Mean: money required for carrying out business activities is called business

Finance

Financial management matlab paise jama karna [alag alag jagah se compare
karke (risk, cost etc) ]
Or uske baad unn paiso ko sahi jagah invest karna ye dhyaan rakh ke ki jitna
paisa jama kiya hai usse zyada return mai mile (profit).

Financial management
Toh financial management risk, cost of udhaar, iss paiso ko invest karna, running
capital availability, inn sabko dhyaan rakhna hota hai.

Ye cheeze affect hoti hai financial decisions se or importance of financial

management (as it affects these factors):
1) size of fixed capital of business
2) current assets
3) long term and short term funds
4) long term capital ke andar debt/equity ka kitna hissa hona chahiye
5) items in P&L account: upar ke saare decisions p&l statement ko bhi affect
karenge

Isliye ye kehe sakte hai ki business ki financial statements (jo business ko bohot
directly affect karti hai) depend karti hai financial decisions par.
Good financial management: mobilisation of funds at lower cost and deployment
of them in wise way.

Objectives of financial management

• maximise shareholders wealthwealth by maximising share price
• value of share is determined by way the funds of company are invested and
return.
• share price increases when benefit from decision exceeds cost involved.
Similarly, when finance is procured, aim is to reduce its cost so that value
addition is higher.
• Thus, in all financial decisions the ultimate objective is that some value
addition should take place.

FINANCIAL DECISIONS
•Investment Decision
•Financing Decision
•Divident Decision

Investment Decision
•relates to kaise funds invested hai different assets mai.
•firm ke pass resources kam hote hain isliye unko highest possible return Pe
invest karna bahut important hai
•investment decision short term or long term dono ho sakta hai

•long term decision (or capital budgeting decision): ye crucial hote hai kyunki ye
long term earning shamta determine karte hai. Also, ye decisions huge cost in
investment and irreversible hote hai isliye bhi important hai. Isliye inko dhyaan
se lena chahiye
•short tern decisions (or working capital decisions) : concerned about inventory,
cash, receivables.
•affect day to day working of business
•affect liquidity and profitability

Factors Affecting Capital Budgetig Decision

Matlab kya cheeze company dekhti hai paisa kahi bhi invest karne se pehle

1) cash flows of project: simple hai. Cash flow matlab kitna extra paisa wapis
milega along with invested money. More cash flow generally mean good
investment decision.
2) rate of return: zyada rate of return=zyada badhiya (considering other factors
constant)
3) investment criteria: decisions like amount of investment, interest rate, cash
flow, rate of return. These decisions are applied to each investment before
selecting a project.

Financing Decision
• Decision ki finance kaha se raise karna hai: long term ya short term.
• main sources of funds: shareholders funds(equity capital or retained earnings)
and borrowed funds (Debentures or other form of debt)
• firm ko apni need ke hisaab se debt ya equity choose karna hota hai. Heres a
breakdown:

• debt: interest pay karna hota hai regardless of profit.

• considered cheapest of all finance, tax deductable
• risk involved: overall risk depends upon proportion of debt in total capital

• equity: no commitment on payment of returns

A firm therefore have to make judicious mix of both debt and equity.

Financial decision, is thus, concerned with the decision about how much to be
raised from which source.

Factors Affecting Financial Decision

1) cost: of raising funds. Cheap is better
2) risk: low is better
3) floatation cost: less cost is better
4) Cash Flow Position: strong cash flow position will invest in debt; weak cash
flow position will opt for investment in equity.
5) fixed operating cost: high operating cost = low debt is better. Similarly, if low
operating cost = more debt is better
6) control consideration: more equity source= less control. No such tension in
debt, so if control is important, more debt is better.
7) state of capital market

Dividend decision
• Dividend is portion of profit which is distributed to shareholders
• the decision involved is how much of the profit earned by company has to be
distributed to the shareholders and how much to be your retained in the
business

Factors Affecting Divident Decision

1) amount of earnings
2) stability of earnings: company having stable earnings are likely to give high
dividends and vice versa
3) stability of dividend
4) growth opportunities: company having more growh tend to retain more money
out of its earnings
5) cash flow position: availability of enough cash
6) shareholders preferences
7) taxation policy
8) stock market reaction
9) legal constraints
10) Contractual Constraints: While granting loans to a company, sometimes the
lender may impose certain restrictions on the payment of dividends in future.
The companies are required to ensure that the dividend does not violate the
terms of the loan agreement in this regard.
11) Access to capital market: Generally, large companies having greater access
to the capital market would not depend on retained earnings to finance their
future projects. Hence, they are likely to pay higher dividends. and vice versa

FINANCIAL PLANNING
Financial planning is essentially the preparation of a financial blueprint of an
organizations future operations.

