business finance
money required to carry out business activities
financial management
concerned with optimal procurement as well as the usage of finance
importance of financial management
- the amount of long term and short term funds to be used
- the size and composition of fixed assets in the business
- break up of long-term financial into debt, equity etc
- all item in the profit and loss account
- the quantum of current assets and its break up into cash, inventory and receivables
objectives of financial management
maximise shareholder’s wealth, which is referred to as the wealth-maximisation concept
three major financial decisions
- financing decision
- investment decision
- dividend dision
investment decision is further divided to
- long term
- short term
long term financial decisions are also called
capital budgeting decisions
short term financial decisions are also called
working capital decisions
factors affecting capital budgeting decisions
- cash flow of the project
- rate of return
- investment criteria required
factors affecting financing decisions
- cost
- risk
- floatation costs
- cash flow position of the company
- fixed operating cost
- control considerations
- state of capital market
financing decision is further divided to
- shareholders funds
- borrowed funds
factors affecting dividend decision
- amount of earnings
- stability of earnings
- stability of dividends
- growth opportunities
- cash flow positions
- shareholder’s preference
- taxation policy
- stock market reaction
- access to capital Market
- legal constraints
- contractual contraints
financial planning
the process of estimating the fund requirements of a buiness and specifying the sources of the fund
objectives of financial planning
- to ensure avalibility of funds whenever requires
- to see that the firm does not raise recourses unnecessarily
advantages of financial planning
- makes the firm better prepared to face the future
- helps in avoiding buiness sock and surprises and help prepare for the future
- it helps in co-ordinating various functions
- reduce wastage, duplication of efforts and gaps in planning
- link the present withh the furture
- provides a link between investment and financial decisions on a continous basis
- makes the evaluation of actual performance
capital structure
mix between owners and borrowed funds
formula for capital structre
debt/equity
when is the favorable financial liverage
when
rate on intrest> rate of intrest
rate of return
earning before intrest and tax/ capital employeed
trading of equity
the increase in profit earned by the equity shareholders due to the preference of fixed financial charges like intrest.
factors affecting the choice of capital structure
- cash flow position
- interest coverage cost
- debt service coverage ratio
- return on investment
- cost of debt
- tax rate
- cost of equity
- floatation cost
- risk condersation
- flexibility
- control
- regulatory framework
- stock market coditions
- capital structure of other companies
a company has cash payment obligations for
- normal buiness operation
- invesvtment in fixed assets
- meeting the debt service commitments
interest coverage ratio
ICR= EBIT/interest
debt service coverage ratio
(profit after tax+ depreciation+ interest+ non cash exp)/(pref div+interest+ repayment obiligation)
