An overview

By:
Ravi Srivastava
Fundamentals:
It simply explains the management of the Finance.
Two basic principles involved in Financial
Management are :
(a)Procurement of Funds.
(b) Utilization of Funds.
i.e. how to arrange and utilize the finance.
Two types of funds are involved –
(a)Long term sources of funds, i.e. Equity Share
Capital, Preference Share Capital, Debentures,
Term Loans etc.
(b)Short term sources of funds, i.e. Trade Credit ,
Bank Credit, Commercial Papers, Factoring ,Short
Term Public Deposits etc.
Capital Structure:
Mix of long term sources of funds is termed as Capital
Structure.
In other words it is the proportion of Debt, Preference
Shares and Equity Shares on a firm’s Balance Sheet.
Optimum capital structure is the capital structure at
which weighted average cost of capital is minimum and
thereby maximum value of the firm.
Cost of Capital
Cost of Capital is the rate of return that a firm must earn on
its project investments to maintain its market value and
attract funds.
It comprises various parts, like Cost of Equity, Cost of
Debentures, Cost of Preference Shares, Cost of Retained
Earnings, etc.
Weighted Average Cost of Capital is the expected average
future cost of funds over the long run fund by weighting the
cost of each specific type of capital by its proportion in the
firm’s Capital Structure
Working Capital
Management
Working Capital Management is the management
of current assets and current liabilities.
It is based on two factors:
(a) Based on concept:
(i) Gross Working Capital – means investment in
the current assts.
(ii) Net Working Capital - it’s the difference
between current assets and current liabilities.
(b) Based on time:
 (i) Permanent w.cap. – it is the minimum w.cap.
which is required each and every time to running
the business efficiently.
(ii) Temporary w.cap. – it is the w. cap. over and
above the permanent w.cap.
Ratio analysis
Ratio analysis is a systematic use of ratios to interpret
the performance and the status of the firm.
Types of ratios:
(i) Liquidity Ratios – It measures ability of the firm to
satisfy its short term obligations as they become due.
(ii) Profitabilty Ratios - These ratios are calculated in
order to state the profitability of the business.
(iii) Coverage Ratios – These ratios measures the firms
ability to pay certain fixed charges.
(iv) Turnover Ratios - It indicates how quickly certain
current assets are converted into cash.
Statement of changes in Financial
Position

It shows the Sources and Application of funds between two

Balance Sheet dates. There are two statements:
(i) Cash Flow Statement - It provides a summary of sources of
cash in flows and uses of cash outflows during a period of
time. In other words it provides a summary of Operating,
Investing and Financing cash flows and reconciles them with
changes in its cash and cash equivalents.
(ii) Funds Flow Statement - Funds Flow Statement is
concerned with changes in working capital position between
two Balance Sheet dates.
 Thanking You.

Regards :

Ravi Srivastava