Key Concepts in Financial Management and Business Studies

Posted on Mar 27, 2025 in Business Administration and Management (BAM)

Importance of Financial Management

Q.1. Discuss the importance of financial management.
ANS. Financial management may be defined as planning, organising, directing and controlling the financial activities of an organisation. All the financial activities of a company are directly or indirectly affected by the financial management. The common activities and areas which are influenced by financial management are:

Size and Composition of Fixed Assets of Business: Financial management decisions have a great impact on the size and composition of fixed assets of a business concerned. For example, a decision to invest a sum of 10 crores in fixed assets would increase the size of fixed assets by this amount
Amount and Composition of Current Assets: The amount of investment in current assets and its division into cash, bills receivable, inventories, etc. depends upon financial decisions. Credit policy, inventory management and nature of business also affect the total current assets and their composition.
Period of Financing: Financial management decides about the proportion of long-term and short-term financing of business requirements. It is assumed that short-term financing is cheaper than long-term financing and thus cheaper financing would increase the profitability of the business.
Fixing Debt Equity Ratio in Capital: Firm can raise long term debts by issue of equity shares as well as by issue of debentures and other borrowed fund security. Financial management helps in fixing this ratio.
Items in the Profit and Loss Account: Various items in the Profit and Loss account of a company are affected by financial management decisions. For example higher amount of debt means higher interest expenses in future.

Thus we can say that overall financial health of the business depends on the quality of its financial management. Good financial management aims at obtaining the funds at a lower cost and using them in the most profitable activities

Fixed Capital vs. Working Capital

Q.2. Distinguish between fixed and working capital.
ANS. Comparison of Fixed Capital and Working Capital:

	Fixed Capital	Working Capital
Definition	Fixed capital is blocked in fixed assets. It generates profits through the use of fixed assets.	Working capital is invested in current assets like raw materials, semi-finished goods, debtors, bills receivable, etc.
Circulation	Fixed capital is blocked in fixed assets. It generates profits through the use of fixed assets.	It fluctuates from time to time. It is required for meeting the short-term needs of the business. It is used for meeting the day-to-day expenditure on wages, materials, rent, freight, etc. Working capital is realised and reinvested again and again. It circulates and recirculates to generate profits.
Sources	Fixed capital is raised from long-term and medium term sources which include shareholders, debenture holders, financial institutions, lease, financing, etc.	Working capital is raised from short-term sources of finance. The main sources include commercial banks, trade credits, public deposits, advance from customers, etc.

Features of a Sound Capital Structure

Q.3. State the features of a sound capital structure.
ANS. Capital structure refers to the ratio between Shareholder’s Funds and Borrowed Funds. A company should aim at maximising the long-term market value of its equity shares. The financial management of a company is expected to design and develop a sound capital structure which is most advantageous for the company and its equity shareholders. A sound capital structure must possess the following features:

Economy: It should be economical in the sense that cost of raising funds should not be more than the benefits expected from it.
Safety: A sound capital structure should ensure safety of investment. It should be so determined that fluctuations in the earnings of the company do not have heavy strain on its financial structure.
Balance: There must be a judicious balance between different types of securities so that there is neither excess of debt nor the lack of trading on equity. Risk and return should be properly balanced.
Flexibility: The capital structure should not be rigid but dynamic enough to be adapted to the changing needs of the company. It should permit the company to raise finance for expansion, modernisation, etc. easily and economically. The company should be able to change the ratio between debt and equity, if necessary.
Control: A sound capital structure should enable the existing group of shareholders to retain the control of the company’s management in their hands. The risk of the loss of control and interference in the autonomy of management should be minimum.
Simplicity: The capital structure should be easy to understand and simple to operate. Use of several types of securities with varied terms and conditions may create confusion among investors. It may also result in an increase in the administrative cost of the company.
Maximum Return: The financial structure of a company should be guided by clear-cut objective. Its objective can be maximisation of the wealth of the shareholders or maximisation of return to the shareholders.
Capacity: The company should have the earning capacity to repay long term debt and its interest obligation. It should be able to generate adequate cash flows.

Objectives of Financial Management

Q.4. Discuss the objectives of Financial Management.
ANS. Financial management may be defined as planning, organising, directing and controlling the financial activities of an organisation.

Objectives of Financial Management: The main purpose of the financial manager is to maximise the wealth of the shareholders or the owners of the business. Wealth of the shareholders can be determined by the following formula:

Shareholders’ Wealth = No. of Shares × Market Price Per Share.

Thus, if the market price of the shares increases, there is appreciation in the shareholders’ wealth and vice-versa. Therefore, the major goal of the financial management is to maximise market price of the equity shares of the company.

