Financial Management

(As per the Revised Syllabus of Semester - II 2016 Pattern of SPPU for MBA)

Prof. Dr. Mahesh L. Abale

Professor and Head of the MBA Department (DMSR),
MAEERS, Maharashtra Institute of Technology,
Kothrud, Pune - 411038,
Maharashtra, India.

Dr. Shriprakash Ghanshyamdas Soni

Assistant Professor,
MIT College of Engineering’s
Centre for Management Studies and Research (CMSR),
Kothrud, Pune - 411038,
Maharashtra, India.

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 PREFACE
It gives us great pleasure to present this book titled, ‘Financial Management’ to our intelligent
and dynamic readers, the scholar students of different Management Courses and knowledge seekers.
This book intends to cover, in detail, the entire Syllabus as per 2016 Pattern of ‘Financial
Management’ of MBA Programme offered by Savitribai Phule Pune University. Apart from that, this
book is also useful to the UG and PG students of other universities who have ‘Financial Management’
as a subject in their respective curriculum. This book is a sincere attempt to provide readers with latest
study material in simple and lucid language. To make the topics clear to the students, various
examples have been included.
Financial Management mainly covers various basic financial aspects of the business
organizations. This book will help to understand the basic concepts of Business Finance, Financial
Planning, Financial Management, Procurement of Funds, Allocation of Funds, Utilization of Available
Resources, etc. It also provides various tools of Financial Statement Analysis, Capital Budgeting,
Capital Structure, etc. which would facilitate decision making. Due to Globalization, Liberalization,
and Privatization, it is essential to have basic knowledge of Finance and Financial Management for all
the Entrepreneurs, Managers and Executives who are working at domestic, national and international
level. For developing analytical abilities and to face the business situations, basic information and
knowledge is must which is provided in this book.
Looking at the new trends and scenarios, and acknowledging necessity of studying various
dimensions of Finance and Financial Management, the Savitribai Phule Pune University has included
this subject in their MBA Programme.
Success can never be achieved single handedly, so it is our duty to express our gratitude towards
all those who provided their help and support. We express our special thanks to Prof. Dr. V.D. Karad,
Executive President and Managing Trustee of MAEER’s MIT, Prof. Rahul V. Karad – Vice President,
MAEER’s MIT, Prof. Dr. Mangesh Karad – Secretary & Executive Director, MAEER’s MIT Group
of Institutions for their continuous motivation in writing the said book. In addition, we wish to express
our gratitude to our colleagues for their help and support. We would also like to express our sincere
thanks to the Publisher of Himalya Publishing House Pvt. Ltd., Mr. S.K. Srivastava – Regional
Manager, Mr. Abhijit, Ms. Archana, Ms. Lalita and all the staff members of Himalaya Publishing for
their willing cooperation and support. Our words fall short to express our feelings towards our family
members, colleagues and our friends who extended their whole hearted best wishes and encouraged us
throughout.
Suggestions of readers are most welcome and will be acknowledged with appreciation.

With best wishes.

Authors
 SYLLABUS
Semester II Specialization NA
Course Code 202 Type Generic Core
Course Title Financial Management (FM)
Course Objectives:
1. To understand various concepts related to financial management.
2. To study in detail, various tools and techniques in the area of finance.
3. To develop the analytical skills this would facilitate the decision making in business situations.

