Karnataka 2nd PUC Business Studies Notes Chapter 9 Financial Management
→ Finance: Finance is the basic requirement of every business and it is considered as one of the important factor of production.
→ Financial management: It means effective and efficient management of money. It is concerned with planning & controlling of firms’ financial resources.
→ Definition: Financial Management is concerned with the efficient use of an important economic resource, namely, capital funds.
→ Importance:
- Estimating capital requirement.
- Capital budgeting.
- Working capital marketing.
- Appraisal of financial performance & financial control.
- Making financial decision
- Making dividend policy decision.
- Solution to financial problem
- Communication of financial performance
1. Estimating capital requirement: Financial Management makes the estimation of both short term & long term financial needs to make the smooth running of a business.
- Short Term Financial Needs: Refers to the financial requirement for a period within one year.or financial required to meet day today expense.
- Long Term Financial Needs: Refers to the financial requirements for a period exceeding one year.
2. Capital budgeting: It refers to the long term funds. Capital can be raised in two ways either by debts or Equity. Capital budgeting decides the composition of debt & equity in the long term finance of an organization.
3. Working capital marketing: Excess of current assets over current liabilities represents the working capital of an organization. To ensure the smooth working of an organization it should have sufficient working capital to meet the day to day needs.
4. Appraisal of financial performance & financial control: Financial Management provides various financials tools such as Ration analysis, Budgeting, Variance analysis. It helps the management to control the financial activities of the organization.
5. Making financial decision: Financial Management is concerned with financial decisions relates to the composition of assets. Capital & Investment. Sound financial decisions are made depending on risk & return.
6. Solution to financial problem: A good financial management helps the top management by providing financial information and also solutions to various financial problems.
7. Communication of financial performance: It is used to measure profitability & liquidity of the business. The various stakeholders who are keen about the financial performance of the organization are Share holders, Creditors, Investors, Economists. Employees and Government.
→ Objectives of financial management:
1. Profit maximization: Profit can be maximized with proper utilization of organizations resource. The company should earn sufficient profit to meet its expenses, expansion & modification.
2. Wealth maximization: It means the maximization of the market value of shares. The market value of shares is related to three financial decision, viz., investment decision, financial decision, & Dividend decision.
3. Proper estimation of total requirement: It is very important o know the financial requirement to start & run the business. Estimating of financial requirement is done after considering factors such as scale of operation, technology, man power requirements etc.
4. Obtaining funds at minimum cost: The required fund can be mobilized through many sources. such as shares, debentures, Bank loan etc. The finance manager must decide about difference & the balance between owned finance & borrowed finance. He must obtain the funds at minimum cost.
5. Proper utilization of finance: Finance must invest in profitable project and care should be taken to ensure that finance is not wasted due to investment in unprofitable project, blocking of finance in inventories & long period of credit.
6. Maintaining proper cash flow: An organization must have proper cash flow to pay its day- to-day expenses such as purchase of raw material, payment of wages & salaries, rent, electricity bills etc. Healthy Cash flow improves organizational success.
7. Risk minimization: Financial management tries to minimize the risk through creation of reserves to meet unforeseen contingencies. A portion of profits are always kept aside as reserve in order to utilize it for future growth and development.
8. Proper co-ordination: Financial Management works in combination with other areas like production, marketing, personnel etc. thus proper co-ordination with other departments is an important objective of financial management to achieve the organizational goals.
9. Financial control: Finance management should always plan the source of procuring funds & also the applications of funds. Deviation between the planned & actual inflow & outflow of funds should be studied; analyzed & corrective actions should be taken immediately.
10. Creation of goodwill: Financial management should try to create good will for the organization. Financial Management ensures good corporate governance. It will help to create confidence in the minds of the stake holders regarding the financial activities of the organization.
Financial decisions:
→ Financial decisions are concerned with how to raise the funds for business activities from various sources. The Financial Management decisions can be broadly classified into:
- Investment decisions
- Financing decision
- The dividend decision
→ Investment decisions: These decisions are concerned with how firm’s funds are invested in different assets either long term or short term.
→ Financing decisions: These decisions are concerned with how to raise the funds for business activities from various sources. (Debt or Equity).
→ Dividend decisions: These decisions are concerned with the apportionment of the firm’s profit.
Financial planning:
→ It is concern with the preparation of a financial blue print of an organization’s for future operations.
→ Importance of financial planning:
- Tool to face uncertainties.
- Ensures liquidity.
- Ensures adequate funds.
- Rational utilization of funds.
- Elimination of waste.
- Economy.
- Better financial control.
→ The Capital requirement of the business organization can be classified under two heads:
- Fixed Capital
- Working Capital
→ Fixed capital: It refers to the amount invested in acquisition of fixed assets.
→ Features of fixed capital:
- Concerned with long-term funds.
- Involves large amount of funds.
- Used to acquire fixed assets.
- Raised with the help of long-term source of funds.
- Involves high risk.
- Involves future prospects of the business.
→ Factors affecting fixed capital requirement:
- Nature of business.
- Scale of operation.
- Growth & Expansion prospects.
- Choice of technique of production.
- Method of fixed asset acquisition.
- Diversification.
- Amount of promotion expenses.
- Level of collaboration
→ Working capital: It refers to investments in current assets such as stock of materials, work- in-progress, finished goods, account receivables etc..
→ Factors affecting working capital:
- Nature of business.
- Scale of operation.
- Growth & Expansion.
- Business cycle.
- Seasonal factors.
- Credit policy.
- Price level changed.
- Level of competition.
- Production cycle.
- Profit level.
- Operating efficiency.
- Dividend policy.
→ Features of working Capital:
- Concerned with short-term funds.
- Index of the solvency of the concern.
- Provides liquidity to the business.
- Involves lesser risk.