Chapter - 9
Chapter - 9
Chapter - 9
FINANCIAL MANAGEMENT
Introduction :-
Money required for carrying out business activities is called business finance.
Finance is needed to establish a business, to run it, to modernise it, to expand
or diversify it.
Finanicial management is the activity concerned with the planning, raising
controlling and administering of funds used in the business. It is concerned
with optimal procurement as well as usuage of finance. It aims at ensuring
availability of enough funds whenever required as well as avoiding idle
finance.
The Main Objective of Financial Management is to maximise shareholder s
wealth, for which achievement of optimum capital structure and proper
utilisation of funds is a must.
Every company is required to take three main financial decisions which are
as follow:
1. Investment Decision :-
It relates to how the firm s funds are invested in different assets.
Investment decision can be long-term or short term. A long term
investment decision is called capital budgeting decisions which involve
huge amounts of investments and are irreversible except at a huge cost
while short term investment decisions are called working capital
decisions, which affect day to day working of a business.
2. Financing Decison :-
It relates to the amount of finance to be raised from various long term
sources. The main sources of funds are owner s funds i.e. equity / share
holder s funds and the borrowed funds i.e. Debts. Borrowed funds have
to be repaid at a fixed time and thus some amount of financial risk (i.e.
risk of default on payment) is there in debt financing. Morever interest on
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3. Dividend Decision :-
Dividend refers to that part of the profit which is distributed to
shareholders. A company is required to decide how much of the profit
earned by it should be distributed among shareholders and how much
should be retained. The decision regarding dividend should be taken
keeping in view the overall objective of maximising shareholder s wealth.
Financial Planning :-
The process of estimating the fund requirement of a business and
specifying the sources of funds is called financial planning. It ensure that
enough funds are available at right time so that a firm could honour its
commitments and carry out, its plans.
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Trading on Equity :
It refers to the increase in profit earned by the equity shareholders due to the
presence of fixed financial charges like interest. Trading on equity happen
when the rate of earning of an organisation is higher than the cost at which
funds have been borrowed and as a result equity shareholders get higher rate
of dividend per share.
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