Financial Management Class 12 Notes Business Studies Chapter 9 - CBSE

Chapter: 9

What Are Financial Management ?

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Finance is needed by every organisation to establish a business, to run , to modernise, to expand, or diversify it. Financial Management is concerned with optimal procurement as well as the usage of finance. It also aims at reducing the cost of funds procured Almost all items in the financial statements of a business are affected
directly or indirectly through some financial management decisions like:

The size and the composition of fixed assets of the business
The quantum of current assets and its break-up into cash, inventory and receivables
The amount of long-term and short-term funds to be used
Break-up of long-term financing into debt, equity etc
All items in the Profit and Loss Account like commission, bad debts etc

The primary aim of financial management is to maximise shareholders’ wealth or wealth-maximisation.

Financial Decisions

Financial management is concerned with the solution of three major issues relating to investment, financing and dividend decision.

Investment Decision

Investment decision is related to investment of funds of an organisation in different assets. Investment decision can be for long-term or short-term. Long-Term investment decision is called Capital Budgeting Decision and Short-term investment decisions are also called working capital decisions.

Factors affecting the Capital Budgeting Decisions

Cash Flows of the Project
The rate of return
The investment criteria involved

Financing Decision

The decision refers to the amount of finance to be raised from various long-term sources. The main sources of finance are: shareholder’s funds and borrowed funds.

Factors affecting Financing Decision

Cost
Risk
Floatation Cost
Cash Flow Position of the Company
Fixed operating Cost
Control Consideration
State of Capital Market

Dividend Decision

Dividend is that portion of profit which is being given to shareholders. The dividend decision refers to the how much amount of profit is to be given to the shareholders and how much should be retained in the business.

Factors affecting Financing Decision

Amount of Earnings
Stability Earnings
Stability of Dividends
Growth Opportunities
Cash flow positions
Shareholder’s Preference
Fixed operating Cost
Taxation policy
Stock Market Reaction
Access to capital market
Legal Constraints
Contractual Constraints

Financial Planning

It is the financial blueprint of an organisation’s future operations.

Objectives of Financial Planning

To ensure availability of funds whenever required
To make sure that the firm does not raise resources unnecessarily

Importance of Financial Planning

Forecasts what may happen in future under different business circumstances.
Avoids business shocks and surprises
Co-coordinates various business functions
Reduces waste and duplication of efforts
Link present and future
Linkage between investment and financing decisions

Capital Structure

It refers to proportion of owner’s funds and borrowed funds in an organisation. It can be calculated by Debt-Equity ratio. Capital structure of the company affects both profitability and financial risk.