BUSINESS STUDIES

XII (2023-24)

PART -1

VIDEO
NOTES
 NOTES
FINANCIAL MANAGEMENT

OFFICIAL SYLLABUS CBSE 2023-24

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 FINANCIAL MANAGEMENT

Management relating to
finance is called
“FINANCIAL MANAGEMENT”.

MEANING
Financial management refers to
“efficient acquisition of finance,
efficient utilisation of finance,
efficient distribution and
disposal of surplus for smooth
working of company
 NOTES
FINANCIALMANAGEMENT
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.

Maintenance of
Proper Utilization of Funds
Liquidity

Profit
Meeting Financial
Maximisation
Commitments with
Creditors
 FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT

All Items in
Profit and
Loss Account The Amount of
Long-term and
Size and Short-term
Funds
Composition
of Fixed
Assets
Roles
Roles
of FM
of FM
Amount and
Size of debt
Composition
& equity in
of Current
capital
Assets
structure
 NOTES
FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT
F
I
N
A It means deciding in advance
how much to spend, on what to spend
N
according to the fund at your disposal.
C
I In general it includes:-
A
L (i) Determine the amount of finance
needed by an enterprise to carryout
P its operation smoothly.
L
A (ii) Determination of sources of fund.
N
(iii) Make suitable policies for proper
N
utilization of funds.
I
N
G
 FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT

Importance

It li
n
Collecting pre ks
sen
wit t
Optimum futu
h
re
Funds
Fixing the mos
o id in g t
Av Appropriate
ho c k s Capital
S
r pr is es Structure
Su
Make
pro r
util per Prope
izat
tm ent
of f
ina
ion
Inves
nce ci sio ns
De
 NOTES
FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT

WHY IS
n:
Q u e st io FINANCIAL PLANNING
ESSENTIAL??

FINANCIAL PLANNING IS ESSENTIAL FOR

Ans: SUCCESS OF ANY BUSINESS ENTERPRISE.
“FINANCE IS LIKE BLOOD OF A BUSINESS
WITHOUT IT A BUSINESS CAN’T SURVIVE .”

IMPORTANCE OF FINANCIAL PLANNING

OPTIMUM UTILISATION
#1 OF RESOURCES
The financial planning estimates
the precise requirement of funds
which means to avoid wastage
and over-capitalisation situation.
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 FINANCIALMANAGEMENT
FINANCIAL MANAGEMENT
#2FIXING THE MOST
APPROPIATE CAPITAL STRUCTURE
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.

HELPS IN INVESTING
#3
FINANCE IN RIGHT PROJECT
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 .

PROPER UTLISATION
#4 OF FINANCE

It helps in proper utilization of finance

:- Finance is the life blood of the
business. So financial planning
decides how fund to be utilized.
 NOTES
FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT

HELPS IN AVOIDING
#5 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.

IT LINKS PRESENT
WITH FUTURE
#6
Financial planning relates present financial
requirement with future requirement by
anticipating the sales and growth plans of
the company.
 BUSINESS STUDIES
XII (2023-24)

PART -2

VIDEO
NOTES
 NOTES
FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT

Investing/
Investment / Financing
Capital Budgeting
Decision
Decision

FINANCIAL
DECISIONS

Dividend
Decision
 FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT
I
This decision relates to
N
careful selection of assets
V
in which fund will be
E
invested by the firms.
S
T Factors affecting Investing Decision
M
#1
E CASH #2
N FLOW RETURN
T OF THE ON
PROJECT INVESTMENT
D
E #4
#3
C
I INVESTMENT
RISK
S CRITERIA
INVOLVED
I
O
N
 NOTES
FINANCIALMANAGEMENT
FINANCIAL MANAGEMENT
#1 CASH FLOW OF 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 .

RETURN ON INVESTMENT #2
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 .

#3 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.

#4 INVESTMENT CRITERIA
Along with return ,risk cashflow there are various
other criteria which helps in selecting proposal e.g.,
availability of Raw material
 NOTES
FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT
SOURCES
OF FUNDS

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It constitutes @t.me/sunilpanda2022
share capital and
retained earning.

BORROWED
FUNDS
It constitutes
Debentures
Loans & Bonds

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. The aspect of deciding the same is
called as FINANCING DECISION
 FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT
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.

Factors affecting Financing Decision

#1 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 .

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 NOTES
FINANCIALMANAGEMENT
FINANCIAL MANAGEMENT
#2 COST
The cost of raising finance from various
sources is different & finance manager
always prefer the source with minimum
cost.

FLOATATION COST #3
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 .

#4 RISK
More risk is associated with borrowed
fund as compared to owner’s fund .
finance manager compares the risk.
 NOTES
FINANCIALMANAGEMENT
FINANCIAL MANAGEMENT
#5 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.

CONTROL
#3
#6
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

#7 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.
 FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT
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.

