GSEB Class 12 Organization of Commerce and Management Notes Chapter 8 Financial Management (2024)

This GSEB Class 12 Organization of Commerce and Management Notes Chapter 8 Financial Management Posting covers all the important topics and concepts as mentioned in the chapter.

Financial Management Class 12 GSEB Notes

Concept and Definition of Financial Management:

• Practically financial management means management of finance functions.
• Financial management means acquisition of fund, its optimum utilization and its appropriate allocation.
• The field of financial management is wide. It includes all the financial decisions since inception to expansion and end of business.

Characteristics of Financial Management:

• Branch of Management
• Wide Scope,
• Base of the Managerial Decisions,
• Relation with Financial Decisions
• Goal of Maximization of Owner’s Economic Welfare
• Key Position
• Relation with other areas of Management
• Division into TWo Parts.

Objectives of Financial Management: There are two approaches for this:

1. Objective of Profit Maximization: Profit maximization means to maximize company’s income. Through profit maximization company can increase income per share.
2. Objective of Wealth Maximization: It is also known as Net Present Value. The difference between present value of wealth and necessary capitalization is equal to Net Present Value. Financial management should take such financial decisions; where by company wealth is maximized. The approach of wealth maximization is superior to that of profit maximization.

Importance of Financial Management:

• Estimation of Financial Needs
• Acquiring Finance
• Planning and Controlling
• Distribution of Finance
• Maintaining Liquidity
• Distribution of Income
• Management of Current Assets
• Financial Decisions and
• Raising Credit of Business.

Financial Decisions:
In Financial Management decisions are taken for below mentioned three important issues:
1. Decisions Related to Investment: In fixed assets of business, long-term investment is made of fixed capital. For selection of such assets and investment into the same decisions are taken, which is termed as capital budgeting. For this various methods of capital budgeting are used. Various factors affect the decision about investment.

2. Decision Related to Financing: The decisions related to financing are connected to capital structure. The capital structure is the mixture of owned capital and borrowing. Therein decision is taken about size of equity capital and borrowings. Optimum capital structure gives maximum return at lower risk.

The factors affecting decisions related to Financing:

• Internal Factors and
• External Factors.

3. Decisions Related to Dividend: Dividend is part of company’s profit. It is return received by shareholders over their investment. What part of profit is to be distributed as dividend and how much to be retained in business is to be decided by Finance Manager. Dividend distribution directly affects the market value of company’s shares. Various factors affect decisions about dividend.

Capital Structure:
1. Concept of Capital Structure: Company procures capital by issuing various types of securities like; equity share, preference share, debenture, etc. The decisions about these securities are reflected in company’s capital structure. In what proportion various types of securities are to be issued is decided by Finance Manager.

Definition of Capital Structure: Capital Structure means proportion and magnitude of different securities and sources utilized by a company to raise its finance.

2. Characteristics of an Ideal Capital Structure:

• Simplicity
• Profitability,
• Adequacy of Finance
• Flexibility,
• Economy,
• Balancing,
• Liquidity,
• Attractiveness and
• Solvency.

3. Types of Capital Structure:

• Capital structure of only Equity Share
• Capital structure of Preference shares with Equity Shares
• Capital Structure of Debentures with Equity Shares
• Capital Structure of Preference shares and Debentures with Equity Shares.

4. Factors Affecting Capital Structure:
(i) Internal Factors:

• Type of Business,
• Size of Business
• Estimation of Business Income
• Nature and Requirement of Assets
• Attitude of Directors
• Financial Requirement and
• Duration of Capital Requirement.

(ii) External Factors:

• Condition of Boom or Depression in the market,
• Present Rate of Interest in Capital Market
• Cost of Capital Expenses of issuing Securities
• Legal Restrictions
• Taxation Policy
• Institutional Investors and
• Foreign Institutional Investors.

Working Capital:
1. Meaning of Working Capital: Working capital is required to pay day-to-day expenses and it remains invested in current assets of the business. The working capital remains constantly circulating in business, it is called life-blood.
Definition: Working capital is the excess of current assets over current liabilities.

2. Concept of Working Capital:

• Gross Working Capital: The total of complete investment in current assets of the business is Gross Working Capital.
• Net Working Capital: Current assets minus current liabilities means Net Working Capital.

3. Difference Between Gross Working Capital and Net Working Capital:

• Meaning,
• Liquidity Position
• Financial Position and Measurement and
• Increase in Current Liabilities.

4. Characteristics of Working Capital:

• Short-Term Capital
• Investment in current assets
• Liquidity
• Less Risk,
• Changing Form
• No Depreciation
• Requirement according to Type and Form of Business and
• To pay Day-to-Day expenses.

5. Factors Affecting Working Capital:

• Type and Nature of Business
• Size of Business,
• Production Cycle
• Production Policy and Type of Demand
• Stockpile of Raw materials
• Credit Policy
• Conversion of Current Assets into Cash
• Stock Turnover Ratio
• Operating Efficiency and
• Distribution of Profit.

Fixed Capital:
1. Meaning and Concept of Fixed Capital:
Fixed capital means Long-Term Capital which is usually invested in business fixed assets for five years or for more period.

2. Characteristics of Fixed Capital:

• Long-term
• Different Ratio in various Types of Business,
• Components
• Less Liquidity
• Risk
• Depreciation and
• Sources.

3. Factors Affecting the Need of Fixed Capital:

• Type and Nature of Business
• Size of Unit
• Use of Ownership/Lease,
• Research Expense
• Modern Technology,
• Government Assistance,
• Government Taxation Policy and
• Establishment Expenses.

4. Difference Between Fixed and Working Capital:

• Meaning
• Period
• Liquidity
• Risk
• Requirement
• Sources and
• Depreciation.