NCERT Solutions Class 12 Business Studies Chapter 9 – Financial Management
To get a strong foothold on the topic of Financial Management, students may refer to NCERT Solutions Class 12 Business Studies Chapter 9. These notes are prepared by the Extramarks subject experts team with years of teaching experience. Students of Class 12 can learn and revise essential points, definitions, and Q&A from the study material offered by NCERT Solutions for Class 12 Business Studies Chapter 9.
NCERT Solutions for Class 12 Business Studies Chapter 9 is written in simple language with point-by-point explanations. Students can use the Class 12 Business Studies NCERT solutions for Chapter 9 for quick reference and take advantage of these notes while studying.
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Key Topics Covered In NCERT Solutions Class 12 Business Studies Chapter 9
Following are the key topics covered in NCERT Solutions Class 12 Business Studies Chapter 9.
| Business Finance |
| Financial Management and its Objectives |
| Financial Decisions |
| Financial Planning and its Importance |
| Capital structure and Factors |
| Fixed and Working Capital |
Business Finance
Business finance refers to the funds necessary to conduct business operations. Almost every business activity necessitates some form of funding.
You’ll need money to start a business, operate it, modernise it, expand it, and diversify it.
Financial Management and its Objectives
Financial management is concerned with the most efficient acquisition and use of funds. Financial management attempts to reduce the cost of money obtained, regulate risk, and ensure the appropriate use of those assets. It also tries to ensure that sufficient finances are available whenever they are needed and avoid unused funds. It goes without saying that a company’s financial management is critical to its long-term success.
Importance of Financial Management
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- The size and composition of the company’s fixed assets: Overinvestment in fixed assets may stifle money and expand the size of fixed assets, which isn’t good for the company, but underinvestment can suppress growth.
- The net amount of current assets, broken down into cash, inventories, and receivables: The quantity of working capital required by a firm is influenced by financial decisions such as fixed asset investments, credit policy, inventory management, etc.
- Breaking down long-term funding into debt, equity, and other forms: A financial manager needs to determine how a corporation’s debt and/or equity proportions must be pumped in. Finance managers’ actions impact debt, equity share capital, and preference share capital and are essential for financing management.
- The amount of long- and short-term finance that will be employed is as follows: The percentage of cash obtained from long-term and short-term sources is determined by the financing choice.
- All profit and loss account items: Financing decisions have an impact on the value of profit and loss account items.
All financial decisions made by financial managers in the past have a significant impact on present and future financial decisions. The quality of financial management determines the overall health of finance. Students may refer to Extramarks NCERT Solutions Class 12 Business Studies Chapter 9 to get the pointwise explanation of the chapter.
Objectives of Financial Management
The objectives of financial management covered under Extramarks NCERT Solutions Class 12 Business Studies Chapter 9 include
- Maximisation of Profit: The major goal of companies concerned with raising their earnings per share (EPS) is to achieve profit maximisation. It is also one of the classic financial management objectives, which emphasises the idea that all financial efforts should be made to enhance the company’s total profit.
- Maximisation of Wealth: The primary goal of financial management is to maximise shareholders’ wealth, commonly known as wealth maximisation. This goal focuses on boosting the company’s total shareholder wealth by targeting finance efforts toward growing the company’s share price. The wealth of the shareholders’ increases as the share price rises. In this case, financial management’s purpose is to maximise the current value of the company’s stock. The company’s financial actions have a significant impact on the market price of its shares.
- Shareholders benefit from a growth in the market value of their stock: It focuses on making financial decisions that add value to the firm, resulting in an increase in the price of the equity share. Other objectives, such as optimal money use, liquidity maintenance, and so on, are naturally achieved as this core goal is met. It entails deciding on the most effective option that will prove to be advantageous.
- Some other Objectives: Other goals might include making the best use of financial resources, selecting the best source, enabling simple access to money at reasonable prices, and so on.
