1. What do you mean by Business Finance ?
Ans - Business Finance is referred to an activity of funds, use of funds, and distribution of profits by a business firm .
2. What is Financial Management ? What are its objectives ?
Ans - Financial management deals with planning , organising , directing and controlling of financial activities of the enterprise .
Objectives -
1. Profit Maximisation - Profit maximisation means augmentation of earning profit . It can be done by using the finances in a best possible way . A finance manager should keep in mind the risk element while increasing the profit .
2. Wealth Maximisation - Wealth maximisation is the appropriate objective of an enterprise . It refers to all the efforts of maximising the net present of the enterprise .Every financial decisions should be based on cost - benefit analysis .
3. Liquidity - There is always a need to keep adequate cash to pay suppliers and creditors to meet day to day needs of the concern liquidity of assets is linked with the inflow and outflow of funds.
4. Proper utilisation of earnings - A company has to use its earnings in such a way that it satisfies the shareholders as well as helps in augmenting funds for the enterprise .
5. Flexibility - An enterprise carries on its activities in an uncertain environment . There should be a flexibility in the financial investment pattern so that funds can be adjusted whether a need arises .
6. Easy Availability of Funds - A good financial management system should aim at meeting various needs of enterprise . The funds should be easily available whenever a need arises .
3. What are the decisions related with financial management ?
Ans - A. Investment Decisions - Investment decisions refers to the determination of total amount of assets to be held in the firm . Investment decisions may be classified as -
1. The long term investment decision which is termed as capital budgeting .
2. Short term investment decision as working capital management.
Capital budgeting is the process of making investment decisions of those expenditure which give benefit over a long time.
Short term investment decision is related to the allocation of funds among current assets.
Factors affecting investment decisions are -
1. Rate of Return - When more than one projects are available then the project offering higher rate of return may be preferred.
2. Cash flow on investment - The inflow and outflow of cash from the investment decisions should be taken into account . Inflow of cash should be more than outflow of cash .
3. Capital Budgeting techniques - These techniques should be used to take appropriate investment decision .
B. Financial Decisions - After making the investment decision , it must decide the best means of financing these commitments . The financial decision is not only concerned with how best to finance new assets but also concerned with the best overall mix of financing for the firm .
Factors affecting financing decision -
1. Cost - The first thing to be seen in financing decision is the cost of raising funds from different sources.
2. Risk - The finance manager has to evaluate risk element of various sources and then take an appropriate decision.
3. Cash Flow Position - The source of funding should be such in which cash inflows are more and cash outflows are less.
C. Dividend Decision - The dividend decision is concerned with the quantum of profits to be distributed among shareholders .
Factors affecting dividend decision -
1. Level of Earnings - The amount and trend of earning is an important aspect of dividend policy.
2. Nature of industry -Nature of industry of which the company is engaged to which the company is engaged also effect the dividend decision .
3. Government economic policy - The dividend policy of a firm has to be adjusted to the economic policy of the government .
4. What are the functions of a financial manager ?
Ans - 1. Financial Forecasting and planning - A financial manager has to estimate the financial needs of a business. Then he has to plan the funds needed in the future.
2. Acquisition of funds - After making financial planning the next step will be to select the sources of funds. These sources may be shares , debentures , banks etc.
3. Investment of funds - The objectives of maximising profit will be achieved only when funds are efficiently used. So a financial manager has to keep in mind the principles of safety , liquidity and soundness while investing funds .
4. Maintaining Proper Liquidity - A financial manger is required to determine the needs for liquids assets and then arrange liquid assets in such a way that their is no scarcity of funds.
5. Helping in valuation decisions - For making valuation, a finance manager should understand various methods of valuing shares and other assets so that correct vales are arrived at .
6. Appraisal of financial performance - A financial manager has to ensure that funds allocated to different departments have been properly used.
5. What do you mean by financial planning ? What are the objectives of financial planning ?
Ans - Financial planning means deciding the advance how much to spend , on what to spend , depending upon the availability of funds. It aims at estimating the capital requirements and determining its composition.
Objectives -
1. To determine the financial resource required to meet the company's operating programme .
2. To develop best plans to obtain the required external funds.
3. To estimate the sources from which financial needs are to be met.
4. To formulate programmes to provide the most effective profit - volume - cost relationship .
5. To analyse the financial results of operations .
6.What are the importance and limitations of financial planning ?
Ans - Merits -
1. Optimum utilisation of funds - The plans for raising funds must be commensurate with requirements . A good plan facilitates maximum utilisation of funds.
2.Foresighting financial requirements - Financial planning forecasts needs for finances in future and then sources are planned to meet them.
3. Ensures coordination - Financial planning helps in coordinating various sources of funds and also in functional areas.
4. Ensures financial control - The standards of performance are fixed and evaluation is done on regular basis to control the finances.
5. Eliminates wastage- Financial planning helps in eliminating wastages of resources.
Demerits- 1. Difficulty in forecasting - Financial planning are prepared by taking into account some expected assumptions about the future. Since the future is always uncertain and thinks may not happen as these are expected so the utility of financial planning is limited.
2. Difficulty in change - A changed situations may demand change in financial plan but it becomes very difficult to change financial plan under such situation .
3. Rapid changes- The growing mechanisation of industry is bringing rapid changes in industrial process. It becomes very difficult to adjust a financial plan for incorporating fast changing situations .
7. What are the features of financial planning ?
Ans - 1. Simplicity - A financial plan should be so simple that it may be easily understood even by a layman .
2. Flexibility - Financial planning should allow a scope for adjustment as and when new situations emerge.
3. Cost - The cost of raising capital is an important consideration in selecting a financial plan.
4. Based on clear cut objective- Financial planning should be done by keeping in view the overace objectives of the company.
5. Profitability - A financial plan should arrange in such a way that which increase productivity as well as profitability of the business organisation.
8. What is Capital Structure ? What are the essential features of capital structure ?
Ans- Capital structure mean the portions of debt and equity used for financing the operations of a business.
Features -
1. The capital structure should be flexible .
2. Maximum possible use of leverage.
3. It should involve minimum possible risk of loss of control .
4. To avoid undue financial risk with the increase of debt .
5. It must avoid undue restrictions in arguments of debt .
9. What are the factors influence Capital Structure ?
Ans - 1. Nature and size of a firm - Nature and size of a firm also influence its capital structure . Small companies have to depend mainly upon owned capital , on the other hand large company can arrange long term loans at reasonable terms.
2. Flexibility - Capital Structure of a firm should be flexible i.e. it should be such as to capable of being adjusted according to the needs of the changing conditions . Thus, the term flexibility also influence capital structure .
3. Assets Structure - The liquidity and the compositions of assets should also kept in mind while selecting the capital structure. If fixed assets constitute a major portions of the total assets of the company . It may be possible for the company to raise more of long term debts.
4. Capital market conditions - Capital market conditions do not remain the same future sometimes there may be depression while at other times there may be boom in the market . Thus capital market conditions should be kept in mind while selecting the capital structure.
5. Purpose of financing - If funds are required for a productive purpose.