Factors affecting Dividend Decision

#1 EARNINGS:-

i.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.
 NOTES
FINANCIALMANAGEMENT
FINANCIAL MANAGEMENT
#2 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 dividends.

CASH FLOW POSITION:- #3

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.

#4 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.
 FINANCIALMANAGEMENT
FINANCIAL MANAGEMENT
#5 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.

TYPES OF SHAREHOLDERS:- #3
#6
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 then company
should pay more in form of dividends.

#7 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.
 BUSINESS STUDIES
XII (2023-24)

PART -3

VIDEO
NOTES
 FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT

FINANCIAL LEVERAGE
/ 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

EQUITY
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 NOTES
FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT

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.
 7800365625

FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT
LET’S PROVE THIS SITUATION

SITUATION #1 SITUATION #2 SITUATION #3

Total Cap. = 50,00,000
Total Cap. = 50,00,000
Total Cap. = 50,00,000
Equity = 40,00,000 Equity = 30,00,000
Equity = 50,00,000
( 400000 shares @10 each )
( 500000 shares @10 each ) ( 300000 shares @10 each )

Debt = NIL. Debt = 10,00,000 Debt = 20,00,000

Tax @ 30% INTEREST @10% INTEREST @10%
EBIT = 7,00,000
Tax @ 30% Tax @ 30%
EBIT = 7,00,000 EBIT = 7,00,000

SOLUTIONS
EBIT = 7,00,000 EBIT = 7,00,000 EBIT = 7,00,000
-(Interest)= (0) -(Interest)= 1,00,000 (10% ) -(Interest)= 2,00,000(10%)
EBT = 7,00,000 EBT = 6,00,000 EBT = 5,00,000

-(Tax @30%)= 2,10,000 -(Tax @30%)= 1,80,000 -(Tax @30%)= 1,50,000

EAT = 4,90,000 EAT = 4,20,000 EAT = 3,50,000

EPS=EAT/No.of Shares EPS=EAT/No.of Shares EPS=EAT/No.of Shares

EPS=4,90,000/5,00,000 EPS=4,20,000/4,00,000 EPS=3,50,000/3,00,000

EPS is 0.98 paise per share EPS is 1.05 paise per share EPS is 1.16 paise per share
 NOTES
FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT

Hence it is proved that more

debt brings more income for
owners in the capital structure. FOR FREE NOTES
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BUT THIS STATEMENT @t.me/sunilpanda2022

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/ 50,00,000)×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.
 BUSINESS STUDIES
XII (2023-24)

PART -4

VIDEO
NOTES
 NOTES
FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT

CAPITAL
CAPITAL STRUCTURE
STRUCTURE

CAPITAL STRUCTURE MEANS

THE PROPORTION OF DEBT AND
EQUITY USED FOR FINANCING
THE OPERATIONS OF BUSINESS.

CAPITAL
STRUCTURE=

DEBT/EQUITY

EQUITY
 FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT
FACTORS AFFECTING
CAPITAL STRUCTURE

#1 CASH FLOW POSITION

The decision related to composition of capital structure also
depends upon the ability of business to generate enough cash
flow . the company is under legal obligation to pay fixed rate
of interest to debentures holders, dividend to preference
share and principal and interest amount for loan. Sometimes
company makes sufficient profit but it is not able to generate
cash inflow for making payments.

RETURN ON
INVESTMENT
#2
ROI is another important factor which helps in
deciding the capital structure . if return on investment
is more than rate of interest then company must
prefer debt in its capital structure whereas if ROI is
less than rate of interest then company should avoid
debt and rely on equity capital.
 NOTES
FINANCIALMANAGEMENT
FINANCIAL MANAGEMENT
#3 COST OF DEBT

If firm can arrange borrowed fund at

low rate of interest then it will prefer
more of debt as compared to equity.

TAX RATE #4
High tax rate make debt cheaper as interest Paid to
debt security holder is subtracted From income
before calculating tax. Whereas companies have to
pay tax on dividend paid to shareholders. So high tax
rate means prefer debt whereas low tax rate we can
prefer capital structure in equity.

#5 COST OF EQUITY
Another factor which helps in deciding capital structure is cost of
equity. Owners or equity shareholders expect a return on their
investment that is EPS [earning per share]. As far as debt in
increasing EPS then we can include it in capital structure But when
EPS start decreasing with inclusion of debt then we must depend
upon equity share capital only.
 FINANCIALMANAGEMENT
FINANCIAL MANAGEMENT
#6 FLOATATION COST
It refers to cost involved in issue of securities
such as broker’s commission , underwriters
fee, Advertisement of Offering share,
expenses on prospectus etc. firm prefer
securities which involve least flotation cost .

RISK #7
More risk is associated with debt as
compared to equity. finance
manager compares the risk.

#8 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.
 NOTES
FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT

CONTROL
#9 CONSIDERATIONS

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.