Unit No. Contents No. of

Sessions
Unit – 1 Business Finance: (Hours:
Introduction of Business Finance: Meaning, Definition of Financial Management, 3+2)
Goals of Financial Management (Profit Maximization and Wealth Maximization),
Modern Approaches to Financial Management (Investment Decision, Financing
Decision and Dividend Policy Decisions), Finance and Other Related Disciplines,
Functions of Finance Manager, Key Strategies of Financial Management, Financial
Planning – Principles and Steps in Financial Planning.
Unit – 2 Capital Structure: (Hours:
Meaning, Factors Affecting the Capital Structure, Different Sources of Finance and its 8+2)
Types, Concept and Measurement of Cost of Capital, Measurement of Specific Costs
WACC, Trading on Equity and its Types.
Unit – 3 Techniques of Financial Analysis: (Hours:
Meaning, Nature, Objectives, Understanding of Financial Statements, Schedule VI of 8+2)
Companies Act, Tools of Analysis, Interpretation and Limitations of Financial
Analysis, Fund Flow Statement (Working Capital Basis), Understanding Cash Flow
Statement – Difference between Cash Flow and Fund Flow Statement, Ratio Analysis
(Computation and Interpretations of Ratios).
Unit – 4 Capital Budgeting: (Hours:
Meaning, Definition and Types of Evaluating the Project on the Basis of Traditional 8+2)
Techniques and Modern Techniques (viz,. Payback Period, Discounted Payback
Period, NPV, ARR, IRR, PI), Time Value of Money.
Unit – 5 Working Capital Management: (Hours:
Nature and Scope, Components of Working Capital, Operating Cycle, Types of 8+2)
Working Capital, Sources of Working Capital Financing, Factors Affecting Working
Capital, Estimation of Working Capital Requirement.
Note:
1. Theory 30% and Numerical Problems 70%.
2. Numerical Problems will be asked on following topics only –
Calculation of Cost of Capital: Specific Costs – Cost of Equity/Preference/ Retained Earnings and Debt, Weighted
Average Cost of Capital, Leverages.
Problems on Ratio analysis (Computation and Interpretations of Ratios).
Simple Problems on Fund Flow Statement
Capital Budgeting: Payback Period, Discounted Payback Period, NPV, ARR, IRR, PI.
Problems on Estimation of Working Capital.
 CONTENTS

Unit Number Unit Name Page Nos.

1. Business Finance 1 – 12

2. Capital Structure 13 – 57

3. Techniques of Financial Analysis 58 – 133

4. Capital Budgeting 134 – 163

5. Working Capital Management 164 – 195

Multiple Choice Questions (MCQs) 196 – 229

 Chapter 1

Business Finance

Contents
 Introduction
 Definition, Characteristics and Nature of Business Finance
 Definition of Finance and Financial Management
 Goals of Financial Management (Profit Maximization and Wealth Maximization)
 Modern Approaches to Financial Management (Investment Decision, Financing Decision
and Dividend Policy Decisions)
 Finance and Other Related Disciplines
 Functions of Finance Manager
 Key Strategies of Financial Management
 Financial Planning – Principles and Steps in Financial Planning.

Introduction
Every Business Organization needs finance to meet their business activities and
requirements irrespective of their nature, size and type of business. Every type of business
activity depends on finance. Hence, finance is called lifeblood of a business organization.
Finance may be called capital, investment, fund, etc., but each term has different meanings and
unique characters. To increase the profit is the ultimate aim of any type of economic activity.
Finance plays an important role in growth and development of every Business Organization
because it is a starting point of every business activity.

Definition, Characteristics and Nature of Business Finance

In simple words, Arrangement of funds is called finance. Finance word is very deep and in
modern era, this word is also known as Business Finance.
2 Financial Management

Definitions of Finance:
 According to Khan and Jain, “Finance is the art and science of managing money”.
 According to Oxford Dictionary, the word ‘Finance’ denotes ‘Management of Money’.

Definitions of Business Finance:

 According to B. O. Wheeler, Business Finance is ‘that business activity which is concerned
with the acquisition and conservation of capital funds in meeting the financial needs and
overall objectives of business enterprise’.
 According to Bonneville and Deway, “Business finance consists of the raising, providing,
managing of all the money, capital or funds of any kind to be used in connection with the
finance”.
 According to Guthmann and Dougall, “Business finance can be broadly defined as the
activity concerned with planning, raising and administering of funds used in the business”.
 According to Parhter and Wert, “Business finance deals primarily with raising, administering
and disbursing funds by privately owned business units operating in nonfinancial fields of
industry”.

Characteristics of Business Finance:

1. Business finance includes all types of funds used in business.
2. It is required in all kinds of business organizations.
3. The amount of business finances differs from firm to firms depending upon their size, nature
of business. It also varies from time to time.
4. It involves estimation of funds.
5. It is concerned with raising funds from different sources as well as investment of funds for
different purposes.

