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.
SUMMARY
The chapter deals in detail with the importance of finance, field of finance meaning and
objectives of financial management and also functions of finance and the major points in Indian Financial
System.
QUESTIONS
1. What is the meaning of Business Finance?
2. What is Financial Management?
3. What are the functions of Finance?
4. Explain the Indian Financial Systems.

SOURCES OF FINANCE
OBJECTIVES
The objective of the chapter is to make the reader understand forms of finance with advantages
and disadvantages, forms of leasing financing, major financial institutions and internal and international
sources of finance.
SUMMARY
The forms of finance like equity share capital, preference share capital, debentures, term
loans, lease, venture capital, seed capital and bonds are dealt with in detail. The various financial
institutions like IDBI, IFCI, ICICI, IRBI, UTI, EXIM Bank, SIDBI, SFCs, SIDCs, LIC, GIC,
NABARD, HDFC and Commercial Banks are given due importance and explained in the chapter.
The internal and international sources of Finance are also mentioned in brief.
QUESTIONS
1. Explain Equity Share Capital with its advantages and disadvantages.
2. Explain debentures as instruments for raising long-term debt capital.
3. What is Leasing? Give its different forms with advantages and disadvantages.
4. Explain briefly five major financial institutions.

MANAGEMENT OF WORKING CAPITAL

OBJECTIVES
The chapter introduces the reader to the classifications of capital, working capital cycle,
adequacy of working capital, under and over trading and also sources of short-term finance.
SUMMARY
The classifications of capital, adequacy of working capital, working capital cycle, capital

requirement, under trading and overtrading, optimum level of working capital are dealt with in this
chapter in great detail.
QUESTIONS
1. Explain the different classifications of capital.
2. What is Working Capital Cycle?
3. How will you estimate working capital requirement?
4. What should be the optimum level of working capital?

MANAGEMENT OF CASH
OBJECTIVES
The chapter familiarises the reader with the meaning of cash, motives for holding cash,
objectives of and problems in cash management. The reader is to get acquainted with cash management
models, financial forecasting and different aspects of Cash Budget.
SUMMARY
The various aspects of Cash Management like meaning of cash, motives for holding cash
objectives and problems of cash management, models of cash management, financial forecasting, cash
budget functions are explained in detail.
QUESTIONS
1. What are the motives for holding cash?
2. What are the major problems in Cash Management?
3. What is the Baumol Model of Cash Management?
4. Explain the different aspects of Cash Budget.

MANAGEMENT OF RECEIVABLES
OBJECTIVES
The chapter is designed to acquaint the reader with the meaning and cost analysis of
receivables. It is also for getting a good understanding of credit policy and credit analysis.
SUMMARY
The meaning of receivables, its purposes and the cost analysis of receivables which have to
be incurred to effect sales on credit or maintaining receivables are discussed. Credit policy and credit
analysis are the other chief areas which are explained in detail in the chapter.

QUESTIONS
1. What is the meaning and purposes of receivables?
2. Explain cost analysis on receivables.
3. Explain credit policy.
4. What is credit analysis?

MANAGEMENT OF INVENTORY
OBJECTIVES
The reader should get an overall idea of inventory with its different categories, benefits and
risks of holding, cost of holding, objectives of inventory management and also its different tenchiques.
SUMMARY
The chapter explains inventories with its different categories. This is followed by benefits,
risks and cost of holding inventories. The chapter also has the objective of inventory management
and its different techniques.
QUESTIONS
1. What are Inventories? Explain
2. What are the benefits and risks of holding inventories?
3. Explain briefly EOQ and determination of RC order level as techniques of inventory
management level.
4. Explain in detail ABC analysis.

FINANCIAL ANALYSIS AND PLANNING

OBJECTIVES
The chapter is to familiarise the reader with Financial Statements and its limitations. It also
helps the reader to understand financial statement analysis and tools of financial analysis.
SUMMARY
Financial Analysis and planning helps to make rational decision in keeping with the objectives
of the form with the help of some analytical tools. The Financial Statement is an organised collection
of data with different basics. It has certain limitations. Financial Statement Analysis are indicates of
profitability and Financial Soundness. There are various methods of Financial Analysis like comperative
Financial Statement, Trend Percentages, Funds Flow Analysis and Ratio Analysis.
QUESTIONS
1. What is Financial Statements and what are its limitations?
2. What is Financial Statement Analysis?
3. What are the tools of Financial Analysis?

FUNDS FLOW ANALYSIS

OBJECTIVES
The reader will have to be acquainted with funds flow statement, uses and preparation of
funds flow statements.
SUMMARY
Funds flow analysis is an important problem of Financial Management, like procuring and
using business funds. funds flow statements is used by financial analysts, credit granting institutions
and financial managers. The funds flow statement is a method by which we study the net funds flow

between two points in time. This is a tool for analysis and understanding changes in the distribution of
resources, between two balance sheets. The chapter also deals in detail with the preparation of funds
flow statement.
QUESTIONS
1. What is funds flow statement?
2. Explain funds flow cycle for a typical manufacturing company with a diagram.
3. Explain funds flow statement with a diagram.
4. Explain the preparation of funds flow statement.

CASH FLOW STATEMENT

OBJECTIVES
After going through this chapter the reader should get an idea of the sources of cash,
application of cash, difference between cash flow analysis and funds flow analysis and also the uses
of cash flow analysis.
SUMMARY
A cash flow statement depicts a change in cash position from one period to another. Sources
of cash can be internal as well as external. The application of cash can be for different purposes.
There are major differences between cash flow analysis and funds flow analysis. The major uses of
cash flow analysis are in the areas of cash management, internal financial management, cash movement
and cash planning.
QUESTIONS
1. Explain the different sources of cash.
2. Explain the different applications of cash with examples.
3. What are the differences between cash flow analysis and funds flow analysis?
4. Explain the uses of cash flow analysis with examples.