Here, the question arises: what steps should be taken by the finance manager to raise the market price of his company’s shares ? Answer to this question is that he should take all three main finance decisions given below:

Optimum Investment Decision: It means he should take such decisions regarding investment as which investments are relatively more profitable.
Optimum Financing Decision: It means that he should make such a mix of debt capital and share capital which has the minimum cost of capital.
Optimum Dividend Decision: It means that the total profits of the company should be distributed among the shareholders in such a manner that they feel satisfied and at the same time the company also has sufficient reserve to meet its future requirements.

Decisions taken in the above manner help to make the financial position of the company strong and it has a positive effect on the market price of the shares.

It can, therefore, be said that the objective of financial management is wealth maximisation.

Objectives of Bombay Stock Exchange (BSE)

Q.5 State the objectives of Bombay Stock Exchange (BSE).
ANS. Objectives of BSE:

To safeguard the interest of investing public having dealings on the exchange.
To establish and promote honorable and just practices in securities transactions.
To promote, develop and maintain well regulated market in securities.
To promote industrial development in the country through efficient resource mobilization by the way of investment in corporate securities.

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Basis

Policies Strategies Types of Decisions Guidelines for making decisions in repetitive situations. Guidelines for making decisions in contingent situations. Nature of Problems Taken for problems about which facts are known. Only time of occurrence is not specific. Taken for problems where alternatives cannot be analysed in advance. Implementation Implementation of policy can be delegated. Implementation of strategy cannot be delegated as it requires last-minute executive decision. Competitors’ Moves Policy is not formulated to understand competitors’ moves. Strategy is formulated in order to understand competitors’ moves. Direction Guides to thinking and actions of those who make decisions. Provides direction in which human and physical resources will be focused. Situation Policies are framed to meet general business situations. Strategies are applied to meet specific challenges. Period Policies are framed for longer periods generally 5-6 years. Strategies are formed for short term. Guidance Policies guide the managers in taking decisions. Strategies make the new application of the available resources of the business.

Difference between Time Study and Motion Study

Basis	Motion Study	Time Study
Meaning	It is the study of movement of body/machine required to perform a job.	Time is an art of observing and recording the time required and each detailed element of an operation.
Purpose	The purpose of motion study is to identify useless motion and eliminate them to find out the best method of doing a particular job.	The purpose of time study is to determine the standard time taken to complete a job and improve efficiency.
Improvement	It improves the performance of the workers within any determination.	It aims at improving the performance of workers by discriminating them as efficient and inefficient.

Centralization vs. Decentralization

Basis of Difference	Centralization	Decentralization
Meaning	Concentration of power or authority at the top level only.	Distribution of power or authority at every level of management.
Authority at Different Levels	Top management retains maximum authority. Middle and lower-level management has very little authority.	Authority is systematically divided at every level.
Freedom of Actions	Managers except top-level have less freedom of actions.	Managers at every level have more freedom of actions.
Suitable	Suitable for small-scale and small-size organizations.	Suitable for large-scale organizations.

Importance of Staffing

Q.7. State the importance of staffing.
ANS. Importance of Training and Development: Training and development is very much essential to the organisations as well as to the employees. Training and Development enables an employee to increase his efficiency and productivity. It helps to minimise the time, cost and wastage in the production process.

The main benefits of training and development to the organisation are as follows:

Higher Productivity: Training increases the efficiency of the employees which helps in increasing the production not only in quantity but also in quality. It also reduces the learning time to perform a particular job which leads to higher productivity also.
Economy in Operations: Trained employee will be able to make better and economical use of materials and machinery which helps in reducing wastage, spoilage, breakage. The cost of production reduces.
Reduce Supervision: Trained employees are more professional and disciplined. They do not require continuous and Intensive supervision. So less supervision cost is required by the organisation.

Concept of Motivation

Q.9 Explain the concept of motivation.
ANS. Meaning of Motivation: Motivation may be defined as a process of stimulating or inducing people to work for the attainment of a desired objective.

Features of Motivation

Psychological Feeling which arises from the personal needs and wants of people.
Continuous Process: Human needs are unlimited. So, the managers have to perform the function of motivation continuously.
Goal-directed Behaviour means a motivated person works toward the achievement of the desired goals.
Complex Process: Motivation is a complex process because all individual do not have same needs, desires and reactions.
Positive or Negative: Positive motivation provides rewards like bonus, promotion, recognition, etc, for work hard. Negative motivation uses negative means like warning letter, stopping increment, demotion, punishment, etc.
Motivation is integrated with the person.

