FINANCIAL

MANAGEMENT
PART- 1
SUNIL PANDA-
THE EDUCATOR
 Financial management refers to “efficient acquisition of finance,
efficient utilisation of finance, efficient distribution and disposal of
surplus for smooth working of company

Management relating to finance is called financial management”.

The main objective of financial management is to maximise the
wealth of shareholder’s.

Equity shareholders get dividend only after the claim of suppliers, lenders,
employees, creditors and other claimants. Therefore if the shareholder’s are
gaining . It automatically that all others claimant are also gaining.
With the objective of wealth maximization of shareholder’s
Following objectives automatically get achieved.
i. Profit maximisation
ii. Proper utilisation of funds
iii.Maintenance of liquidity
iv.Meeting financial commitments with creditors.
FINANCIAL PLANNING
It means deciding in advance how much to
spend, on what to spend according to the
fund at your disposal. In general it includes
i. Determine the amount of finance needed
by an enterprise to carryout its operation
smoothly.
ii. Determination of sources of fund.
iii.Make suitable policies for proper utilisation
of funds.
IMPORTANCE OF FINANCIAL PLANNING
A It helps in collecting optimum funds

B It helps in fixing the most appropriate capital structure

C It helps in investing finance in right project

D It helps in proper utilisation of finance

E Helps in avoiding business shocks and surprises

F It links present with future

 IMPORTANCE OF FINANCIAL PLANNING
Financial planning is essential for success of any business enterprise.
“finance is like blood of a business without it a business can’t survive .”
i. It helps in collecting optimum funds:- The financial planning estimates
the precise requirement of funds which means to avoid wastage and
over-capitalisation situation.
ii. It helps in fixing the most appropriate capital structure:- funds can be
arranged from various sources and are used for long term , medium
term,& short term. Financial planning is necessary to identify the
capital structure.
iii. It helps in investing finance in right project:- it suggest how to fund
are to be allocated for various purposes by comparing various
investment proposals .
iv. It helps in proper utilisation of finance :- finance is the life blood of
the business. So financial planning decides how fund to be utilised.
v. Helps in avoiding business shocks and surprises:- By anticipating the
financial requirements financial planning helps to avoid shocks or
surprises which otherwise firms have to face in uncertain situation. It
helps the company in preparing for the future.
vi. It links present with future:- financial planning relates present
financial requirement with future requirement by anticipating the sales
and growth plans of the company.
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 FINANCIAL
MANAGEMENT
PART- 2
SUNIL PANDA-
THE EDUCATOR
FINANCIAL DECISIONS
Nature of controlling
The finance function is covered with three broad decisions

Investing/
Investment /
Capital budgeting
Financing
decision
decision Dividend
decision
 Investment decision
x
(capital budgeting Decision)

This decision relates to

careful selection of assets in
which fund will be invested
by the firms.
 Factors affecting investment/ Capital budgeting decision
i. Cash flow of the project :- whenever a company is investing huge funds in an
investment proposal it expect some regular amount of cash flow to meet day
to day requirement .
ii. Return on investment :- The most important criteria to decide the investment
proposal is rate of return it will be able to bring back for the company. Those
investment are selected which gives higher return .
iii. Risk involved:- With every investment proposal there is some degree of risk is
also involved. The company must try to calculate the risk involved in every
proposal and select those investment which have low degree of financial risk.
iv. Investment criteria :- along with return ,risk cashflow there are various other
criteria which helps in selecting proposal e.g., availability of Raw material
 Financing Decision
The second important decision
which finance manger has to take is
deciding source of finance. A
company can raise finance from
various sources such as by issue of
shares, debenture or by taking loan
and advance. Deciding how much
to raise from which source is
financing Decision.
 These are Two sources

