Financial
Management
LECTURE NOTES
, CONTENTS
Chapter Title Page No.
I BUSINESS FINANCE 5
II SOURCES OF FINANCE 16
III MANAGEMENT OF WORKING CAPITAL 33
IV MANAGEMENT OF CASH 45
V MANAGEMENT OF RECEIVABLES 54
VI MANAGEMENT OF INVENTORY 59
VII FINANCIAL ANALYSIS AND PLANNING 68
VIII FUNDS FLOW ANALYSIS 73
IX CASH FLOW STATEMENT 81
X RATIO ANALYSIS 86
XI CAPITAL BUDGETING 93
XII FINANCIAL FORECASTING 105
XIII CAPITAL STRUCTURE 116
XIV COST OF CAPITAL 120
XV BUDGETARY CONTROL 131
, CHAPTER - I
BUSINESS FINANCE
OBJECTIVES
To make the reader understand the finer points of business finance which is one of the major
factors in all kinds of economic activity. This chapter is to familiarise the reader the objectives of
financial management, interphase between finance and other functions and also Indian financial system.
IMPORTANCE OF FINANCE
Finance is regarded as the life blood of a business enterprise. Finance is one of the basic
foundations of all kinds of economic activities, particularly in the present modern money-oriented
economy. The manufacturing and merchandising activities are supported by this key factor. Business
needs money to make more money. The success and health of any business enterprise is buttressed
on efficient management of its finances.
THE FIELD OF FINANCE
The field of finance is closely related to accounting and economics.
Accounting is referred to as the language of finance because it provides financial data through
income statements, balance sheets and the statement of cash flows. The financial manager must know
how to interpret and use the financial statements in allocating the firm’s financial resources to generate
the best return possible in the long run.
Economics provides a structure for decision making in such areas as risk analysis, pricing
theory through demand and supply relationships and many other important areas. Economics provides
the broad framework of the economic environment in which business enterprises must continually make
decisions. A finance manager must understand the institutional structure of the Central Banking System,
the Commercial Banking System and the interrelationship between the various sectors of the economy.
He must be well versed in economic variables, such as gross national product, industrial production,
disposable income, unemployment, inflation, interest rates, taxes etc.
MEANING OF BUSINESS FINANCE
Finance is defined as the provision of money at the time it is wanted. As a management
function, finance may be defined as the procurement of funds and their effective utilisation.
5
, Business finance may be defined as the process of raising, providing and managing of all the
money to be used in connection with business activities.
“Financing consists of raising, providing, managing of all the money, capital or funds of any
kind to be used in connection with the business”- J.H.Bonnevilla and Llyod Ellis Dewey.
While taking the financial decisions, Finance Manager has to consider the external and internal
factors.
The external factors are:
State of Economy
Structure of capital and money markets
Govt. Policy and regulations
Taxation Policy
Requirements of investors
The Central Bank’s credit policy
Lending policy of financial institutions.
The internal factors include:
Nature of business
Size of business
Age of the firm and stability of the organisation
Nature of product (Demand and Supply in the market)
Expected return, cost and risk
Fixed assets and working capital structure of the firm
Capital structure
Trends of earnings
Restriction in loan agreements and
Management attitude.
MEANING OF FINANCIAL MANAGEMENT
According to Ezra Soloman & John. J.Pringle, “Financial Management is concerned with
the efficient use of an important economic resource, namely, Capital Funds”.
Financial management is mainly concerned with the proper management of funds. The finance
manager must see that the funds are procured in such a manner that the risk, cost and control
considerations are properly balanced in a given situation and there is optimum utilisation of funds.
6
Management
LECTURE NOTES
, CONTENTS
Chapter Title Page No.
I BUSINESS FINANCE 5
II SOURCES OF FINANCE 16
III MANAGEMENT OF WORKING CAPITAL 33
IV MANAGEMENT OF CASH 45
V MANAGEMENT OF RECEIVABLES 54
VI MANAGEMENT OF INVENTORY 59
VII FINANCIAL ANALYSIS AND PLANNING 68
VIII FUNDS FLOW ANALYSIS 73
IX CASH FLOW STATEMENT 81
X RATIO ANALYSIS 86
XI CAPITAL BUDGETING 93
XII FINANCIAL FORECASTING 105
XIII CAPITAL STRUCTURE 116
XIV COST OF CAPITAL 120
XV BUDGETARY CONTROL 131
, CHAPTER - I
BUSINESS FINANCE
OBJECTIVES
To make the reader understand the finer points of business finance which is one of the major
factors in all kinds of economic activity. This chapter is to familiarise the reader the objectives of
financial management, interphase between finance and other functions and also Indian financial system.
IMPORTANCE OF FINANCE
Finance is regarded as the life blood of a business enterprise. Finance is one of the basic
foundations of all kinds of economic activities, particularly in the present modern money-oriented
economy. The manufacturing and merchandising activities are supported by this key factor. Business
needs money to make more money. The success and health of any business enterprise is buttressed
on efficient management of its finances.
THE FIELD OF FINANCE
The field of finance is closely related to accounting and economics.
Accounting is referred to as the language of finance because it provides financial data through
income statements, balance sheets and the statement of cash flows. The financial manager must know
how to interpret and use the financial statements in allocating the firm’s financial resources to generate
the best return possible in the long run.
Economics provides a structure for decision making in such areas as risk analysis, pricing
theory through demand and supply relationships and many other important areas. Economics provides
the broad framework of the economic environment in which business enterprises must continually make
decisions. A finance manager must understand the institutional structure of the Central Banking System,
the Commercial Banking System and the interrelationship between the various sectors of the economy.
He must be well versed in economic variables, such as gross national product, industrial production,
disposable income, unemployment, inflation, interest rates, taxes etc.
MEANING OF BUSINESS FINANCE
Finance is defined as the provision of money at the time it is wanted. As a management
function, finance may be defined as the procurement of funds and their effective utilisation.
5
, Business finance may be defined as the process of raising, providing and managing of all the
money to be used in connection with business activities.
“Financing consists of raising, providing, managing of all the money, capital or funds of any
kind to be used in connection with the business”- J.H.Bonnevilla and Llyod Ellis Dewey.
While taking the financial decisions, Finance Manager has to consider the external and internal
factors.
The external factors are:
State of Economy
Structure of capital and money markets
Govt. Policy and regulations
Taxation Policy
Requirements of investors
The Central Bank’s credit policy
Lending policy of financial institutions.
The internal factors include:
Nature of business
Size of business
Age of the firm and stability of the organisation
Nature of product (Demand and Supply in the market)
Expected return, cost and risk
Fixed assets and working capital structure of the firm
Capital structure
Trends of earnings
Restriction in loan agreements and
Management attitude.
MEANING OF FINANCIAL MANAGEMENT
According to Ezra Soloman & John. J.Pringle, “Financial Management is concerned with
the efficient use of an important economic resource, namely, Capital Funds”.
Financial management is mainly concerned with the proper management of funds. The finance
manager must see that the funds are procured in such a manner that the risk, cost and control
considerations are properly balanced in a given situation and there is optimum utilisation of funds.
6
