Key Notes: Financial Management - Commerce PDF Download

Points to Remember

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

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

Role of Financial Management

(i) Size and composition of fixed assets
(ii) Amount and composition of current assets
(iii) The amount of long term and short financing
(iv) Fixing debt equity ratio in capital
(v) All items in Profit and Loss account

Financial Decisions

The financial functions relate to three major decisions which every finance manager has to take
(i) Investment decision
(ii) Financing decision
(iii) Dividend decision

Investment Decision (Capital Budgeting Decision)

This decision relates to careful selection of assets in which funds will be invested by the firms.
Factors affecting investment/capital budgeting decisions are
(i) Cash flow of the project
(ii) Return on investment
(iii) Risk involved
(iv) Investment criteria

Financing Decision 

This relates to composition of various securities in the capital structure of the company. Mainly sources of finance can be divided in to two categories
(i) Owners fund
(ii) Borrowed fund
Factors affecting financing decisions are
(i) Cost
(ii) Risk
(iii) Cash flow position
(iv) Control consideration
(v) Floatation cost
(vi) Fixed operating cost
(vii) State of capital market

Dividend Decision 

This relates to distribution of profit earned. The major alternatives are to retain the earnings or to distribute to the shareholders.
Factors affecting dividend decisions are
(i) Earning
(ii) Stability of earning
(iii) Cash flow position
(iv) Growth opportunities
(v) Stability of dividend
(vi) Preference of shareholders
(vii) Taxation policy
(viii) Access to capital market consideration
(ix) Legal restrictions
(x) Contractual constraints
(xi) Stock market reaction

Financial Planning 

It means deciding in advance how much to spend, on what to spend according to the funds at your disposal.

Objectives of Financial Planning

(i) To ensure availability of funds whenever these are required,
(ii) To see that firm does not raise resources unnecessarily.

Importance of Financial Planning

(i) It facilitates collection of optimum funds.
(ii) It helps in fixing the most appropriate capital structure.
(iii) Helps in investing finance in right projects.
(iv) Helps in operational activities.
(v) Base for financial control.
(vi) Helps in proper utilisation of finance.
(vii) Helps in avoiding business shocks and surprises.
(viii) Link between investment and financing decisions.
(ix) Helps in co-ordination.
(x) It links present with future.

Fixed Capital 

Importance or Scope of Capital Budgeting Decision

Factors Affecting Requirement of Fixed Capital

Working Capital

Working Capital refers to excess of Current assets over Current liabilities.
There are two types of working capital
(i) Gross working capital
(ii) Net working capital