Learn CBSE Business Studies Index Terms for Class 12, Part II Chapter 1 Including Definitions and Meanings
1. Business Finance – Business finance is the funds required to establish, and operate business activities and expand in the future. Funds are specifically required for various purchase types of tangible assets such as furniture, machinery, buildings, offices, and factories, or intangible assets like patents, technical expertise, and trademarks.
Other things that require funding are the day-to-day operational activities of a business. This activity includes purchasing raw materials, paying salaries, and bills, collecting money from clients, etc. It is essential to have a sufficient amount of money to survive and grow the business.
Business finance refers to capital funds and credit funds invested in the business.
According to B.O. Wheeler, “Finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall objectives of business enterprise”.
2. Financial Management – Financial management is all about planning, organising, directing, and controlling economic pursuits such as the acquisition and utilisation of the capital of the firm. To put it in other words, it is applying general management standards to the financial resources of the firm.
Financial management is characterised as the function or area in an association which has to be about profit, cash, expenses, and credit. Its goal would be that the association might possess the ability to provide for all functions of organisational financial activities and reap satisfactorily.
3. Wealth Maximisation – In financial management terms, wealth maximisation refers to the process or approach that will result in increasing the profit of the business or, more specifically, increasing the earnings per share (EPS) of the business.
4. Financial Decisions – Financial decisions are the choices that supervisors make, concerning the funds of an organisation. These are crucial choices for the monetary prosperity of the organisation. These choices can be as varied as the acquisition of resources, financing and raising assets, everyday capital, and expenditure management.
Financial decision is concerned with raising funds from long-term sources, that is, through shareholders’ funds or borrowed funds. Shareholders’ funds include share capital, reserves, and surplus and retained earnings, whereas borrowed funds include share capital, reserves, and surplus and retained earnings, whereas, borrowed funds include debentures, long-term loans, and public deposits.
5. Investment Decisions – Investment decision refers to selecting and acquiring the long-term and short-term assets in which funds will be invested by the business.
6. Dividend Decisions – Dividend decisions are concerned with decisions deciding the amount of profits a business would like to distribute among its owners and shareholders. These decisions also involve determining how much amount can be retained within the business for further operations.
In other words, the dividend decision is concerned with the quantum of benefits to be allocated among investors. A decision must be made whether the entire profits are to be distributed, to retain all the profits in business, or to keep a piece of benefits in the business and distribute the remaining profits among investors.
7. Capital Budgeting – Capital budgeting is the process of making investment decisions regarding investing in the long-term assets of a business. It is based on the premise that not all investment decisions turn out to be rewarding, and therefore evaluation of risks and returns needs to be done prior to investment. It will help in choosing the right projects which will give higher returns.
8. Working Capital – Working capital, also known as net worth capital, is the money that a company needs to manage its short-term expenses. It is calculated as a difference between an organisation’s current assets and its current liabilities. Working capital is a measure of the operational efficiency, liquidity, and short-term financial health or solvency of the company.
9. Financial Planning – Financial planning is an integral part of the overall planning of any business organisation. It is the process of determining the objectives, policies, procedures, programmes, and budgets to deal with the corporate financial activities of an enterprise.
In other words, financial planning is undertaking the responsibility of deciding how a business will stand to accomplish its primary objectives and goals. The Financial Plan portrays all of the activities, assets, machinery, and materials that are required to accomplish these targets within a stipulated time frame.
10. Capital Structure – The most crucial component of starting a business is capital. It acts as the foundation of the company. Debt and equity are the two primary types of capital sources for a business. Capital structure is defined as the combination of equity and debt that is put into use by a company in order to finance the overall operations of the company and its growth.
In other words, capital structure is concerned with the particular blend of equity and debt used to back an organisation’s resources and operational activities. According to a corporate point of view, equity addresses a more expensive, super-durable wellspring of capital with more prominent monetary adaptability.
11. Trading on Equity – Trading on equity means the use of fixed-cost sources of finance, such as preference shares, debentures, and long-term loans in the capital structure, to increase the return on equity shares. This is also known as financial leverage. It is advisable to use trading on equity when the rate of return on investment is more than the rate of interest payable on debentures and loans.
