This document discusses key concepts in business finance and financial management. It defines business finance as money and credit used in business operations. There are two types of capital: fixed capital for long-term assets, and working capital for day-to-day operations. Financial management involves optimal procurement and use of funds. Its objectives include ensuring adequate funding, minimizing costs and risks, and maximizing returns. Financial decisions encompass investment, financing, and dividends. Factors like costs, risks, and cash flows influence these decisions. Financial planning and maintaining an appropriate capital structure are also discussed.

1. FINANCIAL
MANAGEMENT

2. BUSINESS FINANCE
 Business finance refers to Money and credit employed in business. Finance is
the base of business. It is required to purchase Assets, Goods, Raw materials
and for the other flow of Economic activities.
 Money is required for almost all the activities in a business, therefore it is
called the lifeblood of business.
 Finance in business can be of two types :-
I. Fixed Capital : In order to begin a business, money is required to buy fixed
assets like land, building, plant and machinery etc…
II. Working Capital : A business needs funds for its day to day activities. It is
required for the purchase of raw materials, paying salaries, wages, rent,
and taxes etc…

3. FINANCIAL MANAGEMENT
Financial management is concerned with optimal procurement as well as usage of
finance.
OBJECTIVES
 To ensure regular and adequate supply of funds to the concern.
 It aim at reducing cost of funds procured and keeping the risk under control.
 To ensure adequate returns to the shareholders which will depend upon the earning
capacity, market price of the share, expectations of the shareholders.
 To ensure optimum funds utilization. Once the funds are procured, they should be
utilized in maximum possible way at least cost.
 To ensure safety on investment. The funds should be invested in safe ventures so that
adequate rate of return can be achieved.
 To plan a sound capital structure-There should be sound and fair composition of
capital so that a balance is maintained between debt and equity capital.

4. FUNCTIONS OF FINANCIAL MANAGEMENT
 Estimation of capital requirements: A finance manager has to make estimation with
regards to capital requirements of the company. This will depend upon expected
costs and profits and future programmes and policies of a concern. Estimations
have to be made in an adequate manner which increases earning capacity of
enterprise.
 Determination of capital composition: Once the estimation have been made, the
capital structure have to be decided. This involves short- term and long- term debt
equity analysis. This will depend upon the proportion of equity capital a company is
possessing and additional funds which have to be raised from outside parties.
 Choice of sources of funds: For additional funds to be procured, a company has
many choices like-
a) Issue of shares and debentures
b) Loans to be taken from banks and financial institutions
c) Public deposits to be drawn like in form of bonds.
Choice of factor will depend on relative merits and demerits of each source and period
of financing.

5.  Investment of funds: The finance manager has to decide to allocate funds into
profitable ventures so that there is safety on investment and regular returns
is possible.
 Disposal of surplus: The net profits decision have to be made by the finance
manager. This can be done in two ways:
a) Dividend declaration - It includes identifying the rate of dividends and other
benefits like bonus.
b) Retained profits - The volume has to be decided which will depend upon
expansion, innovational, diversification plans of the company.
 Management of cash: Finance manager has to make decisions with regards to
cash management. Cash is required for many purposes like payment of wages
and salaries, payment of electricity and water bills, payment to creditors,
meeting current liabilities, maintenance of enough stock, purchase of raw
materials, etc.
 Financial controls: The finance manager has not only to plan, procure and
utilize the funds but he also has to exercise control over finances. This can be
done through many techniques like ratio analysis, financial forecasting, cost
and profit control etc….

6. FINANCIAL DECISIONS
• Financial decision is a process which is responsible for all the
decisions related with liabilities and stockholder's equity of the
company as well as the issuance of bonds. It is of three kinds :-
1) Investing 2) Financing 3) Dividend

7. INVESTMENT DECISIONS
This decision involves careful selection of assets in which funds are to be
invested. These can be of two types :-
1. Long term Investment
• A long term investment decision is also called capital budgeting
decision.
• It is crucial because it affects earning capacity of the business.
• These involve huge amounts and are irreversible and must be taken
with utmost care.
2. Short term Investment
• A short term investment decision is also called working capital
decision.
• It affects profitability and day to day working of business.

8.  Cash flow of the venture: When an organization starts a venture it invests a
huge capital at the start. So it expects at least some form of income from it.
Therefore, there must be some regular cash flow within the venture to help it
sustain.
 Rate of Return: A project is selected on the basis of returns from it and the
risk involved
 Investment Criteria: The decision to invest is based on calculations with
regards to the amount of investment, interest rates, cash flows and rate of
returns associated with propositions.
FACTORS AFFECTING THESE DECISIONS

9. FINANCING DECISIONS
• Financial decision is important to make wise decisions about
when, where and how should a business acquire fund. Because
a firm tends to profit most when the market estimation of an
organization’s share expands and this is not only a sign of
development for the firm but also it boosts investor’s wealth.

10. FACTORS AFFECTING THESE DECISIONS
• Cost: Financing decisions are all about allocation of funds and cost-cutting. The cost
of raising funds from various sources differ a lot. The most cost-efficient source
should be selected.
• Risk: The dangers of starting a venture with the funds from various sources differ.
Larger risk is linked with the funds which are borrowed, than the equity funds. This
risk assessment is one of the main aspects of financing decisions.
• Cash flow position: Cash flow is the regular day-to-day earnings of the company.
Good or bad cash flow position gives confidence or discourages the investors to
invest funds in the company.
• Control: In the situation where existing investors need to hold control of the business
then finance can be raised through borrowing money, however, when they are
prepared for diluting control of the business, equity can be utilized for raising funds.
How much control to give up is one of the main financing decisions.
• Condition of the market: The condition of the market matter a lot for the financing
decisions. During boom period issue of equity is in majority but during a depression, a
firm will have to use debt. These decisions are an important part of financing
decisions.

