Finacial Management Maysa Flashcards
What is finance?
Money of finance required for carrying out business activities is called business finance
What is financial management?
Financial management has two basic aspects optimal procurement of funds, as well as effective use of funds.
It aims at reducing cost of funds,
procured,
keeping the risk under control
making sure effective utilization of funds.
Importance of financial management
Size and composition of fixed assets
Amount and composition of current asset
Amount of long-term and short-term funds
Break up of long-term financing into equity, etc.
All items in the profit and loss account
Objective of financial management
1 profit maximization
Main objective of business is to maximize profits
Must earn sufficient profit to meet its expenses, to pay dividend shareholder, and for expansion and modernization program
Traditional objectives of financial management
2 wealth maximization
Main objective is to maximize shareholders, wealth, or maximize ation of market price of shares
Must ensure value addition to result in increase in the market price of shares market price is linked with investment decisions, financing decision and different decision
Modern objectives of financial management
What is financial decisions?
Financial decisions are three
Investment decisions
Financing decision decisions
Dividend decision decisions
Investment decisions
Investment decisions can be of two types, long-term, and short term
Long-term investment distance is also also called capital budgeting decision. It means allocating resources or capital on a long-term basis.
Short-term investment decisions also called working capital decisions related distance about level of cash, inventory and receivables
Factors affecting capital budgeting decisions, or investment decision
Cash flow of project
The rate of return
Risk involved
The investment criteria involved
Financing decision
Mainly there are two sources
Shareholder funds and borrowed funds
Share all the funds refer to equity capital retained earnings and reserves
Borrowed funds include avenger bonds and long-term loans from financial institutions
A firm has to decide the relative proportion of each item cost and risk involved, etc. so there must be a judicious mix of both depth and equity in making financing decisions
Factors affecting financing decisions
Cost
Risk
Floatation cost
Cash flow position
Fix your operating cost
Control
State of market
Dividend decisions
The term dividend means the part of profits of the company which is distributed among the shareholders
The company can utilize it profit in two ways
To pay dividend to its shareholders and to retain it in business
A major decision of financial management is how much to distribute profit as dividend to shareholders and how much to retain for the reinvestment of the business.
This is known as dividend decision
Factors affecting dividend decisions
Amount of earnings
Stability of earnings
Stability of dividends
Growth opportunities
Cash flow position
Shareholders preference
Taxation policy
Stock market reaction
Access to capital market
Legal constraints
Contractual constraint
Financial planning
Financial planning refers to the process of estimation, procurement, utilization, and administration of funds
Or
Financial planning is the plan which estimates the fund requirement of a business and determining the source for the same
Financial blueprint of an enterprise
Types of financial planning
There are two types
Long-term planning focuses on Expenditure meant for long-term growth and investment(usually 3 to 5 years)
Short term planning covers short term financial plan, called budget (usually for a period of one year or less )
Objectives of financial planning
to ensure availability of funds whenever required
To see that the firm does not raise resources unnecessarily
Importance of financial planning
Forecasting
Avoiding uncertainty
Coordination
Reduces wastage, etc.
Linkage
Easy evaluation
What is capital structure? (Important.)
Capital structure is the mixture of long-term sources of funds in firms capital
It represents the portion of debt capital and equity capital in the total capital of firm
There should be a correct proportion of these finance optimum capital structure Australian
Or
Combination of owner’s fund and borrow fund
What is owners fund and borrowed fund?
Owners funds include equity share Preference share, And reserve and surplus or retain earnings
Borrowed fund include loans depends public deposits, etc.
Equation
Your honor fund are denoted by equity and borrowed funds are denoted by debt
Debt/ equity
Ie, debt/ debt+equity
What is financial leverage?
The proportion of debt in overall capital is called financial leverage/capital gathering/trading on equity
What are the factors affecting choice of capital structure
Trading on equity
Cash flow position
Interest interest coverage ratio
Return on investment
Tax rate
Cost of equity
Floatation cost
Risk of consideration
Flexibility
Control
Regulatory framework
Stock market conditions
Capital structure of other companies
Fixed capital and working capital
Rough first investment in long-term of fix assets like building plant and missionary, etc. these asses are purchased not for recent, but I kept permanently in the business
Management of fixed capital
Management of fix a capital means allocation of firms capital to different project/assets which will have long-term implications for the business. Decisions in this regard, called investment decision decisions, and capital budgeting decisions
Importance of management of financial capital or capital budgeting decisions
Long-term growth
Large amount of funds involved
Risk involved
Irreversible decisions
Factors affecting the requirement of fixed capital
Nature of business
Scale of business
Choice of technique
Technology upgradation
Growth prospects
Diversification
Financing alternatives
Level of collaboration
