Financial Management

Financial Management is concerned with optimal procurement as well as usage of finance. It involves identification of sources of finance, comparison of the sources with cost & associated risks and investment of the finance procured in most profitable avenues. Primary objective of financial management is to maximise shareholder’s wealth which means to maximise the market value of equity shares. Financial Planning refers to the process of estimating the fund requirement of a business and specifying the sources of funds. It includes both short term & long term planning. It is important as it helps to forecast the financial results in different business situations, provides a link between investment & financing decisions, reduces wastage, duplication of efforts, etc. Financial management differs from financial planning. The three types of financing decisions are investment decisions that relates to how the firm’s funds are invested in different assets, financing decision which relates to the quantum of finance to be raised from various and dividend decision that relates to deciding how much of the profits earned by a company are to be distributed & how much are to be retained. Investment decision consists of two types of decisions that are capital budgeting decision and working capital decision. Capital Structure refers to the mix between-owner’s funds (equity) and borrowed funds (debt). Capital structure affects the profitability of firm and aims at increasing value of equity shares. Proportion of debt in the total capital of a company is called ‘Financial Leverage’. Factors affecting capitals structure are cash flow position, interest coverage ratio, debt service coverage ratio, return on investment, cost of debt, tax rate, cost of equity, etc. There are different factors affecting fixed and working capital requirements.

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