Financial Planning vs. Financial Management:

Financial Planning: This is about making sure the company runs smoothly by
ensuring it has the right amount of money when needed. It looks at how much
money is required and where it will come from.It predicts future needs for
money, both how much and when it's needed.

Financial Management: This is about making the best choices for investing and
raising money. It focuses on picking options that will increase the company’s
wealth, especially for shareholders (owners).Focuses on comparing the costs and
benefits of different investment and financing choices to increase wealth.

Example: When a company decides to invest in a big project (capital budgeting),

the operations grow, meaning expenses and revenues will increase. Financial
planning helps predict these changes and ensures the company knows how
much money it needs and when.

Objectives of financial planning:

1) to ensure availability of funds whenever required
2) to see that the firm does not raise resources unnecessarily

•This process of estimating the fund requirement of a business and specifying

the sources of funds is called financial planning
• Financial planning includes both short term (short term financial plan called
budget) as well as long term planning (long term growth and investment like
capital expenditure program)
• Typically financial planning is done for three to five years. for longer periods it
becomes more difficult and less useful
• Plans for one year or less are called budget(detailed plan)
• process: begin with sales forecast, financial statements prepared (keeping in
mind the requirement of funds for investment in fixed and working capital),
expected profits estimated, estimation of requirement for external funds, cash
budgets made.

Importance Of Financial Planning

1) forecasting: helps in forecasting what may happen in future under different
business situations. Makes firm better prepared for future
2) helps in avoiding business shocks and surprises and help company preparing
for the future
3) helps in coordinating various business functions
4) reduce waste, duplication of efforts
5) link present with future
6) provides link between investment and financing decisions on continous basis
7) makes evaluation of actual performance easier

CAPITAL STRUCTURE
definition: Capital structure refers to the mix between owners and borrowed
funds

Owners fund: equity shares, preference shares, reserves, retained earnings

Borrowed funds: loans, debentures, public deposits, borrowings from bank, other
financial institutions, debentureholders, public.

Debt equity ratio: debt/equity

Debt out of total capital: (debt/debt + equity)

Difference:
Cost: debt (udhaar) lena zyada sasta padta hai than equity kyunki udhaar
chukana zaruri hai bhale hii company ko loss hua ho. Lekin equity shares risk
lete hai. Isliye debt sasta hota hai. Additionally, interest paid on is tax
deductable, whereas dividends are paid after tax.

Risk: debt (udhaar) sasta hota hai lekin risky bhi hota hai kyunki payment of
interest (with principal amount)compulsory hai. On the other haath, equity
shares mai koi risk nahi hai (riskless)

Thus, debt = more risk, cheap (for business)

Equity= less risk, expensive (for business)

For shareholders: debt: no risk, low roi

Equity: risky, high roi
Pg 227: right side 2nd paragraph, why is debt considered cheaper?

Financial risk meaning

Financial leverage is (D/D+E). As financial leverage increase, costs of funds

decline because of increased use of cheaper debt and increased financial risk.

Now from pg 238-240, there are 2 cases. In first case, company's ROI is more
than cost of debt, which concludes that more debt makes more return.
And in second case, ROI is less than debt, which concludes more debt reduces
return.
First case is favourable financial leverage and second is unfavorable financial
leverage.

When company uses cheaper debt to increase return, it is called trading on

equity.

Thus, a company must choose risk-return combination wisely.

Factors Affecting Choice Of Capital Structure

1) - 12) in NCERT

Fixed and working capital

Fixed capital
Fixed assets are those which remains in the business for more than one year,
usually for much longer, e.g., plant and machinery, furniture and fixture, land
and building, vehicles, etc.
Decision to invest in fixed assets must be taken very carefully as the investment
is usually quite large. Such decisions once taken are irrevocable except at a
huge loss. Such decisions are called capital budgeting decisions

Told about capital budgeting decisions

Importance of capital budgeting:

1) Long term growth
2) large amount of funds involved
3) risk involved
4) irreversible decision

Factors affecting requirements of fixed capital:

1) - 8) in NCERT

Working Capital

Current assets This investment facilitates smooth day-to-day operations of the

business. Current assets are usually more liquid but contribute less to the profits
than fixed assets. e.g., inventories, debtors, bills receivables, etc. gets converted
into cash or cash equivalents within one year.

Rest is told very generally about current nature of assets and liabilities.
Factors affecting the working capital requirement

1) -12) in NCERT