RATIO ANALYSIS
OBJECTIVES
The chapter tries to acquaint the reader with different types of ratio analysis with examples,
giving importance to advantages and disadvantages.
SUMMARY
Ratio analysis is a techniques used by management in studying the relationship between two
figures in accounting. Primary and secondary ratios initiate the relationship between profits and capital
employed and also the financial position and capital structure of the company. There are various
clasification of ratios like profit and loss account ratio, balance sheet ratio and composit ratio. The
frequently employed and important ratios are current ratio, liquidity ratios, debt-equity ratio, over all
profitability ratio, debt service coverage ratio and turn over ratio. The advantages of ratio analysis
are also depicted.

QUESTIONS
1. What are primary ratios?
2. What are secondary ratios?
3. What are the advantages of ratio analysis?
4. What are the characteristics and uses of ratio analysis? Give examples.

CAPITAL BUDGETING
OBJECTIVES
The chapter enables the reader to understand the different aspects of capital budget and its
applications. Estimation of cash flow with its classifications should be embedded in the minds of the
reader. The chapter enables the study of the value of money and capital rationing.
SUMMARY
Capital investment refers to the investment in projects where results would be available only
after a year. We need capital investment for expansion, replacement, diversification, research and
development and others. Capital budgeting refers to long term planning for proposed capital outlay
and their financing. The most important task in capital budgeting is estimating future cash flow for a
project. A valuation of capital expenditures are necessary for capital budgeting. Capital rationing is an
artificial constraint on the amount of funds, that can be invested in a given period.
QUESTIONS
1. Where are the capital investment required?
2. Write about capital budgeting.
3. How will you estimate cash flows?
4. How will you evaluate capital expenditure proposals?

FINANCIAL FORECASTING
OBJECTIVES
The reader should be able to do financial forecasting using the process of developing a series
of projected financial statements. The reader should understand what sales projection is and how to
prepare production schedule and also proforma Balance Sheet. Familiarise with computerised financial
planning system.
SUMMARY
Financial forecasting is a planning process through which the management of the company
position the firms future activates Proforma income statement is developed through different steps.
Sales projection or sales forecast is the starting point of the financial forecasting exercise. Based on
the anticipated sales the necessary production plan for the projected period is prepared. The main
consideration in constructing a Proforma income statement is the costs specifically associated with
units sold during the period under consideration. Cash budgets are very specific planning tools that
are prepared month or even every week. Computerised financial planning system makes use of
computerised planning models and also the more popular computer generated spread sheets.

QUESTIONS
1. What is Financial forecasting?
2. How will you prepare production schedule?
3. What is cash budget and proforma balace sheet?
4. Write about computerised financial planning system.

CAPITAL STRUCTURE
OBJECTIVES
The student should acquaint himself with the concept of Capital Structure, distinction between
Capital Structure and Financial Structure, optimum Capital Structure and also the features of an
appropriate Capital Structure.
SUMMARY
Capital Structure represents the mix of different sources of long-term funds in the total
capitalization of the company. There are both long-term as well as short-term sources of funds which
is the financial structure. Capital Structure on the other hand is the permanent financing in the company
represented primarily by long-term debt and shareholders funds by excluding all short-term credit.
Factors which determine th capital structure are various. The optimum capital structure is obtained
when the market value per equity share is the maximum. There are five features for the appropriate
capital structure viz., profitability, solvency, flexibility, conservatism, and control.
QUESTIONS
1. Explain the concept of capital structure.
2. What is the difference between capital structure and financial structure with the factors
influencing capital structure?
3. What is optimum capital structure?

COST OF CAPITAL
OBJECTIVES
The chapter makes the reader understand thoroughly the concept and meaning of cost of
capital. It enumerates the importance of cost of capital in financial decisions. The chapter deals with
cost of debts, cost of preference capital, cost of equity capital, cost of term loan, cost of retained
earnings, overall cost or weighted average cost of capital.
SUMMARY
The term cost of capital is defined as the rate of return on investment projects necessary to
have unchanged market price of a firms share. The optimum cost of capital is a financial break-even
point. Acceptance or rejection of an investment proposal depends on the cost of capital. A debt may
be short-term or long-term and the cost of it varies. Dividend paid to the preference share holders is
the cost of preference capital. The cost of equity capital is difficult to compute as the dividend stream
receivable by the equity share holders is not specified by any legal contract. For many companies the
most important source of ownership or equity and internal source of funds. It is necessary for the
finance manager to know the overall cost of capital which can be used as the decision criterion in

capital budgeting or investment decisions. Debt Equity Ratio affects the cost of capital. When the
Debt Equity Ratio of a company increases its cost of capital decline because of incidence of tax on
the interest.
QUESTIONS
1. What is a concept and meaning of cost of capital?
2. What is the importance of cost of capital in financial decisions?
3. What is cost of preference capital and cost of Equity Capital?
4. Illustrate with an example the impact of change in debt and equity on composite cost of
capital.

BUDGETARY CONTROL
OBJECTIVES
To train the reader in the various aspects of performance budgeting and zero base budgeting
and also merits and demerits of ZBB.
SUMMARY
Budgetary Control is an essencial tool of management for controlling cost and maximizing
profits. Performance of budgeting should be capable of predicting statistically the performance for
the budget period in terms of probablity and levels of confidence. Zero Base Budgeting is a new
technique designed to re-vitalize budgeting.
QUESTIONS
1. What is Budgeting Control?
2. What is Performance Budgeting?
3. What is Zero Base Budgeting give the meaning, mertis and demerits? SUMMARY