12. Fixed Working Capital – Fixed working capital refers to the investments or assets (physical or liquid) that are required to establish and run a business organisation, such as property, building, machinery, and equipment.
13. Cash Flow of Project – Capital budgeting considers factors associated with the nature of the industry, taxation, policy, regulatory structures, and political and social stability to make decisions related to expected cash flows for huge investments.
14. Trade-off between Profitability and Liquidity – In case, a business should have continuous liquidity or enough working capital for continuing operations that generate sales and cater to current obligations. Lack of working capital for current assets would make the business illiquid and lead to losses.
15. Legal Constraints in Determining Dividend Decisions – The Companies Act of 1956 has legal provisions under which a certain percentage of profits should be transferred into reserves if the dividend to be paid is more than 10 %.
16. Stability of Earnings – In case the business is able to consistently reduce short-term liabilities, it will be earning stable earnings continuously to declare more dividends.
17. Access to Capital Markets – A business has easy access to capital markets for raising capital if a higher dividend rate is declared.
18. Taxation Policy – Tax policy is directly proportional to a declaration of dividends, as it directly influences the amount of profits available to the company to declare dividends.
19. Regulatory Framework While Determining Financial Decisions – The Companies Act and SEBI guidelines must be observed while raising funds from the public. The Indian Government has laid down certain norms for debt-equity ratio and ceilings on public deposits. Borrowings from banks and other financial institutions require the fulfilment of certain norms. Thus, the relative ease with which their procedures and norms can be met has an impact on the choice of the source of finance.
20. Flexibility in Financial Decisions – Financing should be done in a way that should be able to cater to additional requirements of funds in the future. If a company uses its debt potential fully, it will lose the flexibility to issue further debt, which might become necessary at some future point.
21. State of Capital Market in Financial Decisions – If the stock market is booming, then it is easy to sell equity shares. However, in a depressed capital market, the company has to opt for debt financing.
22. Control Considerations in Financial Decisions – The issue of more equity may dilute shareholders’ control over the business. Therefore, a company afraid of a takeover bid may prefer debt to equity.
23. Fixed Operating Cost in Financial Decisions – In case a firm has a higher fixed operating burden, like payment of interests, premiums, salaries, and rent, then it should avoid financing through debt. This is because it will further increase the interest payment burden and the firm can reach an unfavourable position. However, if the firm has a lower operating cost, then the firm can borrow funds.
24. Flotation Costs in Financial Decisions – If the floatation cost, i.e. the expenses incurred in an issue of debt, is higher, the source of finance becomes less attractive.
25. Cash Flow Position of the Company in Financial Decisions – A stronger cash flow position may make debt financing more viable than funding through equity.
26. Risk in Financial Decisions – The risk associated with each of the sources is different. The source which involves the least risk should be preferred.
27. Costs in Financial Decisions – The costs of raising funds from different sources are different. A wise finance manager opts for the cheapest source of finance.
28. Fluctuating Working Capital – Fluctuating working capital is the capital that is invested by a business for a temporary period. Fluctuating working capital is also called variable working capital. This type of working capital changes along with the changes in the business assets or the size of the business.
We hope that the offered Business Studies Index Terms for Class 12 with respect to Part II Chapter 1: Financial Management will help you.
Related Links:
- Class 12 Business Studies Index Terms – Chapter 1: Nature and Significance of Management
- Class 12 Business Studies Index Terms – Chapter 2: Principles of Management
- Class 12 Business Studies Index Terms – Chapter 3: Business Environment
- Class 12 Business Studies Index Terms – Chapter 4: Planning
- Class 12 Business Studies Index Terms – Chapter 5: Organising
- Class 12 Business Studies Index Terms – Chapter 6: Staffing
- Class 12 Business Studies Index Terms – Chapter 7: Directing
- Class 12 Business Studies Index Terms – Chapter 8: Controlling
- Class 12 Business Studies Index Terms Part II Chapter 2: Consumer Protection
