Business Finance

  • Money required to establish, run, expand, modernize and to diversify a business.

Financial Management

  • Optimal procurement and usage of finance.
  • Balance the risk and return.
  • Ensuring availability of funds whenever required how much required.

Objective of Financial Management

  • Profit maximization
  • Wealth maximization
  • Shareholders’ Wealth = No. of Equity Shares X Market value of shares.
  • Maximization of EPS

Financial decisions

  1. Investment Decisions
  • Concerned with decisions relating to investment in assets.
  • These decisions include-
  1. Capital Budgeting Decisions: Long term, huge investment, irreversible.
  2. Working Capital Decisions: Short term, day-to-day transactions, cash, inventory etc.

Factors affecting Capital Budgeting Decision

  1. Cash flows of the project
  2. The rate of return
  3. The investment criteria involved

Financing Decisions

  • It is concerned with quantum of finance to be raised from various long term sources.
  • Short term sources are studied under Working Capital Management.
  • Main sources are Owned Funds and Borrowed Funds.
  • A firm has to decide the proportion of funds to be raised from either source.

Factors affecting requirement of Financing Decision

  1. Dividend Decision
  • It is concerned with how much of the profit is to be distributed to the shareholders and how much should be retained in the business.

Factors affecting requirement of Dividend Decision

Financial Risk

  • The risk of default of payment is called financial risk.

Floatation Cost

  • The cost of raising funds is called floatation cost.

Financial Planning

  • The process of estimating fund requirement of a business and specifying the sources of funds.
  • Blueprint of an organisaton’s future operations.
  • Proper matching of fund requirements and their availability.

Objectives of Financial Planning

Twin objectives.

  1. To ensure availability of funds whenever these are required:
  2. To see that the firm does not raise resources unnecessarily:

Capital Structure

  • It is the combination/ mix/proportion between owners’ funds and borrowed funds or Debt and Equity.

Financial Leverage

  • It is the proportion of debt in the overall capital.

Trading on Equity

  • It means giving the benefit of using Debt to the Shareholders by increasing EPS.
  • Conditions of Trading on Equity

Factors Affecting Choice of Capital Structure:

  1. Cash Flow Position
  2. Interest Coverage Ratio (ICR)
  3. Debt Service Coverage Ratio (DSCR)
  4. Return on Investment (ROI)
  5. Cost of debt
  6. Tax Rate
  7. Cost of Equity
  8. Floatation Costs
  9. Risk Consideration
  10. Flexibility
  11. Control
  12. Regulatory Framework
  13. Stock Market Conditions
  14. Capital Structure of other Companies

Working Capital

  • Investment in current assets for smooth day-to-day operations. 

Factors affecting requirement of Working Capital

Fixed Capital

  • Investment in long-term assets.

Factors affecting requirement of Fixed Capital 

 

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