Nature of Business Finance:

1. Finance is concerned with cash and every business transaction involves cash directly or
indirectly.
2. The financial resources are always insufficient and limited. Hence, it needs scientific planning
and proper control in order to achieve the desired result.
3. Finance function is the task of procurement and utilization of funds. It covers financial
planning, forecasting of cash receipt and raising of funds, use and allocation of funds and
financial control.
4. Finance is an important function of every organization, as money is required to purchase raw
materials, to pay wages and salaries, electricity expenses and so on. Therefore, finance must
be readily available as and when required.
5. Finance is the basis of every business organization because it is life blood of every business
organization.
Business Finance 3

Corporate Finance:
Corporate finance covers the tools used by financial professionals to analyze, evaluate and make
financial decisions to achieve its goal of maximizing the value of the firm while taking on a minimum
amount of risk. Corporate finance covers several types of financial decisions which include investment
decisions, financing decisions, payout decisions and risk management decisions etc.

Meaning and Definition of Financial Management:

The term ‘Finance’ refers Management of Funds. It may be defined as planning, organizing,
directing and controlling of financial activities in a business enterprise. Financial Management (FM) is
responsible for estimation of financial resources, their procurement and their application in a manner
in which they help, the enterprise grow according to well defined objectives. In short, FM is concerned
the acquisition, financing, and management of assets with some overall goal in mind.

Definitions of Financial Management

According to –
1. Solomon Ezra and Jhon Pringle: “Financial Management is concerned with the efficient use
of an important economic resource namely, capital funds”.
2. S.C. Kuchal: “Financial Management deals with procurement of funds and their effective
utilization in the business”.
3. Dr. S. N. Maheshwari: “Financial management is concerned with raising financial resources
and their effective utilization towards achieving the organizational goals”.
4. Richard A. Brealey: “Financial management is the process of putting the available funds to
the best advantage from the long-term point of view of business objectives”.
5. Howard and Uptron: “Financial management is an application of general managerial
principles to the area of financial decision making”.
6. Weston and Brigham: “Financial management is an area of financial decision making,
harmonizing individual motives and enterprise goals”.
7. Joshep and Massie: “Financial management is the operational activity of a business that is
responsible for obtaining and effectively utilizing the funds necessary for efficient operations”.

Goals of Financial Management

(Profit Maximization and Wealth Maximization)
There are several goals of financial management. But two main goals are profit maximization and
wealth maximization.
1. To earn the maximum amount profit is the main aim of every business organizations.
2. To increase the net present value of business, i.e., maximization of shareholders wealth in the
form of dividend and capital gains is another important goal of financial management.
3. To ensure availability of funds.
4. To keep the cost of funds low.
4 Financial Management

5. To ensure efficient utilization of funds.

6. To ensure reasonable return and safety of funds.
7. To create and establish suitable system for maintaining financial discipline among the
organization.
8. To plan a sound capital structure, i.e., combination of debt and equity capital.
9. To ensure adequate returns to the shareholders.
10. Apart from profit maximization and wealth maximization, organization should also
concentrate on sales maximization, growth maximization, ROI maximization for survival.

Profit Maximization and Wealth Maximization:

Financial Management is concerned with the proper utilization of funds in such a manner that it
will increase the value plus earnings of the firm. Wherever funds are involved, financial management
is there. There are two supreme objectives of Financial Management, i.e., Profit Maximization and
Wealth Maximization. Profit Maximization as its name signifies refers that the profit of the firm
should be increased while Wealth Maximization aims at increasing the worth of the entity.

Meaning and Definition of Profit Maximization:

Profit Maximization is the ability of the firm in producing utmost output with limited input, or it
uses minimum input for producing stated output. It is termed as the primary objective of the company.
It has been usually recommended that the clear motive of any business organization is to earn a
profit, it is necessary for the success, survival, and growth of the company. Profit is a long-term
objective, but it has a short-term perspective, i.e., one financial year.
Profit can be calculated by deducting total cost from total revenue. Through profit maximization,
a firm can be able to find out the input-output levels, which gives the highest amount of profit.
Therefore, the finance officer of an organization should take his decision in the direction
of maximizing profit although it is not the only objective of the company.

