Financial Management Crash Course for 12th Board Exam 2025 PDF

 Financial management Financial management refers to “efficient acquisition of finance, efficient utilisation of finance, efficient distribution and disposal of surplus for smooth working of company OR Management relating to finance is called financial manag...

 Financial management Financial management refers to “efficient acquisition of finance, efficient utilisation of finance, efficient distribution and disposal of surplus for smooth working of company OR Management relating to finance is called financial management”. The main objective of financial management is to maximise the wealth of shareholder’s. Finance is needed to establish a business, to run it, to modernise it, to expand, or diversify it. Equity shareholders get dividend only after the claim of suppliers, lenders, employees, creditors and other claimants. Therefore if the shareholder’s are gaining. It automatically that all others claimant are also gaining. With the objective of wealth maximization of shareholder’s Following objectives automatically get achieved. i. Profit maximisation ii. Proper utilisation of funds iii. Maintenance of liquidity iv. Meeting financial commitments with creditors. NCERT The primary aim of financial management is to maximise shareholders’ wealth, which is referred to as the wealth-maximisation concept.  ROLE OF FINANCIAL MANAGEMENT Size and The Amount of Composition of Long-term and All Items in Profit Fixed Assets Short-term Funds and Loss Account. Amount and Size of debt & Composition of equity in capital Current Assets structure  FINANCIAL PLANNING It means deciding in advance how much to spend, on what to spend according to the fund at your disposal. In general it includes i. Determine the amount of finance needed by an enterprise to carryout its operation smoothly. ii. Determination of sources of fund. iii. Make suitable policies for proper utilisation of funds.  FINANCIAL PLANNING IMPORTANCE OF FINANCIAL PLANNING 1. It helps in collecting optimum funds 2. It helps in fixing the most appropriate capital structure 3. It helps in investing finance in right project 4. It helps in proper utilisation of finance 5. Helps in avoiding business shocks and surprises 6. It links present with future Key Words a) Ensure availability of funds whenever required b) To make sure right amount of capital is available at the right time NCERT Financial planning is essentially the preparation of a financial blueprint of an organisation’s future operations. The objective of financial planning is to ensure that enough funds are available at right time.  IMPORTANCE OF FINANCIAL PLANNING Financial planning is essential for success of any business enterprise. “finance is like blood of a business without it a business can’t survive.” i. It helps in collecting optimum funds:- The financial planning estimates the precise requirement of funds which means to avoid wastage and over-capitalisation situation. ii. It helps in fixing the most appropriate capital structure:- funds can be arranged from various sources and are used for long term , medium term,& short term. Financial planning is necessary to identify the capital structure. iii. It helps in investing finance in right project:- it suggest how to fund are to be allocated for various purposes by comparing various investment proposals. iv. It helps in proper utilisation of finance :- finance is the life blood of the business. So financial planning decides how fund to be utilised. v. Helps in avoiding business shocks and surprises:- By anticipating the financial requirements financial planning helps to avoid shocks or surprises which otherwise firms have to face in uncertain situation. It helps the company in preparing for the future. vi. It links present with future:- financial planning relates present financial requirement with future requirement by anticipating the sales and growth plans of the company.  FINANCIAL DECISIONS Investment decision (capital budgeting Decision) Financing decision Dividend decision i. Cash flow of the project i) Cost i. Earnings ii. Return on investment ii) Risk ii. Stability of earning iii. Risk involved iii) Cash flow position iii. Cash flow position iv. Investment criteria iv) Floatation cost iv. Growth opportunities v) State of capital market v. Stability of dividend vi) Control consideration vi. Taxation policy vii) Cost vii. Types of shareholders a) Opening a new branch a) Deciding the source of capital a) Appropriate allocation of b) Buying a fixed asset plant, b) Issue of shares or Debenture funds machine, office building, etc or Loan to have additional Capital b) Distribution of residual /left c) Change in ratio of debt and over profit equity capital  Investment decision (capital budgeting Decision) This decision relates to careful selection of assets in which fund will be invested by the firms. Factors affecting investment/ Capital budgeting decision i. Cash flow of the project :- whenever a company is investing huge funds in an investment proposal it expect some regular amount of cash flow to meet day to day requirement. NCERT ii. Return on investment :- The most important criteria to decide the The investment decision, investment proposal is rate of return it will be able to bring back for therefore, relates to how the the company. Those investment are selected which gives higher firm’s funds are invested in return. different assets. Investment iii. Risk involved:- With every investment proposal there is some degree of decision can be long term or risk is also involved. The company must try to calculate the risk short-term. A long-term involved in every proposal and select those investment which have low investment decision is also degree of financial risk. called a Capital Budgeting iv. Investment criteria :- along with return ,risk cashflow there are various decision. other criteria which helps in selecting proposal e.g., availability of Raw material.  