Financial Management Buisness Studies Short Note

Financial Management

Introduction

Finance means the money or funds required for carrying over buisness activities finance is the life blood of buisness . A buisness enterprises required funds act every stage to start a Buisness to operate it and to expand it in order to survive and grow in a competitive market every buisness firm must manage it's funds in an efficient manner .

Meaning of financial Management

Financial management is concerned with allocation utilisation of funds in a proper manner finance procured need to be investment in such as manner that the return from investment exceed the cost of raising funds

OBJECTIVE oF Financial Management

1 Ensuring availability of sufficient fund at a reasonable cost - When ever required sufficient fund must be procured at a reasonable cost keeping the risk under control so that some value addition take place .

2 Ensuring Effective Utilisation / deployment of such funds - when investment decision is taken for ex - investment in land . Building plant and machinery etc the aim of financial management is to ensure that benefit or return from the investment exceed the cost so that the value addition is even higher 

3 Ensuring Safety of funds - the financial management must aim at ensuring safety of funds procured by creating reserve reinvesting profit etc

4 Avoiding ideal finance - Financial Management must aim at avoiding ideal finance because if exceed fund are available it will unnecssarily add to cost and may encourage wasteful expenditure .

Functions of Financial Management Decision 

These are basically three financial decision 

1 Investing Decision - The Decision involve carefull selection of assets in which fund are to be invested by the firm investment decision may be short term or long term 

2 Long Term Investment Decision - it is also called budgeting decision for example - acquiring new fixed assets opening a new branch launching a new product line. Investing in advance techniques of Production etc ..

3 Short term investment Decision - they are also called working capital decision it is related to the investment in short term assets such as cash stock determine etc 

Management has to ensure that there is sufficient investment in these assets as they effect the liquidity position of the Buisness

4 Financing Decision - These Decision is about the quantum of finance to be raised on various long term source it envolve identification of various available source which may be in the form of debentures equity share capital preference share capital and retail earning

5 Dividend decision - it refer to the decision of how much profit of the earnings should be distributed among share holders by way of dividend and how much should be retained for meeting future need as retained earnings

Factors Affecting Financial Decision

1 Cost - When the financial manager raises funds he has to keep a watch on the cost of each type of finance he opts for a source which is cheaper 

2 Risk - The consideration of risk is very important at the time of raising funds all the source of finance carry risk sum of them have high risk and other have low risk of the funds is collected in the form of equity share then it have less risk because it is up to the company to pay it . Dividend but if the organisation raises fund in the form of debentures it will have high risk

3 Flotation Cost - Cost of raising fund is called flotation cost for example - cost of advertising printing prospect etc higher the flotation cost less attractive is the source

4 Cash Flow Position - if the cash Flow Position of the company is good the payment of interest on the debentures and  refund of capital can be easily paid than funding through equity

5 state of capital markets - during the period when stock marketing is rising more people are ready to invest in equity however during depressed capital markets a company may find it difficult to make equity issues

# Factor Effecting Dividend Decision

1 Earning - dividend are paid out of current and past earning therefore earning is a measure determent of dividend decision

2 Stability Of Earning - A company Having stable earning can declared higher devidend on the contrary a company having unstable earning is likely to pay smaller dividend

3 Growth Opportunity - Companies having good growth opportunities generally pay less dividend and retained more money out of profit to invest in profitable project

On the other hand non growth companies can pay higher dividend Provide they have enough earning and cash

4 Cash Flow Position - Dividend involved outflow of cash so availability of enough cash in the company is necessary for distribution of dividend sometime it is possible that profit and loss account show high profit but the company fall short of cash so it can pay less dividend

5 Shareholders Preference - Since the share holder are the real owner of the company there preference should be given due consideration by the management or the director of the company

6 Stock Market Reaction - Generally investors and view increase in dividend as a good news and hence market price of share increase in the stock market on the contrary a decrease in dividend reduce the market price of the share these is an important factor Effecting Dividend decision