Meaning and Definition of Wealth Maximization:

Wealth maximization is the ability of a company to increase the market value of its common
stock over time. The market value of the firm is based on many factors like their Goodwill, Sales,
Services, Quality of Products, etc.
It is the adaptable goal of the company and vastly recommended standard for evaluating the
performance of a business organization. This will help the firm to increase their share in the market,
attain leadership, maintain consumer satisfaction.
It has been commonly accepted that the fundamental goal of the business enterprise is to increase
the wealth of its shareholders, as they are the owners of the undertaking, and they buy the shares of the
company with the expectation that it will give some return after a period. This states that the financial
decisions of the firm should be taken in such a manner that will increase the Net Present Worth of the
company’s profit. The value is based on two factors namely:
1. Rate of Earning per Share
2. Capitalization Rate
Business Finance 5

Key Differences between Profit Maximization and Wealth Maximization:

The major differences between profit maximization and wealth maximization are:
1. The process through which the company is capable of increasing earning capacity known as
profit maximization. On the other hand, the ability of the company in increasing the value of
its stock in the market is known as wealth maximization.
2. Profit maximization is a short-term objective of the firm while the long-term objective is
wealth maximization.
3. Profit maximization ignores risk and uncertainty whereas wealth maximization considers both.
4. Profit maximization avoids time value of money, but wealth maximization recognizes it.
5. Profit maximization is necessary for the survival and growth of the enterprise. Conversely,
wealth maximization accelerates the growth rate of the enterprise and aims at attaining the
maximum market share of the economy.

Functions of Financial Management:

Following are the important functions of financial management:
1. Estimation of capital requirement with regards to company is the main function of financial
management.
2. After proper estimation the proper capital structure need to be decided.
3. Proper choice of sources of funds need to be decided in case of procurement of additional
funds, i.e., issue of debentures, public deposits, loan from banks and financial institutions etc.
4. Investment of funds in profitable ventures.
5. Distribution of dividend and retention of profit in case of disposal of surplus.
6. Efficient management of cash.
7. Need to use different financial techniques for precise financial control.

Modern Approaches to Financial Management (Investment Decision, Financing

Decision and Dividend Policy Decisions):
Approaches of Financial management are classified into two categories:
1. Traditional Approach
2. Modern Approach
1. Traditional Approach:
Traditional approach is the initial stage of financial management, which was followed, in the
early part of during the year 1920 to 1950. This approach is based on the past experience and the
traditionally accepted methods. Main part of the traditional approach is raising of funds for the
business concern. Traditional approach consists of the following important area.
1. Arrangement of funds from lending body, i.e., from financial institutions.
2. Arrangement of funds through various financial instruments like shares, bonds, etc.
3. Finding out the various sources of funds.
6 Financial Management

Main Limitations of Traditional Approach:

1. Ignored routine problems.
2. Ignored working capital financing.
3. No emphasis of allocation of funds.
4. Time value of money is not considered.
2. Modern Approach:
This approach is more balanced because it says that financing is concerned with procurement of
funds and wise application of funds. It gives equal weightage to both procurement of funds and
utilization of funds. It is divided into four major decisions:
1. Financing Decision.
2. Investment Decision.
3. Dividend Policy Decision.
4. Funds Requirement Decision.
2.1 Financing Decisions: These decisions basically deal with acquiring of funds and deployment
of funds.
2.2 Investment Decisions: These decisions are related with selection of assets. Assets are
classified into two types:–
(a) Fixed Assets
(b) Current Assets
The decisions regarding Fixed Assets are known as Capital Budgeting Decisions.
The decisions regarding Current Assets come under Working Capital Management.
2.3 Dividend Policy Decisions: Whatever profit company earns, the owners are entitled to
receive them. These decisions are related with distribution of dividends, i.e., to decide how
much profit company should distribute as a dividend and how much should be retained in
business.
2.4 Funds Requirement Decisions: Estimation of the financial requirement of the business
concern, i.e., to estimate, how much finance is required for acquiring fixed assets, forecasting
the amount needed to meet the working capital requirements in future. Funds Requirement
Decisions are also called as Liquidity Decisions.