Financing Decision These are Two sources The second important decision which finance manger has to take is deciding source of finance. A company can raise finance Owner’s fund from various sources such as by issue of shares, debenture or 1 it constitute share capital and by taking loan and advance. Deciding how much to raise from retained earning. which source is financing Decision. Borrowed fund it constitute , debentures , loan , bonds etc. The main concern of finance 2 manager is to decide how much to raise from owner’s fund and how much to raise from borrowed fund. Financing decision is, thus, concerned with the decisions about how much to be raised from which source. This decision determines the overall cost of capital and the financial risk of the enterprise. Factors affecting financing decision i) Cost :- The cost of raising finance from various sources is different & finance manager always prefer the source with minimum cost. ii) Risk :- More risk is associated with borrowed fund as compared to owner’s fund. finance manager compares the risk. iii) Cash flow position:- The cash flow position of the company also helps in selecting the securities with smooth cash flow companies can easily afford borrowed fund but when companies have shortage of cash flow then they must go for owners fund securities only. iv) Floatation cost :- it refers to cost involved in issue of securities such as broker’s commission , underwriters fee, expenses on prospectus etc. firm prefer securities which involve least flotation cost. v) State of capital market :- The conditions in capital market also help in deciding the type of securities to be raised. during boom period it is easy to sell equity share as people are ready to take risk whereas during depression period there is more demand for debt securities in capital market. vi) Control consideration:- Issue of shares means Giving ownership to Others. If existing shareholders don’t want to loose control then they should prefer Debts or vice versa vii) Fixed Operating Cost:- If a company has already issued a lots of debt which means more interest liability or more fixed operating cost then company should not issue more debt because it leads to more fixed operating cost, so in that situation company should issue on Equity shares.  Dividend Decision It is the decision related to how much amount of profit is to be distributed among the shareholders and how much amount is to be retained for future growth. Factors affecting Dividend decision i. Earnings:- Dividends are paid out of current and previous year earnings if there are more earnings then company declare high rate of dividend whereas during lower earning period the rate of dividend is also low. ii. Stability of earning:- Companies having stable or smooth earning prefer to give high rate of dividend whereas companies with unstable earnings prefer to give low rate of earnings. iii. Cash flow position:- Paying dividend means outflow of cash. Companies declare high rate of dividend only they have surplus cash. In situation of shortage of cash companies declare no or very low dividend. vi. Growth opportunities:-if a company has a number of investment plans then it should reinvest the earning of the company. As to invest in investments projects. Company has two options one to raise additional capital or invest its retained earnings. Retained earning are cheaper source as they do not involve floatation cost and any legal formalities. If companies have no investment or growth plan than it would be better to distribute more in the form of dividends generally mature companies declare more dividend whereas growing companies keep aside more retained earnings v. Stability of dividend:- some companies follow a stable dividend policy as it has better impact on shareholders and improve the reputation of company in the share market. Here company pay regular dividend. vi. Taxation policy:- The rate of dividend also depends upon the taxation policy of government under present taxation system dividend income is tax free Income. For shareholders whereas company has to pay tax on dividend given to shareholders if tax rate is higher than company preferred to pay less in the form of dividend whereas if tax rate is lower then company may declare higher dividend. vii. Types of shareholders:- If company is having major Young age shareholders then company may Retain more for growth purpose and less in form of dividend but if shareholders are retired  Financial Leverage or Trading on Equity Financial leverage means the presence of debt in the overall capital structure of an entity. Debt is a cheaper source of finance but it is risky. FINANCIAL LEVERAGE = DEBT/ TOTAL EQUITY More debt will result in increase in earning only when rate of earnings of the company i.e., ROI is more than rate of NCERT interest on debt With higher use of debt, this difference between ROI and cost of debt increases the If rate of interest is more than the earning or ROI of then EPS. This is a situation of favourable more debt means loss of company. financial leverage. Let us prove the situation Situation 1. Total capital = ₹ 50,00,000 Equity share capital ₹50,00,000 (5,00,000 shares @ ₹10 each) Debt =Nil Tax rate= 30% p.a. Earning before interest and tax (EBIT)= ₹7,00,000 Situation 2. Total capital = ₹ 50,00,000 Equity capital =₹40,00,000 (4,00,000 shares @ ₹10 each) Debt= ₹10,00,000 Tax rate =30%p.a. Interest on debt =10 % Earning before interest and tax(EBIT)= ₹ 