Owner’s fund Borrowed fund

Owners fund :- it constitute share capital and retained earning.
Borrowed fund:- it constitute , debentures , loan , bonds etc.
The main concern of finance manager is to decide how much to raise from
owner’s fund and how much to raise from borrowed fund.
Factors affecting financing decision
i) Cost :- The cost of raising finance from various sources is different & finance
manager always prefer the source with minimum cost.
ii) Risk :- More risk is associated with borrowed fund as compared to owner’s
fund . finance manager compares the risk.
iii) Cash flow position:- The cash flow position of the company also helps in
selecting the securities with smooth cash flow companies can easily afford
borrowed fund but when companies have shortage of cash flow then they must
go for owners fund securities only .
iv) Floatation cost :- it refers to cost involved in issue of securities such as
broker’s commission , underwriters fee, expenses on prospectus etc. firm prefer
securities which involve least flotation cost .
v) State of capital market :- The conditions in capital market also help in deciding
the type of securities to be raised . during boom period it is easy to sell equity
share as people are ready to take risk whereas during depression period there
is more demand for debt securities in capital market.
vi) Control consideration:- Issue of shares means Giving ownership to Others. If
existing shareholders don’t want to loose control then they should prefer Debts
or vice versa
vii) Fixed Operating Cost:- If a company has already issued a lots of debt which
means more interest liability or more fixed operating cost then company should
not issue more debt because it leads to more fixed operating cost, so in that
situation company should issue on Equity shares.
x Dividend decision
It is the decision related to how
much amount of profit is to be
distributed among the
shareholders and how much
amount is to be retained for
future growth.
Dividend decision
The decision is concerned with distribution of surplus funds. The profit of the
firm is distributed among various parties such as creditors , employees,
debentures holders, shareholders etc. these are the fixed liability of the
company. The surplus profit is either distributed to equity shareholders in the
form of dividend or kept aside in the form of retained earnings under dividend
decision the finance manager decide how much to be distributed in the form
of dividends and how much to keep aside as retained earning. To take the
decision company keep in the mind about the growth plans and investment
opportunities. If more investment opportunities are available and company
has growth plans then more escaped is kept aside as retained earnings and
less is given in the form of dividend but if company want to satisfy the
shareholders and has less growth plans. Then more is given in the form of
dividends and less is kept aside as retained earnings.
Factors affecting Dividend decision
i. Earnings:- Dividends are paid out of current and previous year earnings if
there are more earnings then company declare high rate of dividend
whereas during lower earning period the rate of dividend is also low.
ii. Stability of earning:- Companies having stable or smooth earning prefer to
give high rate of dividend whereas companies with unstable earnings prefer
to give low rate of earnings.
iii.Cash flow position:- Paying dividend means outflow of cash. Companies
declare high rate of dividend only they have surplus cash. In situation of
shortage of cash companies declare no or very low dividend.
iv. Growth opportunities:-if a company has a number of investment plans then it
should reinvest the earning of the company. As to invest in investments
projects. Company has two options one to raise additional capital or invest its
retained earnings. Retained earning are cheaper source as they do not involve
floatation cost and any legal formalities. If companies have no investment or
growth plan than it would be better to distribute more in the form of dividends
generally mature companies declare more dividend whereas growing
companies keep aside more retained earnings
v. Stability of dividend:- some companies follow a stable dividend policy as it has
better impact on shareholders and improve the reputation of company in the
share market . Here company pay regular dividend.
vi. Taxation policy:- The rate of dividend also depends upon the taxation policy
of government under present taxation system dividend income is tax free
Income. For shareholders whereas company has to pay tax on dividend given to
shareholders if tax rate is higher than company preferred to pay less in the form
of dividend whereas if tax rate is lower then company may declare higher
dividend.
vii. Types of shareholders:- If company is having major Young age shareholders
then company may Retain more for growth purpose and less in form of dividend
but if shareholders are retired
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 FINANCIAL
MANAGEMENT
PART- 3
SUNIL PANDA-
THE EDUCATOR
 Financial Leverage or
x Trading on Equity
Financial leverage means the
presence of debt in the overall
capital structure of an entity.
Debt is a cheaper source of
finance but it is risky.
FINANCIAL LEVERAGE =
DEBT/ TOTAL EQUITY
More debt will result in increase in earning only when rate of earnings of the
company i.e., ROI is more than rate of interest on debt
If rate of interest is more than the earning or ROI of then more debt means loss
of company.
Let us prove the situation
Situation 1.
Total capital = ₹ 50,00,000
Equity share capital ₹50,00,000 (5,00,000 shares @ ₹10 each)
Debt =Nil
Tax rate= 30% p.a.
Earning before interest and tax (EBIT)= ₹7,00,000
Situation 2.
Total capital = ₹ 50,00,000
Equity capital =₹40,00,000 (4,00,000 shares @ ₹10 each)
Debt= ₹10,00,000
Tax rate =30%p.a.
Interest on debt =10 %
Earning before interest and tax(EBIT)= ₹ 7,00,000
Situation 3.
Total capital =₹ 50,00,000
Equity share capital = ₹ 30,00,000 ( 3,00,000 shares @ ₹10 each)
Debt = ₹ 20,00,000
Tax rate =30 %
Interest on debt = 10%
Earning before interest and tax (EBIT)= ₹ 7,00,000
Hence it is proved that more debt brings more income for owners in the capital
structure. But this statement holds true only if return on investment is more than
rate of interest
In the above case ROI = (EBIT/ Capital employed)*100
If in the above three situations we take net profit before interest and tax
(EBIT)= ₹ 3,00,000
Then (3,00,000/ 5,00,000)×100 = 6% Rate of interest is 10 %
If ROI < rate of interest
Hence it is proved that more debt brings less income for owner. But this statement
hold true only if return on investment is less than rate of interest.
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