Finance and Other Related Disciplines:

Financial management is one of the significant parts of overall management, which is directly
related with various functional departments like marketing, production, personnel, etc. Financial
management covers broad area with multidimensional approaches. The following are the important
scope of financial management.
1. Finance and Economics:
Economic concepts like micro and macroeconomics are directly applied with the financial
management approaches. Investment decisions, micro and macro-environmental factors are directly
related with the functions of financial manager. Financial management also uses the economic
Business Finance 7

equations like economic ordering quantity, money value discount factor, etc. Financial economics is
one of the upcoming area, which provides huge opportunities to finance, and economical areas.
2. Finance and Accounting:
Accounting records includes the financial information of the business organization. Hence, one
can easily comprehend the relationship between the financial management and accounting. In the
ancient periods, both financial management and accounting were treated as a same discipline and then
it was merged as Management Accounting because this part is very much useful to finance manager to
take several decisions. But nowadays financial management and accounting discipline are separate and
interconnected.
3. Finance and Mathematics:
In today’s competitive era financial management applied large number of mathematical and
statistical tools and techniques. They are also called as econometrics. Economic order quantity, ratio
analysis, working capital analysis, discounting factor, time value of money, present value of money,
cost of capital, capital structure theories, dividend theories are used as mathematical and statistical
tools and techniques in the field of financial management.
4. Finance and Production:
Production management is the operational part of every business organization which helps to
increase the money into profit. Profit of every business organization depends upon the production
performance. Production performance needs finance, because production department requires
machinery, raw materials, wages, operating expenses, etc. These expenditures are decided and
estimated by the finance department and accordingly, the finance manager allocates the appropriate
finance to the production department. The finance manager must be aware about the operational
processes and essential finance required for each process of production activities.
5. Finance and Marketing:
Manufactured goods are sold in the market with innovative ideas and modern ways. For this, the
marketing department also needs finance to meet their departmental requirements. The finance
manager or finance department is liable to allocate adequate finance to the marketing department.
Hence, marketing and finance are interconnected and depends on each other.
6. Finance and Human Resource:
Financial management is also associated with human resource department, which provides
required manpower to all the functional areas of the organization. Finance manager should cautiously
evaluate the requirement of manpower to each department and allocate the finance to the human
resource department as wages and salaries, remunerations, commissions, bonus, pensions and other
monetary benefits to the human resource department. Hence, finance is directly related with human
resource management.
7. Finance and Costing:
Cost efficiency is the foremost strategic advantage to a business organization which will greatly
contribute towards its profitability, competitiveness and sustainability. A finance manager has to
comprehend and manage cost through suitable tools and techniques including Budgeting, Marginal
Costing, Standard Costing, Activity-based Costing, Kaizen Costing, Target Costing, etc.
8 Financial Management

8. Finance and Quantitative Methods:

Financial management is also closely related with quantitative methods such as discounting
techniques, present value techniques, probability, linear programming, etc., are useful in examining
difficult financial management problems. Therefore, the financial manager must be familiar with
several tools, techniques of quantitative methods.
9. Finance and Taxation:
All financial decisions are likely to have tax implications. Therefore, finance manager must have
sound knowledge in taxation, both direct and indirect taxes.
10. Finance and Law:
Apart from taxation knowledge, finance manager should be familiar with the knowledge of Legal
Environment, Business Laws, Corporate Laws, Commercial Contracts, Import Export Guidelines,
International Trade and Patent Laws etc.
11. Finance and Banking:
A good knowledge of banking operations and ancillary services is required for a finance manager
because banking has completely undergone a change in today’s environment.
12. Finance and Treasury Management:
Every business organization including banks treasury has become an important function and
discipline. Therefore, every finance manager should be well versed in treasury operations.
13. Finance and Insurance:
Identify and evaluate the commercial insurance requirements, choice of products and available
reliable insurers in the market, analyze the applicability according to needs, cost effectiveness,
techniques ensuring appropriate and optimum coverage, handling of claims, etc., fall within the area of
finance manager’s scope.
14. Finance and Information Technology:
A finance manager must know how to incorporate finance and costing operations through
software packages including ERP, SAP, etc. The finance manager must take active part in evaluation
of various available options, identifying the best one in the implementation of such packages in the
business organization for smooth functioning and prompt reporting.

