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RECAP
Financial Management
Meaning Objectives

Finance Function
Investment Decision Financing Decision Dividend Decision

MEANING OF FINANCIAL PLANNING

Financial Planning means deciding In advance how much to spend, on what to spend, according to the funds at your disposal.

How it is done
Depending on their past performance, business organisations estimate the sales they will be able to achieve in future. The firm will require additional production capacity. It will require additional long term funds and greater working capital.

This process of estimating the fund requirements of a business and determining the sources of funds is called Financial Planning.
thusthe two aspects of Financial Planning How much funds are required ? From where will the fund come from ?

Importance
Helps management avoid waste from complexity of operations; It Provides policies and procedures which creates a closer cooperation between various functions of the Business Enterprise; It aids the company in preparing for the future; Communicates expectations to all concerned; Avoids confusion and waste such as loss of time; Provides a detailed plan of action for the proper direction of individual and group efforts.

MEANING OF CAPITAL STRUCTURE

The Capital Structure means the proportion of debt and equity used for financing the operations of Business. This means that all decisions relating to Capital Structure should emphasise on increasing the shareholders wealth.

Features of Appropriate Capital Structure

Return; Risk; Flexibility; Capacity; Control.

Factors Determining Capital Structure

Financial Leverage; Cash Flow Ability; Control; Flexibility; Market Conditions; Flotation costs; Legal Framework.

CAPITALISATION
Capitalisation is the valuation of capital which comprises of owners as well as borrowed funds, long term loans and reserves. Total capital invested in the concern should be covered by its earnings.

TYPES OF CAPITALISATON Fair or Normal Capitalisation; Over Capitalisation; Under Capitalisation.

FAIR OR NORMAL CAPITALISATION

In this method the Business employs the sufficient amount of capital required, i.e. without any extra additions.

OVER CAPITALISATION
Under this method the Business employs MORE capital than what is warranted to it . INDICATORS Amt of capital invested exceeds the real value of Assets; Earnings not justified by the amt of capitalisation; Business has more Net Assets than required.

CAUSES OF OVER CAPITALISATION

High promotion cost; Unduly high price paid for Assets; Inflationary conditions during boom period; Inadequate provision of depreciation; Liberal dividend policy; Shortage of capital.

ON THE COMPANY

EFFECTS OF OVER CAPITALISATION

Market value of shares falls severely due to reduced earning capacity; Credit standing is adversely affected hampering the loan raising capacity; Company cuts down the expenditure on maintenance, replacement of assets & adequate provision for depreciation ; Company manipulates accounts to show profits; Company has to reorganize its capital.

ON SHAREHOLDERS

Capital depreciates and the value of share falls; Dividends become irregular due to reduced ; Shares are not accepted as security and loans and, become a liability; Shareholders have to bear the brunt of capital reorganization.

ON SOCIETY

Concern tactfully increases the price and decreases the quality due to low profits; Expenses on wages is curtailed leading to labour unrest and dissatisfaction; Creditors are affected due to irregular payment of interest; Wastage of societal resources.

UNDER CAPITALISATION
Under this method the Business employs LESS capital than what is warranted to it. INDICATORS Future Earnings are under estimated during promotion; Unforeseen increase in earnings.

CAUSES OF UNDER CAPITALISATION

Underestimation of earnings; Flotation of Company during depression ; Conservative dividend policy; High Efficiency.

EFFECTS OF UNDER CAPITALISATION

ON THE COMPANY

Market value of share goes up; Secret reserves are built up ; Government intervenes by levying higher taxes; High rate of earnings encourage competition; Demand for higher wages and salaries.

ON THE SOCIETY

Encourages unhealthy speculation & adversely affects the investment climate; Consumers feel exploited due to the high profits of the concern.

MANAGEMENT OF FIXED CAPITAL

Fixed Capital refers to investment in long term assets. It involves allocation of firms capital to different projects or assets with long term implications for the business.

FACTORS AFFECTING CAPITAL BUDGETING DECISIONS

To invest in a project, a business has to evaluate a project carefully depending upon its returns. Factors affecting these decisions are as follows:
Cash flows of the project; The rate of return; The investment criteria involved

WORKING CAPITAL MEANING

Working capital refers to short term assets of a firm such as Inventories, and short term liabilities like creditors . There are two concepts of working capital : Gross working capital : It includes those current assets which can be easily converted into cash in an accounting period such as cash ,inventories ,receivables etc . Net working capital : It is the excess of current assets over current liabilities. NOTE : The net working capital concept indicates the liquidity position of the firm.

OPEARATING AND WORKING CAPITAL

It is the time gap between conversion of raw materials into finished goods and selling them for credit or cash and realizing cash from creditors. Working capital is required to finance these activities during operating cycle.

Some distinct phases of operating cycle are;

Procurement of raw materials; Payment of labour ,power , fuel and other expenses; Placing raw materials into work in progress and converting them into finished goods; Sale of finished goods for cash or credit. If credit then conversion of receivables into cash. These phases result in cash flows going in and out of business. The working capital requirements of a business will therefore depend on the operating cycle of the firm.

Factors Affecting Working Capital Requirements.

Important factors affecting working capital needs are ; Nature of business; Business cycle fluctuations; Seasonal operations; Technology and production cycle; Credit policy; Price level changes; Market competition;

What we have learnt:

Financial Management Finance Function
Investment Decision Financing Decision Dividend Decision

Capital Structure
Meaning, Features Factors Determining Capital Structure

Capitalisation
Over Capitalisation Under Capitalisation

Management of Fixed Capital

Working Capital Decisions Operating Capital & Working Capital Factors Affecting Working Capital Desicions

Dividend
Determinants Factors Affecting Dividend Policy

Thank You
Shireen Maam Sandeep

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