Business Studies · Ch 9 — Financial Management
Summary
Summary
- Business Finance: The money required for carrying out business activities is called business finance. Almost all business activities require some finance — to establish a business, run it, modernise it, expand it, or diversify it.
- Financial Management: Financial Management is concerned with the optimal procurement as well as the optimal usage of finance. Different available sources of finance are identified and compared in terms of their costs and associated risks.
- Objectives and Financial Decisions: The primary aim of financial management is to maximise shareholders' wealth, referred to as the wealth-maximisation concept — the market price of a company's shares is linked to its three basic financial decisions: the Investment Decision, the Financing Decision, and the Dividend Decision.
- Financial Planning and Importance: Financial planning is essentially the preparation of a financial blueprint of an organisation's future operations. It strives to achieve two objectives: (a) to ensure availability of funds whenever required, and (b) to see that the firm does not raise resources unnecessarily. It is an important part of overall business planning — it helps the firm forecast the future, avoid business shocks and surprises, coordinate business functions, reduce waste and duplication, link the present with the future, and make the evaluation of actual performance easier.
- Capital Structure and Factors: Capital structure refers to the mix between owners' funds and borrowed funds. Deciding the relative proportion of these funds depends on factors such as Cash Flow Position, Interest Coverage Ratio (ICR), Debt Service Coverage Ratio (DSCR), Return on Investment (RoI), Cost of Debt, Tax Rate, Cost of Equity, Floatation Costs, Risk Consideration, Flexibility, Control, Regulatory Framework, Stock Market Conditions, and the Capital Structure of other Companies.
- Fixed and Working Capital: Fixed capital refers to investment in long-term assets. Managing fixed capital involves allocating the firm's capital to different projects or assets with long-term implications, and these decisions (investment or capital budgeting decisions) affect the growth, profitability, and risk of the business in the long run. Factors affecting the requirement of fixed capital are: Nature of Business, Scale of Operations, Choice of Technique, Technology Upgradation, Growth Prospects, Diversification, Financing Alternatives, and Level of Collaboration. …