Download Financial Management – CBSE Notes for Class 12 Business Studies and more Study notes Business in PDF only on Docsity! Financial Management – CBSE Notes for Class 12 Business Studies 1. Business Finance Money required for carrying out business activities is called Business Finance. 2. 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. 3. 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 4. Objectives of Financial Management 5. 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 6. 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 7. Financing Decision (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 9. Financial Planning It means deciding in advance how much to spend, on what to spend according to the funds at your disposal. 10. Objectives of Financial Planning (i) To ensure availability of funds whenever these are required, (ii) To see that firm does not raise resources unnecessarily. 11. Importance of Financial Planning (i) It facilitates collection of optimum funds. (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. 12. Capital Structure Capital structure means the proportion of dept and equity used for financing the operations of business. Capital Structure =Debt/Equity 13. Financial Leverage It refers to overall capital Financial Leverage = E/D Where, D = Debt, E = Equity 14. Factors Determining the Capital (i) Cash flow position (ii) Interest Coverage Ratio (ICR) = EBIT/Interest (iii) Debt Service Coverage Ratio (DSCR) (iv) Return on investment (v) Cost of debt (vi) Tax rate (vii) Cost of equity (viii) Floatation cost (ix) Risk consideration
