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Business Finance

STD. XII

Secretarial Practice

Introduction
Business finance is a broad concept. It deals with all financial activities of the business. The term business covers both commerce and industry. In simple words, business finance applies to all financial activities of agriculture, industry, banking, transport, insurance, etc. Thus the scope of business finance includes commercial finance, industrial finance, property finance, corporate finance and agricultural finance. In an academic world, the term corporate finance is now known as financial management.

Financial Management
Financial management is a specialised function of general management. It refers to management of business funds. It is mainly concerned with raising of finance and its effective utilization for achievement of goals of the organization.

Definition
Kuchal S.C, Financial management deals with procurement of funds and their effective utilization in business.

Role of financial management


Functions 1. Routine functions: Record keeping and reporting Preparation of various financial statements Cash planning Credit Management Providing information to BOD on current financial position for making decisions of purchases , marketing , pricing, etc.

2. Executive Functions: Forecasting financial requirements Deciding sources of funds Investment decisions Dividend policy Checking and analysis of financial performance Advising BOD

Objectives of financial management


1. Profit Maximization 2. Wealth Maximization: value maximization maximising market value of shares

Financial Planning
Financial planning is an important function of financial management. It is a continuous process in day to day administration of business. It is not possible for business manager to go ahead unless he prepares financial plan. FP is not only required for profit making but even for survival of a firm. The term FP refers to assessment of financial requirements and arranging the sources of capital.

Definition
J.H. Boneville The financial plan of a corporation has two fold aspects, it refers not only to capital structure of the corporation but also to the financial policies which corporation has adopted or intends to adopt.

Significance of FP
Elimination of waste Co-ordination Dynamism Communication Decision making Integration Futuristic

Capital Structure
Capital structure constitutes two wards i.e. capital and structure. Capital refers to investment of funds in the business while structure means arrangement of different components in proper proportion. Thus capital structure means mix-up of various sources of funds in desired proportion.

Definition
Weston and Bringham Capital structure is the permanent financing of firm represented by long term debt ,preferred stock and net worth.

Components of capital structure


Equity share capital Preference share capital Retained earnings Borrowed capital (a)Debentures (b)Term loan

Factors influencing capital structure


Internal Factors 1. Requirement of capital 2. Size and nature of business 3. Growth of business firm 4. Adequate and stable earning 5. Cash position 6. Period of finance 7. Future plan 8. Trading on equity 9. Capital earing 10. Attitude of management

External factors
1. Market condition 2. Attitude of investors
3. Cost of capital

4. Government regulations
5. Attitude of financial institutions 6. Rate of interest 7. Taxation 8. Competition

Fixed Capital
The concept of fixed capital was first theoretically analysed by David Recardo. It refers to any kind of real or physical capital i.e. fixed assets. It is not used for the production of goods. Fixed capital is that portion of total capital which is invested in fixed assets such as land, building, equipment, etc. According to Karl Marx, Fixed capital also circulates, except that the circulation time is much longer.

Factors affecting requirement of fixed capital


Nature of business Size of business Growth and expansion of business Stage of development of business Business cycle

Working Capital
There is no universally accepted definition of working capital. Various financial experts have used this term in different ways. difference between current assets and current liabilities. Gerstenbergh, The excess of current assets over current liabilities Western and Brigham, WC refers to the firms investment in short term assets cash, short term securities, accounts receivables and inventories.

Factors affecting the requirement of Working Capital


Nature of business Size of business Volume of sale Production cycle Business cycle Term of purchase and sale Credit control Growth and expansion Management ability External factors Requirement of cash Seasonal fluctuation