You are on page 1of 5

FINANCIAL MANAGEMENT

MEANING:-
Financial management is concerned with efficient acquisition and allocation
of funds. In operational terms, it is concerned with management of flow of
funds and involves decisions relating to procurement of funds.

OBJECTIVES OF FINANCIAL MANAGEMENT:-


(1)Maximize the earnings available to shareholders
(2)Increase price of equity shares

FINANCE FUNCTION:-
(1)Investment decision
(2)Financing decision
(3)Dividend decision

FINANCIAL PLANNING
MEANING:-
Financial planning means deciding in advance how much to spend and on
what on to spend according to the fund at your disposal.

IMPORTANCE:-
(1)Helps management avoid waste resulting from complexity of operations
(2)Provides policies and procedures which helps closer cooperation between
various function of business
(3)Aids company in preparation for future
(4)Tends to relieve top management from detailed time consuming process
(5)Avoids confusion and waste such as loss of time, goodwill & financial
matters
(6)The success or failure of production and distribution function depend on it

CAPITAL STRUCTURE
MEANING:-
The capital structure means the proportion of debt and equity used for
financing the operations of a business. The right proportion of debt and equity
is desired to maximize the use of funds.
FEATURES OF APPROPRIATE CAPITAL STRUCTURE:-
(1)Return
(2)Risk
(3)Flexibility
(4)Capacity

FACTORS DETERMINING THE APPROPRIATE CAPITAL


STRUCTURE:-
(1)Financial leverage
(2)Cash flow ability
(3)Control
(4)Flexibility
(5)Market conditions
(6)Floatation costs
(7)Legal framework

CAPITALIZATION

THREE POSSIBILITIES OF CAPITALIZATION

(1)Normal / Fair capitalization


(2)Over capitalization
(3)Under capitalization

1] OVER CAPITALIZATION:-

(1)INDICATORS OF OVER CAPITALIZATION:-


(a)When amount of capital invested exceeds the real value of assets
(b)When earnings are not justified by the amount of capitalization
(c)When business has more assets than required

(2)CAUSES OF OVER CAPITALIZATION:-


(a)High promotion costs
(b)Unduly high price paid for the assets
(c)Inflationary conditions during boom period
(d)Inadequate provision for depreciation
(e)Liberal dividend policy
(f)Shortage of capital

(3)EFFECTS OF OVER CAPITALIZATION :-


(a)On the Company:
(i)Market value of shares fall drastically because of its reduced earning
capacity
(ii)Becomes difficult for such companies to raise due to its week credit
standing
(iii)Since the earnings are low company cuts down expenditure on
maintenance,
replacement of assets and adequate provision of depreciation
(iv)Reputation of company is lost and goodwill is affected
(v)Company resorts to manipulation of accounts and dividend may be paid
even
there is no profit.

(b)On the Shareholders:


(i)Market value of share is lost and their capital is depreciated and they
incur
huge loss at the time of selling the shares
(ii)Dividends are affected as they are uncertain and irregular
(iii)Shares of such company are not accepted as security for advance and
loans
(iv)In the case of reorganization of the company, share holders bear the
brunt

(c)On Society:
(i)The company may resort to tactics like increase the price, reduce quality
of
products etc.
(ii)Expenditure on wages is curtailed which leads to labour unrest & strikes
(iii)Creditors affected due to irregular payment of interest
(iv)Such firms are drain on the resources of the society as they don’t earn
adequate returns.

2] UNDER CAPITALIZATION:-

(1)INDICATORS OF UNDER CAPITALIZATION:-


(a)Future earnings are underestimated at the time of promotion
(b)Unforeseen increase in earnings

(2)CAUSES OF UNDER CAPITALIZATION:-


(a)Underestimation of earnings
(b)Floatation of company due to depression
(c)Conservative dividend policy
(d)High efficiency

(3)EFFECTS OF UNDER CAPITALIZATION:-


(a)On the company:-
(i)The market value of shares goes up as the prices of shares go up
(ii)Secret reserves are built
(iii)Govt. intervention in the form of higher taxes
(iv)The high rate of earnings may encourage outsiders to enter field and
thus
increase competition
(v)The employees may demand higher wages and this may lead to
dissatisfaction among workers

(b)On the society:-


(i)Since shares’ prices are high, speculations’ possibilities are high
(ii)Consumers feel exploited as profits are high as they may feel it is due to
high price charged for the profit
MANAGEMENT OF FIXED CAPITAL
Importance
(1)Long term growth and growth
(2)Large amount of funds involved
(3)Risk involved
(4)Irreversible decisions

FACTORS AFFECTING CAPITAL BUDGETTING DECISION:-


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

WORKING CAPITAL
Two concepts of working capital:-
(1)Gross working capital
(2)Net working capital

FACTORS AFFECTING WORKING CAPITAL REQUIREMENTS:-


(1)Nature of business
(2)Business cycle fluctuations
(3)Seasonal operations
(4)Technology and production cycle
(5)Credit policy
(6)Price level changes
(7)Market competition

FACTORS AFFECTING DIVIDEND POLICY:-


(1)Financial requirements of the company
(2)Stability of dividends
(3)Capital market considerations
(4)Preferences of share holders
(5)Legal restrictions and constraints on paying dividends
(6)Bonus shares
(7)Inflation Compiled
by,
Rizwan Basheer Ahmed

You might also like