Importance Of financial Planning 

1 A sound financial plans help the enterprise of buisness to avoid the problem of shortage and surplus of funds

2 Financial planning help in Effective Utilisation of fund

3 Financial planning help the company to prepare for facing between stocks and surprise in the future

4 It provides a link between investment and financial decision on a continuous basis

5 Financial planning helps in coordinating various Difference function

6 Financial planning enable the management so exercise the effective control over the financial activities of an enterprise

Important For Exam

CAPITAL STRUCTURE

It means the proportion between owner funder equity and borrowed fund (debentures )

Capital structure is equal to debt

                                                  Equity

Debenture is Less costly then equity but is more risky than equity capital structure thus affect profitability and financial risk and Optimum capital structure thus affect profitability and financial risk and Optimum capital structure is the one where in the new proposition of debts and equity such that it results in increasing the share holder by a maximizing the value of equity shares

Trading on Equity

Equity means ownership fund of a company and trading mean taking advantage of therefore trading an equity implies borrowing fund at reasonable cost with the help of a share capital when the return on the investment of the company is high and his greater than the rate of interest on debts it can used more debts to increase the profit earned by equity share holder these is called trading on Equity .

FACTORS Affecting Capital Structure Decision

1 Control - Debts normally does not cause in dilution of Management control over the Buisness by issue of more equity may reduce the management holding in the company there is a Threat of take over also So if the management of the company is interested in retaining control over the affairs of the Buisness it will used more debts .

2 Flotation Cost - It is the cost involved in issue of share and debentures these cost includes the cost of advertising printing prospect under writing competition statutory fees etc these considerations may also effects the choice between debts and equity .

3 Flexibility - A good capital structure should be flexible so that the adjustment can be mad whenever the need arises debentures and preference share can be paid of whenever the company feel necessary but equity share can't be paid during the Life of a company

4 Stock Market Conditions - During these recession people don't like to take and are not interested in to buying equity share during boom pariod invester are ready to take risk and invest equity share ..

5 Cash Flow Position - A company uses more debts if it can generate enough cash inflows to pay interest on debt on the contrary it would be quite risky to use more debts if cash inflows are unstable

6 Tax Rate - The companies borrowed funds get deduction on their income and the actual cost of expenses reduce where as in case of funds raised by equity share or preference share don't get deduction on income 

# WORKING CAPITAL working capital refer to excess of current assets over current liabilities ..

1 Gross Working Capital - these refer to the investment in all the current assets such as cash B/R Prepaid expenses these current assets get converted into cash with in an accounting year example of current assets in order to liquidity are cash in hand cash at bank debt or marketable securities b/R Working program raw material etc .

2 Net Working Capital - These refer to excess of current assets over current liabilities current liabilities are to be paid with in account year . Bill payable creditors etc .. current liabilities are source of funds for acquiring current assets the net working capital can be negative also when current liabilities exceed  current implies positive net working capital implies positive net working capital implies positive liquidity Position where as negative net working capital indicated weak poor liquidity Position

# Factor Effecting the working capital

1 Production Cycle - The Amount of Working Capital directly depends upon the length of operating cycle operating cycle  refer to the time period involved in Production it start right from acquisition of raw material and end till payment is recal after sale the working capital is more important for the smooth flows of operating cycle if operating cycle is long then more working capital is required where as for companies among share operating. Cycle the working capital requirements is less

2 Nature of Buisness - A Trading Buisness need less amount of WORKING capital because there is no processing on the contrary working capital requirements of a manufacturing Buisness is more since raw material needs to be converted into finished good before any sales can Became possible 

3 Scale of Operations - the firm's operating at large scale need to maintain more inventory so they generally required more working capital where as firm operating at small scale required less working capital

4 Seasonal Factor - the working capital requirements is higher in peak season because of higher level as activity for example demand for cold drink in summer as against these. The level of activity and therefore working capital requirements will be lowered during the lean season 

5 Growth  prospect -- if the growth potential of the enterprise is higher , it will require higher amount of working capital so that it is able to meet higher Production and sale target which ever required ..

6 Buisness Cycle - In case of boom condition the production as well as sale are likely to be higher more working capital is to be required in contrast during periods of depreciation working capital requirements will be lower since Production and sale will be low ..