7,00,000 Situation 3. Total capital =₹ 50,00,000 Equity share capital = ₹ 30,00,000 ( 3,00,000 shares @ ₹10 each) Debt = ₹ 20,00,000 Tax rate =30 % Interest on debt = 10% Earning before interest and tax (EBIT)= ₹ 7,00,000 Hence it is proved that more debt brings more income for owners in the capital structure. But this statement holds true only if return on investment is more than rate of interest In the above case ROI = (EBIT/ Capital employed)*100 If in the above three situations we take net profit before interest and tax (EBIT)= ₹ 3,00,000 Then (3,00,000/ 5,00,000)×100 = 6% Rate of interest is 10 % If ROI < rate of interest Hence it is proved that more debt brings less income for owner. But this statement hold true only if return on investment is less than rate of interest. Factors determining the capital structure Capital structure i. Cash flow position Capital structure means the proportion of debt and ii. Return on investment equity used for financing the operations of business iii. Cost of debt Capital structure = Debt/ equity iv. Tax rate v. Cost of equity vi. Floatation cost vii. Risk KEY WORDS viii. State of capital market a) Ratio of Debt and Equity in Total Capital ix. Control consideration b) Issue of additional equity shares to raise more funds x. Fixed Operating Cost will effect capital structure xi. Interest Coverage Ratio c) Issue of additional debenture or taking more loans will xii. Debt service Coverage Ratio effect the capital structure Factors determining the capital structure i. Cash flow position :- the decision related to composition of capital structure also depends upon the ability of business to generate enough cash flow. the company is under legal obligation to pay fixed rate of interest to debentures holders, dividend to preference share and principal and interest amount for loan. Sometimes company makes sufficient profit but it is not able to generate cash inflow for making payments. ii. Return on investment:- ROI is another important factor which helps in deciding the capital structure. if return on investment is more than rate of interest then company must prefer debt in its capital structure whereas if ROI is less than rate of interest then company should avoid debt and rely on equity capital. iii. Cost of debt:- if firm can arrange borrowed fund at low rate of interest then it will prefer more of debt as compared to equity. iv. Tax rate :- High tax rate make debt cheaper as interest Paid to debt security holder is subtracted From income before calculating tax. Whereas companies have to pay tax on dividend paid to shareholders. So high tax rate means prefer debt whereas low tax rate we can prefer capital structure in equity. v. Cost of equity:- another factor which helps in deciding capital structure is cost of equity. Owners or equity shareholders expect a return on their investment that is EPS [earning per share]. As far as debt in increasing EPS then we can include it in capital structure But when EPS start decreasing with inclusion of debt then we must depend upon equity share capital only. vi. Floatation cost :- it refers to cost involved in issue of securities such as broker’s commission , underwriters fee, Advertisement of Offering share, expenses on prospectus etc. firm prefer securities which involve least flotation cost. vii. Risk :- More risk is associated with debt as compared to equity. finance manager compares the risk. viii. State of capital market :- The conditions in capital market also help in deciding the type of securities to be raised. during boom period it is easy to sell equity share as people are ready to take risk whereas during depression period there is more demand for debt securities in capital market. ix. Control consideration:- Issue of shares means Giving ownership to Others. If existing shareholders don’t want to loose control then they should prefer Debts or vice versa. x. Fixed Operating Cost:- If a company has already issued a lots of debt which means more interest liability or more fixed operating cost then company should not issue more debt because it leads to more fixed operating cost, so in that situation company should issue on Equity shares. xi. interest coverage ratio (ICR):- The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligation. This may be calculated as follows: The higher the ratio, lower shall be the risk of company failing to meet its interest payment obligations. However, this ratio is not an adequate measure. A firm may have a high EBIT but low cash balance. Apart from interest, repayment obligations are also relevant. xii. Debt service coverage ratio (Dscr):- Debt Service Coverage Ratio takes care of the deficiencies referred to in the Interest Coverage Ratio (ICR). The cash profits generated by the operations are compared with the total cash required for the service of the debt and the preference share capital. It is calculated as follows:- A higher DSCR indicates better ability to meet cash commitments and consequently, the company’s potential to increase debt component in its capital structure.  