Financial Decisions
Financial management is concerned with the resolution of three primary concerns connected to a company’s financial operations, namely, investment, financing, and dividend determination. It refers to choosing the optimum finance or investment option in a financial environment. As a result, the financial department is responsible for three major choices, which are detailed below:
- INVESTMENT DECISIONS: This section of NCERT Solutions Class 12 Business Studies Chapter 9 gives a brief on investment decisions.
- A company should determine where to invest its cash in order to maximise its profits. These are known as investment decisions, and they may be divided into two categories: long-term and short-term investment decisions.
- The many resources available to an organisation are limited and can be used in other ways. A company must adequately determine where to invest in order to maximise earnings.
- Investment choices are those made concerning how the firm’s finances are invested in various assets or various investment ideas.
- FINANCING DECISIONS: This section of Class 12 Business Studies Chapter 9 notes explains the following.
- Financing decisions entail determining the amount of money to be raised from various sources.
- Identification of financial sources is also part of these decisions.
- There are two basic ways to get money: from shareholders (equity) and borrowed money (debt).
- A corporation must choose the best combination of debt and equity-based on cost, risk, and profitability.
- While debt is less expensive than equity, it comes with a higher financial risk.
- Financial decisions must be made carefully since they affect the firm’s total cost of capital and include financial risk.
- In most cases, a combination of debt and equity money is favourable to the organisation.
Take a look at the elaborate topic of Dividend Decisions on Extramarks website under the section of Class 12 Business Studies Chapter 9 notes for better understanding.
- Dividend distribution choices are made when a company’s profit or excess is distributed.
- A dividend is that portion of a company’s profit that is delivered to shareholders.
- The corporation must decide whether to pay it as dividends to equity owners or to keep it as retained earnings.
- As a result, the most crucial issue is how much profit should be divided and how much should be kept in the firm.
- This choice is often made with the goal of maximising shareholder strength while also keeping earnings to boost the organisation’s future earning capability.
Financial Planning and its Importance
Financial planning is the process of creating a financial blueprint for a company’s future activities. Financial planning aims to guarantee that sufficient finances are accessible at the appropriate moment.
Financial planning focuses on fund requirements and availability in light of financial decisions in order to ensure smooth operations.
The aim of the financial planning process is to anticipate all of the elements that are expected to change. It helps management to anticipate financial requirements in terms of both quantity and time. Expected shortages and surpluses are forecasted so that required actions can be made ahead of time to address them.
Importance of Financial Planning
This section of NCERT Solutions Class 12 Business Studies Chapter 9 defines the importance of financial planning.
- Helps in facing eventual situations: Things that are about to happen are predicted. It helps a business better prepare itself to deal with future challenges. Prepares a blueprint portraying alternative scenarios and prepares management ahead of time to deal with a modified current situation.
- Helps in complete utilisation of funds: Helps in the elimination of waste, resulting in better financial management.
- Improves coordination: Helps in the coordination of a variety of corporate operations. Some examples are providing clear rules, regulations, and processes to coordinate the tasks of the sales, manufacturing, and finance divisions.
- Evaluating performance: It is simpler to analyse segment-wise company performance by providing precise business objectives and presenting financial projections for various business segments.
- Supports in avoiding surprises and shocks: Helps a corporation anticipate future shocks and surprises.
- Reduces duplicity and wastage: Detailed action plans assist in minimising waste and eliminating duplication of work.
- Works as a link: Attempts to bridge the present and future gap. Makes the connection between investment and finance decisions.
Capital Structure and Factors
The company’s capital structure refers to the percentage of debt and equity utilised to support its operations. To put it another way, capital structure refers to the ratio of debt to equity capital in a company’s capital structure. It’s tough to state which capital structure is the best for a business. The capital structure should be structured to increase the value of equity owners’ equity shares, maximising their wealth. The company’s capital structure is determined by three primary factors: cost, risks, and returns.