Functions of Finance Manager:

For carrying out its different functions effectively and efficiently management requires different
financial information and data in simple and more analytical form. This is provided by finance
manager. A person who deals with finance-related activities is called a finance manager. Finance
manager is considered to be the eye and brain of the management as far as finance and financial matter
is concerned.
Business Finance 9

Finance Manager’s Role:

1. Forecasting financial requirements of business organization.
2. Acquiring necessary capital/raising of funds for business organization.
3. Allocation of funds to the different departments of the business organization.
4. Take appropriate investment decisions.
5. Proper cash management.
6. Constantly coordinate with other departments.
7. Profit planning for dividend distribution and profit retention.
8. Understanding capital markets according to environment.

Functions/Duties of Finance Manager:

1. Finance Manager should take decisions related to Capital Budgeting.
2. Finance Manager is responsible for proper Working Capital Management.
3. Finance Manager should formulate the appropriate Dividend Policy according to the
objectives of the organization.
4. Finance Manager is liable for Investment Decisions, Wealth Maximization and Finance
Control in the organization.
5. Finance Manager is responsible for Profit Maximization (Profit After Tax)
6. Finance Manager is accountable for Assets Management and Allocation of Income.
7. Finance Manager is answerable for Corporate Taxation.
8. Finance Manager is liable for Performance Evaluation of the business organization.
9. Finance Manager should always try for Maximizing Earnings Per Share.
10. Finance Manager is responsible for Shareholder’s Wealth Maximization

Key Strategies of Financial Management

The areas of key strategies are identified by financial management to achieve the desired goals
and objectives of an organization. The key strategies of financial management are as follows:
1. Determining Financial Needs: The financial manager should ensure availability of sufficient
financing according to the requirement of business organization from time to time.
2. Determining Sources of Funds: The financial manager has to select different sources of
funds according to the situation for short-term or long-term requirement.
3. Optimal Capital Structure: The finance manager has to set up an ideal capital structure and
make sure the highest rate of return on investment.
4. Profit Planning and Control: Profit planning and control has immense importance in the
financial activities of today’s business era.
5. Project Planning and Evaluation: A sizeable portion of the initial capital must be invested
in long-term assets of a firm. Also the inaccuracy of judgment in project planning and
evaluation should be minimized.
10 Financial Management

6. Capital Budgeting: Capital budgeting decisions are most crucial and they have long-term
implications. Therefore, they should relate to sensible allocation of capital.
7. Financial Analysis: It is the evaluation and explanation of a firm’s financial position and
operations which involves a comparative study of accounting data.
8. Cost-Volume-Profit Analysis: This is popularly known as the ‘CVP relationship’. For this
purpose, fixed costs, variable costs and semi-variable costs have to be analyzed.
9. Fixed Assets Management: Land, building, machinery and equipment, furniture are the
firm’s fixed assets and intangibles assets such as patents, copyrights, goodwill, and so on. The
acquisition of any fixed assets involves capital expenditure decisions and long-term
commitments of funds.
10. Working Capital Management: Working capital is a financial lubricant which keeps
business operations going. It is the life-blood of a business operation.
11. Dividend Policies: Decisions related to formulation of dividend policies and distribution of
dividend is always crucial for the management. Considering future plans of expansion and
need of working capital, the Management takes decisions related to distribution of dividend.

Financial Planning – Principles and Steps in Financial Planning

Meaning of Financial Planning:
According to Business Dictionary, “Financial Planning means long-term profit planning aimed at
generating greater return on assets, growth in market share, and at solving foreseeable problems”.
Financial planning is an important part of financial management. It is the process of determining the
objectives; policies, procedures, programmes and budgets to deal with the financial activities of an enterprise.
Financial planning reflects the needs of the business and is integrated with the overall business
planning. Proper financial planning is essential to permit the business enterprise to have right amount
of capital to continue its operations effectively and efficiently. It involves certain important decisions
so that funds are continuously available to the company and are used efficiently. These decisions
highlight the scope of financial planning.