11. DIVIDEND DECISIONS
• Dividends decisions relate to the distribution of profits earned by
the organization. The major alternatives are whether to retain the
earnings profit or to distribute to the shareholders.

12. FACTORS AFFECTING THESE DECISIONS
• Earnings: Returns to investors are paid out of the present and past income.
Consequently, earning is a noteworthy determinant of the dividend.
• Stability in Earnings: An organization having higher and stable earnings can
announce higher dividend than an organization with lower income.
• Stability of Dividends: For the most part, organizations attempt to stabilize
dividends per share. A consistent dividend is given every year. A change is
made, if the organization’s income potential has gone up and not only the
income of the present year.
• Growth Opportunity: Organizations having great development openings if they
hold more cash out of their income to fund their required investment. The
dividend announced in growing organizations is smaller than that in the non-
development companies.
• Cash flow: Dividends are an outflow of funds. To give the dividends, the
organization must have enough to provide them, which comes from regular
cash flow.

13. FINANCIAL PLANNING
 Financial Planning is the process of estimating the financial requirement of
an organisation, specifying the sources of funds and ensuring that enough
funds are available at the right time.
 There two types of financial plans :-
• Long term plans : These focuses on long term growth and investment matters.
These are made for 3-5 years time period.
• Short term plans : These are also known as budgets and are made for 1 year
or less.

14. IMPORTANCE OF FINANCIAL PLANNING
• Helps in forecasting future.
• Avoid business shocks and surprises.
• Helps in coordinating business functions.
• Links present with future.
• Helps in decision making.
• Reduces wasteful activities.
• Acts as the basis of controlling

15. CAPITAL STRUCTURE
• Capital structure is the mix of owner’s fund and borrowed fund. In a business,
it affects profitability and financial risks
COMPONENTS
• Owner’s fund/Equity: It refers to the sum of Share capital, reserve and
surplus and retained earnings etc...
• Borrowed fund/Debt: It refers to the sum of debentures, public deposits, log
term loans etc….
FINANCIAL LEVERAGE
• The amount of total debt in total equity is called financial leverage.
• Financial Leverage= Debt/Equity
• When financial leverage increase, cost of funds declines but the risk
increases.

16. FACTORS AFFECTING CAPITAL STRUCTURE
1. Interest Coverage Ratio: It refers to number of time companies earnings before
interest and taxes (EBIT) cover the interest payment obligation.
• ICR= EBIT/ Interest
• High ICR means companies can have more of borrowed fund securities and vice
versa.
2. Debt Service Coverage Ratio (DSCR): It is one step ahead ICR. ICR covers the
obligation to pay back interest on debt but DSCR takes care of return of interest as well
as principal repayment.
• If DSCR is high then company can have more debt in capital structure as high DSCR
indicates ability of company to repay and vice versa.
3. 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.
4. Cost of Equity: Owners or equity shareholders expect a return on their investment i.e.,
earning per share. As far as debt is increasing earnings per share (EPS), then we can
include it in capital structure but when EPS starts decreasing with inclusion of debt then
we must depend upon equity share capital only.

17. FIXED CAPITAL
• Fixed capital is that portion of total capital which is invested in
fixed assets such as, land, building, equipments, machinery etc. It
may be held in business for 5, 10 or 20 years or more. Thereafter it
may be sold or reused. Investors invest their money in fixed
capital hoping to make future profit.

18. FACTORS AFFECTING FIXED CAPITAL
1. Nature of Business: The type of business Co. is involved in is the first factor which helps
in deciding the requirement of fixed capital. A manufacturing company needs more fixed
capital as compared to a trading company, as trading company does not need plant,
machinery, etc.
2. Scale of Operation: The companies which are operating at large scale require more
fixed capital as they need more machineries and other assets whereas small scale
enterprises need less amount of fixed capital.
3. Technique of Production: Companies using capital-intensive techniques require more
fixed capital whereas companies using labour-intensive techniques require less capital.
4. Technology Up-gradation: Industries in which technology up-gradation is fast need
more amount of fixed capital as when new technology is invented old machines become
obsolete whereas companies where technological up-gradation is slow they require less
fixed capital as they can manage with old machines.
5. 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.

19. WORKING CAPITAL
• Working capital means current assets or circulating capital.
Experts define working capital in both, narrow as well as broad
sense. In the narrow sense, it is defined as “the difference between
current assets and current liabilities”.
• Working Capital= Current Assets/Current Liabilities

20. FACTORS AFFECTING WORKING CAPITAL
1. Business Cycle: When there is boom in the economy, sales will increase, which will lead
to an increase in investment in stock. Hence, additional working capital would be
required. During recession period, sales would decline and the need of working capital
would also decrease.
2. Requirement of Cash: The requirement of working capital depends upon the cash
required by the organization for various purposes. If the requirement of cash is more,
then company requires more working capital and vice versa.
3. Size of Business: The size of business has a great impact on the requirement of
working capital. Large scale firms require large amount of working capital.
4. Management Ability: The requirement of working capital will reduce if there is proper
co ordination between production and distribution of goods. Lack of co ordination
between different departments may result in heavy stocking of finished and
semi finished goods, which ultimately leads to an increase in the requirement of working
capital.
5. Nature of Business: The nature of business highly influences the requirement of
working capital. Industrial and manufacturing enterprises, trading firms, big retail stores
etc. need a large amount of working capital as they have to satisfy varied and continuous
demands of consumers.

21. THE END