Financial management aims at reducing the cost of funds procured, keeping the risk under control and achieving effective deployment of such funds.

Issuing more equity may lead to dilution of management’s control over the business, whereas debt financing has no such implication.

Larger the lead time, the larger the quantity of material to be stored, and consequently, the larger shall be the amount of working capital required.

To maintain flexibility, a firm must maintain some borrowing power and avoid using its debt potential to the full.

Investment decisions, particularly capital budgeting, focus on ensuring that benefits from the investment exceed the cost so that value addition takes place.

Money required for carrying out business activities is called business finance.

If a firm’s business risk (based on fixed operating costs) is lower, its capacity to use debt (and incur financial risk) is higher, and vice-versa. Total risk depends on both.

Financial payment obligations.

The requirement for working capital will be lower during the period of depression as the sales as well as production will be small.

The use of higher equity, potentially leading to higher dividend payments, affects items in the Profit and Loss Account (specifically profit available for distribution).

Higher level of competitiveness may force larger stocks of finished goods, increasing the working capital requirement.

A better debtors turnover ratio reduces the amount tied up in receivables, reflecting higher operating efficiency and resulting in a lower requirement of working capital.

The large amount raised through debt or equity combinations to finance the take-over significantly affected the capital structure of the acquiring company.

Contractual Constraints, imposed by a lender when granting a loan, may restrict the payment of dividends in the future.

In case of a boom, sales and production are likely to be larger, and therefore, a larger amount of working capital is required.

Good financial management aims at mobilisation of financial resources at a lower cost and deployment of these in most lucrative activities.

To the extent a firm avails credit on purchases, the working capital requirement is reduced, as current liabilities increase relative to current assets needed to cover purchases.

Companies with easy access to the capital market may depend less on retained earning and tend to pay higher dividends than smaller companies with lower market access.

The ultimate objective that guides the decision-maker is that some value addition should take place, leading to an increase in the price of the equity share.

Short-term investment decisions are also called working capital decisions, concerned with managing the levels of cash, inventory, and receivables, affecting day-to-day liquidity and profitability.

Financial planning usually begins with the preparation of a sales forecast, as estimates of sales determine the scale of operations and the resulting fund requirements for fixed and working capital.

Owners’ funds consist of equity share capital, preference share capital, and reserves and surpluses (retained earnings). Debentures are borrowed funds.

This is the Dividend Decision, relating to how much profit is distributed to shareholders and how much should be retained.

Fixed assets (long-term assets) should be financed through long-term sources of capital such as equity, preference shares, debentures, long-term loans, and retained earnings. They should never be financed through short-term sources.

When an asset is taken on lease, the firm avoids huge sums required to purchase it, thus reducing the funds required to be invested in fixed assets and reducing fixed capital requirements.