Meaning of Business Finance
Money required for carrying out business activities smoothly is called Business Finance.
Finance also helps to run day to day business expenses and purchase assets (Tangible and Intangible).
What is Financial Management?
Financial management is concerned with optimal utilisation of finance.
Aims of Financial Management
• Financial management aims at reducing the cost of funds procured, keeping such funds under control and achieving effective expansion of such funds.
• Financial management also ensures the availability of adequate funds whenever required.
Importance of Financial Management
Financial decisions depend on three major issues relating to the financial operations of a firm.
• Investment Decision
• Dividend Decision
The investment decision relates to how the firm’s funds invested in different assets. Investment decisions can be long term or short term, a decision is long term when managers invest in a new machine to replace old ones. This decision is very crucial for any business since they affect its earning capacity of a business.
Short-term investment decisions are concerned with the decisions about the level of cash, inventory and receivables.
The financial statements such as Balance Sheet and Profit and Loss Account, reflect a firm’s financial position and its financial health. Some examples of the aspects being affected could be as under:
• The size and the composition of fixed assets of the business.
• The quantum of current assets and its break up into cash, inventory and receivables.
• The amount of long-term and short-term funds to be used.
• Break-up of long-term financing into debt, equity etc.
• The overall financial health of a business is determined by the quality of its financial management.
Objective Of A Financial Management
The main objective of financial management is to maximise shareholder’s wealth. All financial decisions aim at ensuring that each decision is efficient and adds some value. Those decisions which result in increasing the share value are known as healthy financial decisions and those decisions which result in decline in the share price are poor financial decisions.
Factors affecting Capital Budgeting Decision
• Cash flows of the projects: When a company takes an investment decision involving huge amount it expects to generate some cash flow.
• The rate of return: During investment time calculations are based on the expected returns from each proposal and the assessment of the risk involved.
• The investment criteria involved: It involved calculations regarding the amount of investment, Interest rate, cash flows and rate of return these terms are considered which investment decisions are taken.