CBSE Class 12 Business Studies, Financial Management


Chapter 9: Notes on Financial Management

Financial management is concerned with managerial activities relating to planning, procurement and administration of funds and their optimum utilization.

Objectives of financial management

  1. Procurement of necessary funds at economic costs.
  2. Appreciation in the value of funds
  3. Coordination between different departments of the enterprise
  4. Financial control to ensure the safety of funds

Factors affecting financial decision

  1. Cost
  2. Risk
  3. Cash Flow Positions
  4. Floatation Cost

Financial planning: refers to planning regarding financial needs of the enterprise various sources of raising funds and their optimum utilization.

Importance of Financial Planning

  1. It facilitates collection of optimum funds.
  2. It helps in fixing the most appropriate capital structure.
  3. Helps in investing finance in right project.
  4. Helps in operational activities & reduces financial uncertainties.
  5. Link between investment and financial decision

Factors determining the capital structure

  1. Cash flow ability
  2. Control
  3. Flexibility
  4. Cost of Debt
  5. Market Conditions
  6. Flotation Costs
  7. Interest Coverage Ratio

Dividend Decision this relates earned. The major alternatives are to distribution of to retain the earnings profit or to distribute to the shareholders.

Factors affecting dividend decisions are

  1. Earning
  2. Stability of earning
  3. Cash flow position
  4. Growth opportunities
  5. Stability of dividend
  6. Preference of shareholders
  7. Taxation policy
  8. Access to capital market consideration
  9. Legal restrictions

Fixed Capital involves allocation of firm's capital to long term assets or projects.

Importance of Capital Budgeting Decision

  1. Long term growth
  2. Large amount of funds involved
  3. Risk involved
  4. Irreversible decision

Working capital: part of total capital which is required to meet the day to day expenses to buy raw materials to pay wages & other expenses of routine nature in the production process.

Factors affecting Working Capital

  1. Nature & size of business
  2. Ratio of cost of raw material to total cost
  3. Cost of labour
  4. Production period
  5. Credit policy
Over capitalization Under capitalization
Profits are not sufficient to pay a fair return on capital Rate of return on capital is exceptionally high.
Value of shares in market declines goes up Value of shares in the market goes up
It leads to loss of goodwill & decline creditworthiness It enhances goodwill & creditworthiness.<>/td>

Factors affecting capital budgeting decisions

  1. Cash flow of the project
  2. Risk & return analysis
  3. Investment criteria