Class 12th Business Studies Financial Management Notes.

Financial Management.... Short & Easy Notes for Board Exam.

1. What do you mean by financial management? what are its role?

> Financial management is concerned with the managing finance of the business for smooth functioning and success of the enterprise. The primary objective of financial management is to maximize owners wealth and others.
Following are its objectives;

• To ensure adequate supply of capital to the business.
• To use fund effectively.
• To conserve the fund through creation of reserve and investment of profit.

Financial management plays the following roles;

• Determination of fixed assets.
• Determination of current assets.
• Determination of proportion of long-term and short-term finance.
• Determination of various item of profit and loss account.

2. What do you mean by financial planning? what are its importance?
> Financial planning refers to estimate the amount of capital and determining its composition. It means deciding in advance how much to spend and on what to spend.
Following are its main objectives;

• To estimate accurate amount of fund are available at the right time.
• To ensure most profitable utilisation of fund.
• To ensure effective control over fund.
• To maintain financial liquidity and flexibility.
• To minimise the cost of the fund.

Following are its importance;

• Without planning business plans are incomplete and useless.
• It helps in the problem of excess or shortage of fund.
• It helps in financial control.
• It insures the liquidity.
• Minimise the cost of financing.
• It ensure co-ordination between different functional area in the business.

3. What do you mean by capital structure? what are its features?
> Capital structure refers to the composition of long-term source of fund. Such as equity share, preference share, debenture, retail earning and long term loan. All these types of finance have to be right proportion in order to ensure an optimum capital structure.
Following are its features;

• Capital structure should give maximum return to the shareholder.
• Capital structure should minimise the risk and its costs.
• The company should have capacity to pay fixed charge on time.
• The companies should be able to change the proportion of debts and equity in capital structure.

4. What do you mean by fixed capital? what are its sources?
> fixed capital refers to those funds which are invested in fixed or permanent assets.i, e, land building plant machinery equipments tools patent furniture etc. It is essential to run the business. It is the capital which is required to meet the long-term needs of the business. It is permanent assets and cannot be drawn from the business till its liquidation. It is the life blood of the business. Without capital no business can be started.
Following are its source;

• Owner capital- equity share and preference share
• Borrowed capital -loan and debenture 
• Public deposits
• Retain earning.

5. What do you mean by capital budgeting? what are its importance?
> Capital budgeting means the decision regarding investment in fixed assets that yield income for a long period. It is made by top level management. Its investment is very large.
Following its importance;

• It involves the large quantity of financial resources and therefore the risk of suffering large losses.
• It can have a large impact on profitability.
• It involves the long-term duration.
• It is prepared to select best alternative.

6.what do you mean by working capital? what are its importance?
> Working capital refers to that capital, which is utilised for meeting current liabilities by cash payment. It is invested in raw material, partly finished goods to meet day to day expenses. Such as salary, rent, wages, insurances, taxes, etc.
following and its importance;

• It maintains the solvency of the business.
• It maintain the credit by prompt payment to the supply.
• It attract cash discount.
• It increase the Goodwill of the concerned.
• It increased the morale and consequence of the employer.
• It insures the regular payment of dividend.
• It attract the willingness of the bank to grant loan.

7. Write the difference between fixed and working capital?
Fixed capital;

• It is required for the fixed assets.
• It is permanent in nature.
• It is procured by long-term source.
• It is required for meeting the long-term needs.
• It is blocked in fixed assets permanently.

Working capital;

• It is required to meet the day to day expenses.
• It is temporary in nature.
• It is obtained by long term and medium term and short term resources.
• It is required for meeting the short term needs of the business.
• It is released and invested again and again.

POINTS;

1. Financial management is art and science both.
2. The source of working capital are cash sells, cash received from debtors and bank overdraft.
3. Net working capital = current assets - current liabilities.
4. The sum of current assets is called working capital.
5. Equity share holder gets voting rights in a company.
6. Break even point is that point where total revenue is equal to total cost.
7. Equity share-holder gets dividend from the company.

THE END