FIXED
OPERATING #10
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.
 FINANCIAL MANAGEMENT

The requirement of fixed

capital depends upon various
factors which are explained in
the upcoming pages

FIXED
CAPITAL

Investment in fixed assets is for

longer duration is called fixed
capital fixed capital is financed
through long term source of
finance such as equity share,
preference Share, debentures,
long term loan etc.
 NOTES
FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT
FACTORS AFFECTING FIXED CAPITAL

#1 NATURE OF BUSINESS
The type of business is involved in the first factor
which help in deciding the requirement of fixed
capital a manufacturing company needs more
fixed capital as compared to trading company as
trading company does not need plant, machinery
etc.

SCALE OF
OPERATION
#2
The company which are opening at large scale require
more fixed capital as they need more machinery and
other assets whereas small scale company need less
amount of fixed capital.

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 FINANCIALMANAGEMENT
FINANCIAL MANAGEMENT
#3 TECHNIQUE OF PRODUCTION
Companies using capital intensive
techniques require more fixed
capital whereas companies using
labour intensive techniques require
less capital.

TECHNOLOGY UPGRADATION #4
Industries in which technology upgradation is fast need more
amount of fixed capital as when new technology is invented
and they need to buy a new plant. Whereas those company
whose technology upgradation is slow they require less fixed
capital as they can manage with old machine.

#5 GROWTH PROSPECTS
Companies which are expanding and have higher growth plan
require more fixed capital as to expand they need to expand
their production capacity and to expand production capacity
companies need more plant and machinery so more fixed
capital.
 NOTES
FINANCIALMANAGEMENT
FINANCIAL MANAGEMENT
#6
ASSETS AVAILABLE ON LEASE

If assets are available on lease or EMI

then company would require less
Fixed Capital and if leasing facility is
not available then company required
more Fixed capital as they have to pay
lumpsum amount for the assets.

COLLABORATION OR JOINT VENTURES #7

Less Fixed capital is required for
a company which is going to
Collab with other companies.

#8 DIVERSIFICATION

If a company plan to diversify its business

operation or deal in Multi product then it
requires more Fixed Capital.
 FINANCIAL MANAGEMENT

It refers to excess of
current assets over
current liabilities.

WORKING
CAPITAL

Operating cycle is the time

period between acquisition of
raw material and the collection
of cash from receivables.
Longer the operating cycle,
longer will be the working
capital requirement.
 NOTES
FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT

FACTORS AFFECTING WORKING CAPITAL

#1 LENGTH OF OPERATING CYCLE

The amount of working capital directly
depends upon the length of operating cycle if
operating cycle is long then more working
capital is required whereas companies having
short operating cycle, the working capital
requirement is less.

NATURE OF #2
BUSINESS
In case of trading concern or retail shop the
requirement of working capital is less because length
of operating cycle is small. The wholesaler as
compared to retail shop require more working capital
as they have to maintain large stock.
 FINANCIALMANAGEMENT
FINANCIAL MANAGEMENT
#3 SCALE OF OPERATION

The firms operating at large scale need to maintain

more inventory. So they generally require large
working capital whereas firms operating at a small
scales require less working capital.

BUSINESS CYCLE FLUCTUATION #4

During boom period the market have more demands,
more production, more stock which means more
working capital is required. Whereas during
depression period low demand, less stock to be
maintained so less working capital is required.

TECHNOLOGY AND
#5 PRODUCTION TECHNIQUE
Company using labour intensive technique of
production then more working capital is required
whereas company using capital intensive technique
need less working capital.
 NOTES
FINANCIALMANAGEMENT
FINANCIAL MANAGEMENT
#6 GROWTH PROSPECTUS
Firms planning to expand their activities will
require more amount of working capital As for
expansion they need to increase sale of
production which means more raw material,
more inputs. So more working capital required.

CREDIT ALLOWED #7
If company is allowed credit facility to its customers then it
requires more working capital where as if company is not
allow credit facility to its customers then it requires less
working capital because in that case company can arrange
funds from cash sales.

#8 CREDIT AVAILABILITY
if Company Can avail a long term credit facility from its
suppliers then it requires less amount of working capital.
Whereas if credit is not availed or avail for short term then it
requires less amount of working capital.
 FINANCIAL
FINANCIAL MANAGEMENT
MANAGEMENT

AVAILABILITY OF RAW
#9 MATERIALS
Sometimes due to unavailability of Raw material or
lack of supply of raw material a Producer need to
maintain large amount of stock of raw materials so it
requires more working capital whereas if there is no
fear of shortage of raw material in market then
producer can maintain less stock of raw material
hence requirement of working capital is less.

EXTENT OF
COMPETITION
#10
In a highly competitive market a firm has to maintain large
amount of stock because they are following liberal credit
policy to retain customers, So more working capital is
needed. Whereas in less competition or monopoly market
firm can maintain less amount of working capital because it
can dictate terms according to its own requirements.

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