financial management

Revision Notes for Class 12 Business Studies Chapter 9 – Financial Management Business Finance is the money required to perform business activities, including daily operations, purchasing assets, and managing financial obligations. Financial Management Financial Ma...

Revision Notes for Class 12 Business Studies Chapter 9 – Financial Management Business Finance is the money required to perform business activities, including daily operations, purchasing assets, and managing financial obligations. Financial Management Financial Management involves planning, organizing, directing, and controlling the financial activities such as procurement and utilization of funds in the business. It includes making decisions about investments, financing, and dividends to ensure the financial stability and growth of the business. Importance of Financial Management Fixed Assets: Proper investment in fixed assets ensures that funds are not excessively tied up, maintaining a balance between growth and liquidity. Current Assets: Effective management of cash, inventory, and receivables is crucial for maintaining the necessary working capital. Long-term Financing: Deciding the right mix of debt and equity is vital for the company’s financial structure, impacting leverage and financial risk. Profit & Loss Impact: Financial management decisions have a direct impact on all items in the profit and loss account, influencing profitability and sustainability. Objectives of Financial Management Profit Maximization: The traditional objective focusing on increasing the company’s earnings per share (EPS). Wealth Maximization: The modern approach emphasizing the increase in shareholders' wealth by maximizing the market value of the firm's shares. Class XII Business Studies www.vedantu.com 1  Other Objectives: These include optimal utilization of financial resources, ensuring easy availability of funds, and maintaining the firm's financial health. Financial Decisions 1. Investment Decision: a. Long-term Decisions (Capital Budgeting): Involve investing in projects that will yield returns over a long period, affecting the firm's asset base and profitability. b. Short-term Decisions (Working Capital Management): Focus on managing current assets and liabilities, affecting the firm’s liquidity and operational efficiency. 2. Financing Decision: a. Sources of Funds: The decision to raise funds through equity, debt, or a combination of both, balancing cost and risk. b. Factors: Considerations include the cost of funds, risk, control over the company, cash flow position, and market conditions. 3. Dividend Decision: a. Profit Distribution: Deciding how much profit should be distributed to shareholders versus how much should be retained for reinvestment. b. Factors: Include the firm’s earnings, stability, growth opportunities, shareholder preferences, and legal constraints. Financial Planning 1. Financial Planning involves forecasting the future financial needs of the company, ensuring funds are available when needed while avoiding excess or shortage of resources. Class XII Business Studies www.vedantu.com 2  2. Objectives: o Ensure timely availability of funds. o Avoid unnecessary raising of resources. 3. Importance: o Helps in forecasting future needs and preparing for uncertainties. o Aids in coordinating various business functions and linking present operations with future goals. Capital Structure 1. Capital Structure refers to the proportion of debt and equity that a company uses to finance its operations. a. Debt-Equity Ratio: A critical measure to assess the balance between borrowed funds and owners' equity. 2. Factors Influencing Capital Structure: a. Cash Flow Position: Adequate cash flow ensures the company can meet its obligations. b. Business Size: Larger businesses may prefer debt due to lower relative costs, while smaller businesses might rely more on equity. c. Interest Coverage Ratio: A measure of a company’s ability to meet its interest obligations, affecting its choice between debt and equity. d. Tax Rate: Higher tax rates make debt more attractive due to the tax deductibility of interest. Class XII Business Studies www.vedantu.com 3 Fixed and Working Capital 1. Fixed Capital: Long-term investments in assets like land, buildings, and machinery, which are crucial for production and business operations. Factors: ▪ Nature of Business: Manufacturing requires more fixed capital than trading. ▪ The scale of Operations: Larger operations demand higher fixed capital. ▪ Technology Upgradation: Regular updates in technology may necessitate continuous investment in fixed assets. ▪ Growth and Diversification: Expanding or diversifying operations increases the need for fixed capital. 2. Working Capital: Capital is required for the day-to-day operations of a business, such as cash, inventory, and receivables. Factors: ▪ Business Cycle: Companies need more working capital during boom periods. ▪ Credit Policy: Offering longer credit terms to customers increases the need for working capital. ▪ Operating Efficiency: Efficient operations reduce the need for excessive working capital. ▪ Seasonal Factors: Seasonal businesses require varying levels of working capital throughout the year. Class XII Business Studies www.vedantu.com 4