Characteristics of Directing

Q:10 Discuss the characteristics of directing.
ANS. Features of Directing:

Directing Initiates Action: Directing is an important managerial function. Directing initiates actions in an organisation which have already been set by other functions (planning, organising and staffing) by giving directions or instructions.
Pervasive Function: Directing is a pervasive function. It is required to perform in all types of organisations, at all levels of management and, moreover, every managers are responsible to perform the directing function.
Continuous Function: Directing is a continuous function which continues throughout the existence of the organisation. Directing does not end after giving instruction to the employees to start work, the managers must continuously guide, supervise and motivate their subordinates to get things done,
Performance Oriented: Directing is a performance oriented function. It converts plans into performance. The main aim of directing is to bring efficiency in performance of the employees towards achievement of organisational objectives.

Functions of a Supervisor

Q.11. Discuss the functions of a Supervisor.
ANS. Functions of a Supervisor: The following are the main functions preformed by a supervisor:

Serving as a Linkman: Supervisor act as a linkman between workers and management. He communicates the policies and decisions of the management regarding work to the workers and gets suggestions, grievanes and complaints of worker regarding this for discussion with the management. In this way, the worker, the supervisor helps management in revising plans and policies and also improving the quality of decisions which results in reduce misunderstanding and conflict between the management and workers.
Issuing Orders and Instruction: Supervisor maintains direct contact with the workers. He issues order to initiate amd modify any work. He is also gives instruction regarding how the work is to be completed. Besides a supervisor have a duty to provide the task of orientation of new workers and provide on-the-job training.
Guiding Subordinates: A Supervisor must provide guide and advice to his subordinates. He explain the plans and policies of the management to the subordinates and also helps to solve the problem relating to various aspect of the job such as working conditions, technical aspects, interpersonal relationship etc.
Work Scheduling: To ensure a steady flow of work, a supervisor prepares a work schedule for his subordinates. Scheduling of work generally mean bounding the time of total work completion as well as different subsidiary part of work completion.

Planning vs. Control

Points	Planning	Control
1. Definition	Planning is an intellectual process of determining the future course of action. It is the rational pre-thinking about ways and means to accomplish the desired goals and targets.	Control refers to an administrative process of verifying or checking whether actual performance or action conforms to planned standards or targets.
2. Orientation	Planning is objective-oriented and future-oriented function.	Control is action result oriented and post-oriented function.
3. Purpose	Its purpose is to command over the forces of uncertainty and complexity. The task of planning is to tackle the future. It estimates the future course of action.	Its purpose is to ward off disruptive forces that cause deviations, to detect deviations and adopt corrective action to keep the plan on the right track. It is a post-mortem analysis of performances.
4. Task	The task of planning is to tackle the future. It estimates the future course of action.	The task of control is to detect deviations and adopt corrective action to keep the plan on the right track. It is a post-mortem analysis of performances.
5. Scope	The scope of planning is much wider.	The scope of control is confined to limited action.
6. Level Responsible	Planning is the function of top management level.	Control is the function of middle and supervisory management level.

Difference Between Marketing and Selling

Points	Marketing	Selling
(1) Definition	Marketing is the process by which people satisfy their needs and wants by obtaining products in exchangefor money.	Selling refers to the exchange of goods and services for money between the seller and the buyers. It involves the distribution of goods already produced.
(2) Objective	The objective of marketing is selling of satisfaction rather than selling a product.	Selling aims at producing goods and somehow selling the goods in the market to make maximum profit.
(3) Scope	Marketing is wider and it includes not only selling but also other activities such as advertising, market research, product planning and development etc.	Selling is narrow and is just a part of marketing.
(4) Orientation	It is oriented to satisfying consumer needs and desires.	It is oriented to satisfying the seller’s need.
(5) Emphasis	The consumer occupies the pride of place in any marketing scheme.	The product occupies the pride of place in any selling scheme.
(6) Focus	It is concerned with planning and development of products to match the market requirements.	It is only concerned with selling the goods and services which have already been produced.

Advantages of Scientific Management

Q.4. State advantages of Scientific Management.
ANS. Advantages to Employers :

Lower cost of production: Scientific management is the effective combination of the most suitable factors of production. It makes possible for the management to ensure greater efficiency through standardisation, simplification and scientific task planning. Ultimately, this results in the reduction of costs.
Simplification of productive process: Scientific and factual study and investigation of different methods and techniques offer the most appropriate and simplified process.

Advantages to Workers :

Higher standard of living: As productivity is increased under scientific management, the workers get more wages which increase their standard of living.
Better working conditions: Under scientific management, there is a great emphasis on improving the actual working conditions such as proper ventilation, lighting, space etc. This enables workers to devote more hours to work smoothly.