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FINANCIAL MANAGEMENT

By. B.Ravikumar
BUSINESS FINANCE
Business Finance = Money or funds available for a
business for its operations (that is, for some specific
purpose) is called finance.

It is indispensable for survival and growth of business, for


production and distribution of goods and meeting day to
day expenses etc.
• It involves acquiring funds to buy Fixed assets (tangible and
intangible) and Raw materials and maintain working capital.
FINANCIAL MANAGEMENT
• Financial Management is concerned
with optimum procurement as well as
usage of finance.
Aims of Financial Management:

• Reduce cost of funds procured


• Keep risks under control
• Achieve effective employment of fund
• Ensure availability of sufficient funds
while avoiding idle fund
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-
Interest, Dividend,dep etc
Objectives of Financial Management
• Primary objective: To maximize wealth
of owners in the long run – Wealth
Maximization concept.
Other objectives that help a firm
achieve the primary objective are:
• Ensure availability of funds at
reasonable costs:
• Ensure effective utilization of funds:
• Ensure safety of funds thro creation of
reserves:
FINANCIAL DECISION
1. Investment Decision

• Resources are scarce and can be put to


alternate use. A firm must choose where
to invest so as to earn the highest
possible profits.
• Investment decision relates to decisions
about how the firm‘s funds are invested
in different assets that is, different
investment proposals
Has two components:

• Working Capital Decisions – Short Term


investment decisions.
• Capital Budgeting decisions – Long Term
investment decisions
Factors affecting Investment
Decisions/Capital Budgeting
decisions
• 1. Cash flows of the project:
• 2. Rate of Return: The expected returns
from each proposal and risk involved in
them should be taken into account to
select the best proposal.
• 3. Investment Criteria Involved: NPV,Pay
Back Period
FINANCING DECISION
• Financing decision involves deciding the
sources from which required funds may
be raised. 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
(viii) ROI
(ix) Tax Rate
(x) Flexibility
(xi) Regulatory Framework
DIVIDEND DECISION
• Dividend is that portion of divisible
profits that is distributed to the owners
i.e. the shareholders. It results in current
income for the shareholders.

RETAIN OR DISTRIBUTE
Factors affecting Dividend Decision
(i) Earning
(ii) Stability of earning
(iii) Cash flow position
(iv) Growth opportunities
(v) Stability of dividend
(vi) Preference of shareholders
Factors affecting Dividend Decision
• (vii) Taxation policy
(viii) Access to capital market
consideration
(ix) Legal restrictions
(x) Contractual constraints
(xi) Stock market reaction
RECAP
• Financial Management: Concerned with
procurement and usage of finance
• Trading on Equity: Keeping Equity low to
maximize return on Equity shares
• Investment Decision
BUSINESS FINANCE

• 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.
CAPITAL STRUCTURE
• Capital structure means the proportion of debt and
equity used for financing the operations of business.
• TOTAL CAPITALISATION = DEBT + EQUITY
Factors determining the Capital Structure
• (i) Projected Cash Flows
• (ii) Interest Coverage Ratio
• ICR = EBIT / INTEREST
(III)Debt Service Coverage Ratio (DSCR)- Paying Debt
Instalment
DSCR = PAT+In+Dep and non cash Write off / Pref
Div+Interest+ Debt repayment Obligation
(iv) Return on investment
(v) Cost of debt
(vi) Tax rate
(vii) Cost of equity (viii) Floatation cost
(ix) Risk consideration
(x) Flexibility
(xi) Control
(xii) Regulatory framework
(xiii) Stock market condition
(xiv) Capital structure of other companies
Fixed Capital
• Fixed Capital involves allocation of firm’s capital to
long term assets or projects.
Importance or Scope of Capital Budgeting
Decision
(i) Long term growth
(ii) Large amount of funds involved
(iii) Risk involved
(iv) Irreversible decision
Factors Affecting Requirement of Fixed Capital
(i) Nature of business
(ii) Scale of operation
(iii) Technique of production
(iv) Technology up gradation
(v) Growth prospects
(vi) Diversification
(vii) Level of collaboration/joint ventures
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
Factors Affecting capital requirements of an
organization:
• Nature of Business
• Scale of Operations
• Business Cycle
• Seasonal Factors
• Credit allowed
• Credit availed
• Inflation
Operating Cycle
• Operating Cycle/Turnover of Working Capital:
Turnover means speed with which the working
capital is converted into cash by sale of goods. If it is
speedier, the amount of working capital required will
be less.