Fixed capital Factors determining Fixed Capital Investment in fixed assets is for longer duration is called fixed Requirement capital fixed capital is financed through long term source of finance such as equity share, preference Share, debentures, i. Nature of business long term loan etc. The requirement of fixed capital depends ii. Scale of operation upon various factors which are explained in Next slide. iii. Technique of production iv. Technology upgradation KEY WORDS v. Growth prospects a) Amount invested in buying fixed assets vi. Assets available on lease b) Total investment in fixed asset vii.Collaboration or Joint Ventures c) Business like manufacturing industries require more fixed viii.Diversification capital than business involved in providing services  Factors determining Fixed Capital Requirement i. Nature of business:- the type of business is involved in the first factor which help in deciding the requirement of fixed capital a manufacturing company needs more fixed capital as compared to trading company as trading company does not need plant, machinery etc. ii. Scale of operation:- the company which are opening at large scale require more fixed capital as they need more machinery and other assets whereas small scale company need less amount of fixed capital. iii. Technique of production:- companies using capital intensive techniques require more fixed capital whereas companies using labour intensive techniques require less capital. iv. Technology upgradation:- industries in which technology upgradation is fast need more amount of fixed capital as when new technology is invented and they need to buy a new plant. Whereas those company whose technology upgradation is slow they require less fixed capital as they can manage with old machine. v. Growth prospects:- companies which are expanding and have higher growth plan require more fixed capital as to expand they need to expand their production capacity and to expand production capacity companies need more plant and machinery so more fixed capital. vi. Assets available on lease :- If assets are available on lease or EMI then company would require less Fixed Capital and if leasing facility is not available then company required more Fixed capital as they have to pay lumpsum amount for the assets. vii. Collaboration or Joint Ventures:- Less Fixed capital is required for a company which is going to Collab with other companies. viii. Diversification:- If a company plan to diversify its business operation or deal in Multi product then it requires more Fixed Capital. Factors affecting the working capital Working capital i. Length of operating cycle It refers to excess of current assets over current liabilities. ii. Nature of business operating cycle is the time period between acquisition of raw iii. Scale of operation material and the collection of cash from receivables. Longer iv. Business cycle fluctuation the operating cycle, longer will be the working capital requirement. v. Technology and production technique vi. Growth prospectus a) Amount invested for one financial year vii. Credit Allowed b) Total value of current assets represents gross working capital viii.Credit availability c) Difference between value of current assets and current ix. Availability of raw materials liabilities represent net working capital x. Extent of Competition d) Amount invested in inventory, cash, receivables, debtors, bank, etc.  Factors determining Working Capital Requirement Factors affecting the working capital The finance manager must keep in mind following factors i. Length of operating cycle:- the amount of working capital directly depends upon the length of operating cycle if operating cycle is long then more working capital is required whereas companies having short operating cycle, the working capital requirement is less. ii. Nature of business:- In case of trading concern or retail shop the requirement of working capital is less because length of operating cycle is small. The wholesaler as compared to retail shop require more working capital as they have to maintain large stock. iii. Scale of operation:- The firms operating at large scale need to maintain more inventory. So they generally require large working capital whereas firms operating at a small scales require less working capital. iv. Business cycle fluctuation:- During boom period the market have more demands, more production, more stock which means more working capital is required. Whereas during depression period low demand, less stock to be maintained so less working capital is required. v. Technology and production technique:- company using labour intensive technique of production then more working capital is required whereas company using capital intensive technique need less working capital. vi. Growth prospectus:- firms planning to expand their activities will require more amount of working capital As for expansion they need to increase sale of production which means more raw material, more inputs. So more working capital required. vii. Credit Allowed :- If company is allowed credit facility to its customers then it requires more working capital where as if company is not allow credit facility to its customers then it requires less working capital because in that case company can arrange funds from cash sales. viii. Credit availability:- if Company Can avail a long term credit facility from its suppliers then it requires less amount of working capital. Whereas if credit is not availed or avail for short term then it requires less amount of working capital. ix. Availability of raw materials:- Sometimes due to unavailability of Raw material or lack of supply of raw material a Producer need to maintain large amount of stock of raw materials so it requires more working capital whereas if there is no fear of shortage of raw material in market then producer can maintain less stock of raw material hence requirement of working capital is less. x. Extent of Competition:- In a highly competitive market a firm has to maintain large amount of stock because they are following liberal credit policy to retain customers, So more working capital is needed. Whereas in less competition or monopoly market firm can maintain less amount of working capital because it can dictate terms according to its own requirements.  LIKE | SHARE | COMMENT DOWNLOAD SPCC APP CUET LIVE CUET 2025 PREMIUM COURSE