount, for investment in, current assets  is needed…..			Lesser amount, for investment in, current assets  is needed…….
	1. Nature of Business	If Manufacturing Business			If Trading Business.
	2.Scale of Operation	If Higher Production level			If Lower Production level
	3.Seasonal factor	If season is on			If season is off.
	4.Production cycle(means time duration of conversion of raw material.)	If longer			If shorter
	5.Credit sale or cash sale	If sale is mainly on credit.			If sale is mainly on cash.
	6.Credit purchase of cash purchase	If purchase is mainly on cash.			If purchase is mainly on credit.
	7.Level of inflation	If inflation is higher.			If inflation is lower.
	8.Level of Competition	If competition is higher.			If competition is lower.

[L] Meaning of Financial Planning:-In coming future how much finance/funds will be needed and from what source finance will be obtained. [M] Importance/Need of Financial Planning:- 1)Timely availability of required finance. 2)Correct selection of source of finance. 3)Achieving financial goals (maximization of market value of equity shares.) 4)Quick decision making. 5)Reducing financial uncertainties. 6)Ensuring sufficient cash flow(availability)	[N] Meaning of Capital Structure :- Deciding structure of total capital of business, by dividing in owner’s capital and borrowed capital. [O] Determinants of Capital Structure:-
	Factor/Determinant  ▼	Owner’s capital should be used, if……	Borrowed capital should be used, if…….
	1.Cash flow/availability	Cash flow is not good.	Cash flow is good.
	2.Cost of debt(Interest rate)	Interest rate is high.	Interest rate is low.
	3.Flexibility(means finance can be paid back, when not needed)	Flexibility is not necessary.	Flexibility is necessary.
	4. Sharing of Control(voting power)	Yes, ready to share.	Not ready to share
	5. Stock market condition is good for issue of new equity shares.	Yes, stock market is in good condition.	No, stock market is not in good condition
	6. Interest Coverage Ratio.	If ratio is low.	If ratio is high.
	7.Tax Rate.	If rate is lower	If rate is higher

aaa