FACTORS AFFECTING CAPITAL STRUCTURE
NCERT Solutions Class 12 Business Studies Chapter 9 gives a clear insight on the factors that affect the choice of Capital Structure, which are as follows:
- Size of Business: Small firms prefer retained earnings and equity capital over debt or borrowed money because debt or borrowed capital has a fixed interest expense. On the other hand, large organisations do not have as much difficulty issuing debt, and they may obtain long-term financing from borrowed sources at a lower cost than small businesses.
- Cash Flow Position: Before obtaining funds, a company must analyse its projected cash flow to make sure that it will be able to meet its fixed financial commitments. A corporation with significant liquidity and a favourable cash flow situation can issue debt capital since it is less likely to face financial danger than a company with little cash.
- Tax Rate: The greater the tax rate, the more debt capital is preferred in the capital structure because interest on debt capital is a tax-deductible expenditure, making the loan cheaper.
- Interest Coverage Ratio implies the number of times a company’s income can cover its interest commitments, and a greater ICR lowers the risk of defaulting on interest payments.
- Cost of Debt: If a company has the ability to borrow cash at a cheaper interest rate, it can use debt to raise capital.
- Debt Service: It shows the company’s capacity to satisfy its financial commitments for interest and loan principal.
- Return of Investment: If a corporation produces a high rate of return, it has the option of using death as a source of funding.
- Cost of Equity: If a corporation has a high-risk profile, its shareholders may demand a high rate of return, which in turn will result in a higher cost of capital.
- Regulatory Framework: The standards for documentation procedures have an impact on the decision to use a specific source of funding.
- Floatation Cost: Choosing a funding source is determined by the cost of flotation to be spent to acquire such cash; the cost of flotation makes this programme less appealing.
- Flexibility: The loans chosen are determined by the company’s borrowing capacity and the amount of flexibility it wishes to maintain in selecting a future source of cash.
- Risk Consideration: A firm chooses debt as a source of capital based on its operational and overall business risks.
- Capital Structure of Other Companies: While the capital structure of other companies in the field can be used as an illustration when developing a company’s capital structure, the ultimate choice must be made based on the company’s ability to bear financial risk.
- Stock Market Conditions: In case the stock market is performing well and the economy is booming, corporations may decide to use more equity in their capital structure rather than debt. However, in the event of a downturn, corporations will choose more debt over equity in their capital structure to minimise further risks.
Fixed and Working Capital
Fixed Capital
Long-term assets are referred to as fixed capital. Fixed capital management is allocating a company’s money to various initiatives or assets that have long-term ramifications for the company.
It must be funded through long-term capital sources such as stock or preference shares, debentures, long-term loans, and the company’s retained earnings. Short-term financing should never be used to fund fixed assets.
Factors affecting the Fixed Capital
Extramarks NCERT Solutions Class 12 Business Studies Chapter 9 throws light on all the factors affecting the requirement for fixed capital:
- The technique of production: When a corporation uses capital-intensive technology, it depends less on manual labour and has a higher need for fixed capital. A corporation built on labour-intensive technology, on the other hand, will require less fixed capital since it will spend less on fixed assets.
- Nature of business: The nature of a company’s business is a significant component in determining its capital requirements. A manufacturing firm, for example, has a higher fixed capital demand than a trading company.
- The scale of operation: Because large-scale corporations acquire more machinery and plants for their operations and demand more space, they require more fixed capital than small-scale enterprises.
- Technology upgradation: When a corporation undergoes rapid industrial upgrading, it will require more fixed capital to replace outdated machinery with new machinery in order to upgrade technology. While the process of upgrading will be slow, the amount of fixed capital required will be lower.
- Level of collaboration: Because they may share available machinery with their collaborators, companies who favour partnerships will require less fixed capital.
- Growth prospects: Companies that extend their activities in order to achieve higher growth will require more fixed capital than companies that do not.