Principles:
1. Set measurable and achievable goals.
2. Understand the consequences of financial decisions on other financial issues.
3. Re-evaluate the financial plan periodically.
4. Start financial planning on the basis of available resources.
5. Consider total picture of an organization while doing financial planning.
6. Don’t confuse financial planning with investing.
7. Don’t imagine impractical returns on investments.
8. Don’t wait until a financial crisis to start planning.
9. Proper implementation of Financial Plan.
10. Monitor the Financial Plan.
Business Finance 11

Steps in Financial Planning:

(i) Determination of Financial Objectives: For effective financial planning, it is essential to
clearly lay down the financial objectives wanted to be achieved. The financial objectives
should be based on the overall objectives of the company. The objectives of financial
management may be set up in the areas, namely, investment, profit planning, financing and
dividend.
(ii) Estimation of Capital Requirements: Capital is mandatory for various needs of the business.
Separate assessment is to be made of the requirements of fixed and working capital. Fixed
capital is needed for acquiring fixed assets such as land and building, plant and machinery,
furniture, etc. It is blocked for a long time. Working capital is essential for holding current
assets like stock, bills receivable, etc. and cash for meeting day to day expenses for running
the business.
(iii) Determination of the Kinds of Securities to be Issued: A company can issue equity chares,
preference shares and debentures to raise long-term funds. The types and proportion of
securities to be issued should be properly determined. In short, company needs to decide its
capital structure.
(iv) Formulation of Financial Policies: Financial planning leads to formulation of policies
relating to borrowing and lending, cash control and other financial activities. Such policies
will help in taking vital decisions for the administration of capital and achieving coordination
in financial activities.
The important benefits of financial planning to a business are discussed below:
1. Financial planning provides policies and procedures for the sound administration of the
finance function.
2. Financial planning results in preparation of proper plans for the future. Thus, new projects
could be undertaken easily.
3. It ensures required funds from different sources for the smooth conduct of business.
4. Uncertainty about the availability of funds is reduced and ensures stability of business
operations.
5. Financial planning attempts to achieve a balance between the inflow and outflow of funds.
Adequate liquidity is ensured throughout the year. This will increase the goodwill of the
company.
6. Cost of financing is kept to the minimum possible and scarce financial resources are used
wisely.
7. Financial planning serves as the basis of financial control. The management attempts to
ensure proper utilization of funds in tune with the financial plans.
Finance is the life-blood of business. So financial planning is an integral part of the corporate
planning of the business. All business plans depend upon the soundness of financial planning.
12 Financial Management

Review Questions
1. “From the point of view of a corporate unit, Financial Management is related not only to
fund-raising but encompasses the wider perspective of managing the finances for the
company efficiently”. Elucidate.
2. “Financial Management is nothing but managerial decision making on asset mix, capital mix
and profit allocation”. Explain.
3. “The Financial Manager’s primary task is to plan for acquisition and use of funds so as to
maximize the value of the firm”. Do you agree? Comment.
4. “Liquidity and Profitability are competing goals for the Finance Manager”. Comment.
5. “The responsibilities of the Financial Managers are linked to the goal of ensuring liquidity,
profitability or both and are also related to the management of assets and funds of any
business enterprise”. Comment.
6. “Financial Management is something more than an art of accounting and bookkeeping”.
Explain.
7. Write detail note on ‘Interrelationship between investment, financing and dividend decisions’.
8. “It is advantageous to decentralize Accounting function while Finance function should be
centralized”. Comment.
9. “It has traditionally been argued that the objective of a company is to earn profit, hence the
objective of Financial Management is also profit maximization”. Comment.
10. ‘A Finance Manager is a person who is responsible in a significant way to carry out the
finance functions’. Justify.
11. ‘Wealth maximization is superior to the profit maximization’. Do you agree with this
statement?
12. “Financial Management in India has changed substantially in scope and complexity in view of
recent Government Policy”. Critically examine this statement.
13. Explain in detail how finance is associated with other disciplines.
14. Elucidate the concept of Financial Planning. Discuss the Principles and Steps involved in
Financial Planning
References:
1. http://keydifferences.com

2. http://www.businessdictionary.com

3. http://www.managementstudyguide.com

4. http://www.yourarticlelibrary.com
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