UGC-NET-Commerce-08-Financial Management

Financial Management is all about how finances are managed. When we say finance we mean money. This unit will not only help you in understanding how finances are managed in corporate world but also you can relate the topics studied to your personal finances and clearly manage them well.

Though there is a wide list of topics that can be put under Financial Management, but topics for UGC NET are limited. However, whatever are the topics they need to be studied in detail.

Financial Management is a topic of Paper II. There will be a total of 5 questions in your exam from this topic and the syllabus for this topic are:

  1. Cost of Capital
  2. Capital Structure
  3. Dividend Decisions
  4. Capital Budgeting
  5. Leverage
  6. Working Capital Management

This article will give you a general idea about the topic contents you need to study for financial management.

To get thorough understanding for financial management, let us assume you want to start your own business.  After deciding the line of business, you need to identify the following:

  1. How much money will be required for the business? This includes both:
    1. Initial Setup Cost
    2. Day to Day Operational Cost
  2. Once you know the requirement you need to locate the sources from where the money will be financed?
  3. The assets required for the business and how those assets will be financed? Whether money will be borrowed from outside sources or from owned funds etc.

The answers to these questions form the sub-topics of your main topic financial management. Let us see how:

Now, you have figured out the amount required for the business for start up and day to day activities. The money required for day to day operations is short term decisions covered under working capital management. Then you will decide the sources from where the money will be financed. While deciding about the sources, you will consider how much each source will cost the organization (i.e. funds are not available free of cost), they cost some money to the organization like paying interest on debentures or dividend to preference shareholders. This cost of raising funds is known as cost of capital and so is your first sub topic.

How much money needs to be raised from a particular source of finance is also one of the most important decisions of Financial Management. This is done by keeping in mind the cost of each individual sources.

The various sources can be:

Debentures

Interest is paid on debentures and tax benefit is available on interest paid. This interest paid after tax is cost of raising debentures.

Equity Shares

Dividend is paid on equity shares. This dividend paid is cost of equity capital.

Preference Shares

Dividend is paid on Preference Shares

Retained Earnings

The earnings of business that have not been expanded and retained in business. This is calculated same as cost of equity.

Now you decide the proportion of their financing.

Lets Say

Equity - 60%

Preference  - 20%

Debentures - 20%

This proportions of 60%, 20%, 20% is known as Capital Structure. This Capital Structure has to be worked out keeping in mind the objective of maximizing the returns to the shareholders of the company. Now you have raised funds from Equity Shares, Preference Shares and Debentures. When we specifically talk about the effect of debt on capital structure that is termed as leverage. Next decision is related to deciding the amount of dividend that needs to be paid to the shareholders of the company and how much profits to be retained in business. This will depend upon the profitable opportunities available with the business for investment. The decision related to it is known as dividend decision.

Now, as the business is growing and expanding you might need to buy new assets for business or consider replacing old ones with new ones or modernizing your business. The decisions relating to purchasing or replacement is covered under capital budgeting decisions. These are very important decisions as they have long term impact on business.

All these topics we talked about form part of key decisions of FM. There are 3 key decisions of FM:

  1. Investment Decision
    1. Capital Budgeting
    2. Working Capital Management
  2. Financing Decision
    1. Cost of Capital
    2. Capital Structure
    3. Leverage
  3. Dividend Decision
    1. Dividend Policy
    2. Retained Earnings

It is the finance manager of the company who is entrusted with the responsibility of taking care of these business decisions in view of the organization interest.

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To learn about How to Prepare for UGC NET click here?

To learn about subject UGC NET-Commerce-08-Business Environment click here.

To learn about subject UGC NET-Commerce-08-Business Management click here.

To learn about subject UGC-NET-Commerce-08-Financial Management click here.

To learn about subject UGC NET-Commerce-08-Business Economics click here.

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Thank You

MunshiGiri

To learn about the UGC NET – visit cbsenet.nic.in

5 thoughts on “UGC-NET-Commerce-08-Financial Management

  • October 18, 2019 at 5:46 am
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    Great article. I think that this will definitely help me to be able to have a good financial management. This will help me to improve my accounting as well. This article is very helpful. Thanks for sharing this article.

    Reply
  • September 11, 2019 at 4:56 am
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    Yes, I totally agree with what you said. I think that when we are growing business, we definitely need financial management. Thanks for sharing this article. This article is very helpful for business owners.

    Reply
  • August 27, 2019 at 6:50 am
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    I think that it is very important to have a proper financial management. I believe that this article is definitely very helpful for me and my business.Thanks for sharing this article. This is very a very helpful article.

    Reply
  • February 22, 2018 at 7:22 pm
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    Hi,I have a small doubt.I am planning write a UGC NET and I wanna take a subject Financial management but this subject comes under which subject in UGC ( It’s part of Commerce or management).Please help me which to choose and syllabus I need to prepare for Financial management.

    Reply
    • February 22, 2018 at 7:57 pm
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      Hi Prasanthi,

      Financial management is in both Commerce and Management. FM in Management has more topics than in Commerce.

      Thank You
      MunshiGiri

      Reply

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