- Availability of finance and leasing facility: Companies might avoid purchasing fixed assets if they are supplied with leasing options. As a result, the amount of fixed capital required is reduced.
- Diversification: Diversifying a company’s range of manufacturing operations will necessitate additional fixed capital to manufacture goods.
Working Capital
Current assets are generally more liquid than fixed assets, although they contribute less to earnings. These assets are likely to be turned into cash or cash equivalents within a year. These help the company stay afloat. Short-term sources, such as current liabilities, are frequently used to fund a portion of current assets. The remaining is known as net working capital and is financed by long-term sources.
Factors affecting Working Capital
NCERT Solutions Class 12 Business Studies Chapter 9 at Extramarks website presents a pointwise elaboration on the topic of factors affecting working capital.
- Types of Business: One of the most critical indicators of working capital requirements is the type of firm. Trading companies, for example, have shorter operational cycles since they do not process anything. As a result, they have a minimal working capital need.
On the other hand, a manufacturing company would require a considerable amount of operating capital. It is so because it has a long operational cycle, in which raw resources must first be turned into completed commodities before being sold.
- Fluctuations in Business Cycles: Working capital requirements vary depending on the stage of the business cycle. For example, both output and sales are greater during a boom period. As a result, the need for working capital is likewise considerable. In contrast, during a depression, demand is low, and hence output and sales are down. As a result, there is less of a need for operating capital.
- Production Cycle: The time between receiving products and processing them into finished items is referred to as the production cycle. Working capital requirements increase as a company’s production cycle lengthens, and vice versa. This is because a longer manufacturing cycle would demand more working capital due to increased inventory and other related expenditures.
- The scale of Operations: Companies with a larger scale of operation require more working capital than those with a smaller scale of operation. It is due to the fact that businesses with a larger scale of operations are forced to have a more extensive stock of goods and debtors. A firm with a lower scale of operation, on the other hand, requires less working capital.
- Credit Availed: Suppliers may grant credit to a company/firm based on their creditworthiness. The more credit they acquire, the less they need in terms of operating capital.
- Growth Prospects: Stronger production, sales, and inputs suggest higher growth potential. As a result, a company’s more significant growth potential necessitates a higher working capital level.
- Credit Allowed: The average duration for collecting sale profits is referred to as credit policy. This is dependent on the clients’ creditworthiness. As a result, a firm with a flexible lending policy will need greater working capital.
- Seasonal Factors: During the peak season, companies require a large amount of working capital due to the high level of activity. However, during the lean season, they demand less as the activities decrease.
- Availability of Raw Materials: Lower stock levels might suffice if raw supplies are readily available and consistent. This will assist the firm/company avoid the storage of a significant quantity of raw materials, hence lowering the requirement for working capital. However, if the time between making an order and receiving items grows, the firm will need to maintain a considerable amount of raw material stock, resulting in a higher working capital demand.
- Operating Efficiency: Companies with a high level of operating efficiency will require less working capital, whereas companies with a low level of efficiency will require more working capital. This is because efficiency can help a company/firm reduce the number of raw materials required, the average time finished goods inventory is held, and so on.
- Level of Competition: In order to produce items on time, the corporation will need bigger stockpiles of finished goods as the market becomes more competitive. As a result, they keep a larger inventory, which necessitates a significant amount of money.
NCERT Solutions Class 12 Business Studies Chapter 9 Financial Management
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Key Features of NCERT Solutions Class 12 Business Studies Chapter 9
NCERT Solutions Class 12 Business Studies Chapter 9 provides detailed answer to all questions. Some of the compelling reasons for you to choose Extramarks are:
- All solutions are mentioned in a detailed and easy to understand manner.
- By laying a foundation and explaining the chapter’s fundamental principles, the answers help eliminate the student’s doubts and confusions.
- All solutions are prepared, keeping in mind the guidelines laid by CBSE.