OCM 3 Marks Each

• In layman language, management of finance is called financial management.
• Finance is the blood of business.
• Business can neither be started without finance nor can it sustain without it. Thus, finance is the foundation stone of business.

• The activity done at managerial level for planning and controlling financial resources for the business enterprise is called financial management.
• Under financial management, the managers try to optimally manage the financial resources so that the business earns a satisfactory return.

• According to F. W. Paish, “In the modern economy, based on utilization of funds, financial management means acquiring of required funds at the required time.”
• According to Raymond J. Chambers, “Financial management means to take decisions about financial matters to implement then smoothly and to review, them.”
• According to Prof. M. Kimbal, “Financial management means acquisition of fund, its optimum utilization and its appropriate allocation.”
• From all these definitions we can conclude that the scope of financial management is so wide that it covers all the financial decisions of business, right from the inception.

• Boom and depression are the two faces of capital market.
• When the market is in boom, the company earns good profit. Investors become positive and invest in the shares of the company. This enhances the capital structure of the company.
• When the market is in depression, the investors tend to invest in debt market so that they can safeguard their returns.
• Thus, how the market behaves plays a very important role in the formation of capital structure of the company and hence it cannot be ignored.

• If the business sells its goods on cash, it will require less on hand capital. But, if sold on credit, the business will be cash deficient.
• In the same way, if the business can acquire raw material on credit and sell the goods on credit or cash, it will affect the capital available with the business.
• Naturally, the availability of capital with the business will decide its credit requirements and policy.

• The financial manager studies the position of working capital and fixed capital thoroughly. He also studies the factors that affect these capitals.
• After studying the requirement the manager has to study the various sources of finance such as equity shares, preference shares, debentures, bank loan, etc. and prepare the right mix of finance sourcing.
• The task does not get over at just acquiring finance. The manager also needs to see that it is utilized and allocated properly. Failure to do so can lead to disaster or losing important capital raised for the business.

• To encourage industries and for balanced growth of various regions, government provides help in form of grant or subsidy to people.
• The help can be in the form of cheap or free land, industrial shades at reasonable rates, machinery at subsidized rates, etc. All this reduces the need of fixed capital.
• Taxation policy of the government also affects the need of fixed capital. For example, when the government gives tax benefits or adopts liberal policy towards sale of some new machineries then it helps the entrepreneurs because their need for fixed capital reduces.

• Fixed capital remains blocked up in fixed assets for a longer period. So, there arises a risk of return on investment in case changes occur in technology, preference of consumers, etc. because the machinery or plant may become obsolete as compared to these changes.
• Apart from this, changes in political, social and economic factors also tend to raise the rate of risk.

• According to Lincoln, Doris and Stevens, “Working capital is the excess of current assets over current liabilities.”
• According to J. S. Mill, “The sum of the current assets means the working capital.”

• Capital needed in the business to run day-to-day expenses is known as working capital.
  Working capital is generally used in current assets of business such as purchasing raw material, making payment to creditors, paying utility bills, etc.
• Working capital continuously circulates in the business.

Fixed capital:

• Capital invested in business for a period of five years or above is called fixed capital.
• Fixed capital is invested in fixed assets such as land, building, machinery, plant, furniture, etc. Thus, fixed capital remains in business for a long period.

• When a company issues securities for raising the capital, it has to incur expenses for doing so.
• The expenses for issuing securities include releasing prospectus, underwriting commission, brokerage, etc. As a result, the cost of capital increases.
• The expense on issuing debenture is lesser then issuing securities.

• No business can be done without raising assets. Assets can be big, small, purchased or leased.
• If the business requires fixed assets on large scale, then the ratio of equity share will be high in capital structure of that business.
• Similarly, if the company needs high value assets then whether it procures them by purchasing or leasing affects the form of capital structure.

• Condition of boom-depression in capital market
• Present rate of interest in capital market
• Cost of capital expenses of issuing securities
• Legal restrictions
• Taxation policy
• Institutional investors
• Foreign institutional investors

• Type of business
• Size of business
• Estimation of business income
• Nature and requirement of assets
• Attitude of directors
• Financial requirements
• Duration of capital requirement

• The combination of different sources utilized by the company to raise necessary capital for running the company is called the capital structure.
• According to Hogland, “Capital structure means the proportion and magnitude of different securities issued and sources utilized by a company to raise its finance.”
• Company can obtain necessary capital funds from various sources. It can raise capital by issuing various types of securities such as equity share, preference share, debenture, etc.
• In this context, Gesternberg says that “Decisions regarding type of securities are reflected in the capital structure of the company.”
• It is the responsibility of the finance manager to determine the proportion of various types of securities to be issued.

• In market, investors purchase the shares of company with a hope of earning maximum dividend. As a result, company should earn maximum profit out of its available resources. Moreover, its dividend policy should be based on maximization of profit.
• In addition, this approach suggests that company should take up only those business projects which can earn good profits i.e. which aims at profit maximization.
• This approach increases the share price of the company. This in turn increases company’s per-share earning.

• The scope of financial management is extremely wide. Its scope includes estimating the need of finance, acquiring finance, maximum utilization, proper allocation and its planning and controlling.
• It covers all financial operations, right from the inception of business.

• Prices go up during market fully, so company earns good profit.
• Investors invest in quality to get high dividend considering this point financial management increase capital in equity shares.
• Curing recession prices come down and the profit of the company reduces and shares holders get less dividend and sometimes they may not get any dividend.
• Investors invest in debenture to steady interest income.
• So financial market include debentures in capital structure.
• In short, market study is necessary to include various types of securities in capital structure.

• From administrative point of view it is simple structure which contains the least security, but this type of structure cannot attract different types of investors.
• Capital structure with various types of securities may attract investors but its capital cost is very high.
• It is quite difficult to make it economical.
• It is not possible to have are ideal characteristic in one capital structure.

• But when it is sold on credit, working capital remains is business for the time for which credit is given so more working capital is required.
• In the same way if raw material is purchased on credit then less working capital is required.
• If, it is purchased on cash more working capital is required.

• During depression investors prefer steady interest income so they invest not in equity shares but in debentures of fixed interest.
• During boom period they prefer to invest in equity shares with expectation of high dividend.
• Thus capital structure depends on market condition.

• In the same way working capital.
• We find working capital follows cyclical movement.
• It parts of body function actively only when blood reaches that part in the same way working capital is required by every department of business, to retain the continuity of activities and to make the business profitable.