Revision: Business Finance and Marketing >> Financial Management Business Studies Commerce (English Medium) Class 12 CBSE

Financial management refers to the efficient acquisition, allocation, and usage of funds by the company. It is carried out with the primary aim of reducing the cost of the funds that are procured, minimizing the risk, and effective distribution of funds to different opportunities.

Gerstenbergh defines it as “The excess of current assets over current liabilities.”

According to R. H. Wessel, “The long term sources of funds employed in a business enterprise.”

 Stock Keeping Unit (SKU) code
(a) All items in the inventory is to be identified with a unique code which signifies certain aspects of the item.
(b) It can be colour, size, weight or any other characteristics that is of importance in its use.
(c) The SKU code can be a combination of alpha and numeric.
(d) SKU is the very basic unit for data collection and further manipulation for deriving meaningful statistics and decision making.
(e) Bar Codes and RFID (Radio Frequency Identification tags are used in tracking etc. using SKU.

\[\frac{\mathrm{Debt}}{\mathrm{Equity}}\]  (D/E)

\[\frac{\mathrm{Debt}}{\mathrm{Debt}+\mathrm{Equity}}\]  \[\left(\frac{D}{D+E}\right)\]

\[\frac{\mathrm{EBIT}}{\text{Total Investment}}\times100\]

\[\mathrm{ICR}=\frac{\mathrm{EBIT}}{\mathrm{Interest}}\]

\[\frac{\text{Profit after tax}+\text{Depreciation}+\mathrm{Interest}+\text{Non Cash exp}.}{\mathrm{Pref.~Div}+\mathrm{Interest}+\text{Repayment obligation}}\]

NWC = CA - CL

Where:

• NWC = Net Working Capital
• CA = Current Assets
• CL = Current Liabilities

• Tata Steel–Corus deal (2007): 12 billion USD; largest Indian overseas private acquisition then.
• Entity renamed Tata Steel Europe (2010).
• Funded via 8+ billion USD debt and ₹36,500 crores (debt, equity, internal accruals).
• SPV used: Tata Steel UK; 1 billion USD each from Tata Sons and Tata Steel via preference shares.
• Case highlights core financial management principles: planning, capital structure, risk, profitability, and timely fund-raising.

• Business finance refers to money required for business activities.
• Every business requires finance for its various activities.
• Finance is essential to establish a business.
• Finance is required to run ongoing business operations.
• Finance helps in modernising existing business.
• Finance supports expansion of business activities.
• Finance enables diversification into new areas of business.

• Financial management = optimal procurement + usage of finance.
• Primary objective = maximise shareholders' wealth via market value of equity shares.
• Reduces cost of funds and controls financial risk.
• Decisions affect both the Balance Sheet (assets, capital structure) and P&L (interest, depreciation, dividends).
• Ensures effective deployment and timely availability of funds.

• Financial management involves three decisions: investment, financing, and dividend.
• Investment decision = allocating scarce funds to assets to earn the highest return.
• Long-term investment decisions are called capital budgeting; they are irreversible and affect profitability and competitiveness.
• Short-term investment decisions are called working capital decisions; they involve cash, inventory, and receivables.
• Three key factors affecting capital budgeting: cash flows of the project, rate of return, and investment criteria.
• When risk is equal, the project with the higher rate of return is preferred.
• Sound working capital management requires efficient handling of cash, inventory, and receivables.

• Dividend decision = profit sharing vs profit retention.
• Dividend gives income now; retained earnings support future growth.
• More retained earnings mean less need for outside finance.
• Profit level, profit stability, and dividend stability strongly shape dividend.
• Growth plans, cash, shareholder choice, tax, market reaction, and access to funds all influence the dividend amount.
• Company law and loan conditions can restrict how much dividend is paid.

• Financial planning tackles uncertainty of funds and supports smooth functioning and survival of business.
• It forecasts future conditions and enables preparation of alternative financial plans.
• It helps avoid business shocks and surprises by preparing the company for the future.
• It coordinates sales and production through clear policies, procedures and budgets.
• Detailed action plans reduce waste, duplication of efforts and planning gaps.
• It links present decisions with future requirements and connects investment and financing decisions.
• It sets detailed objectives that make evaluation and comparison of actual performance with planned results easier.

• Capital structure = Mix of owners' funds and borrowed funds.
• Debt is cheaper but riskier than equity.
• Financial risk increases with higher debt.
• Financial leverage is measured by D/E or D/(D+E).
• Optimal capital structure maximizes shareholders' wealth.
• Favourable Financial Leverage: RoI > Cost of Debt → EPS increases.
• Unfavourable Financial Leverage: RoI < Cost of Debt → EPS decreases.
• Trading on Equity should be used only when RoI exceeds the Cost of Debt.

• Capital structure choice depends on cash flows and ability to meet fixed payments.
• ICR and DSCR show how safely a firm can service interest and total debt.
• RoI compared with cost of debt decides whether trading on equity raises or lowers EPS.
• Tax rate, cost of debt, and cost of equity change the attractiveness of debt versus equity.
• Business risk, financial risk, flexibility, and control limit how much debt can be used.
• Laws, SEBI rules, stock market conditions, and industry norms also influence capital structure decisions.

• Fixed capital is the investment in long-term assets, while current assets are converted into cash within one year.
• Fixed capital decisions (capital budgeting) involve acquiring, expanding, replacing, or modernising fixed assets.
• Fixed assets should be financed through long-term sources, not short-term funds.
• Capital budgeting is important because it involves large investments, long-term growth, risk, and irreversible decisions.
• Fixed capital requirements depend on the nature and scale of business, technology, growth prospects, and diversification.
• Leasing and collaboration can reduce the need for fixed capital investment.

• Working capital is the investment in current assets needed for smooth day-to-day operations.
• Current assets are more liquid but provide lower returns than fixed assets.
• Current liabilities are short-term obligations payable within one year.
• Net Working Capital = Current Assets − Current Liabilities.
• A business should maintain a balance between liquidity and profitability.
• Working capital requirements depend on factors such as nature of business, scale of operations, business cycle, seasonality, production cycle, credit policy, operating efficiency, raw material availability, growth prospects, competition and inflation.