Financial Management Notes
Subject Overview
Financial Management is the core paper on how businesses make money decisions — raising capital, deciding what to invest in, and managing working capital day to day. You'll cover the time value of money and cost of capital, capital structure theories and operating/
Subject at a glance
4
Units
24
Topics
6
Credits
4
Infographics
Unit-wise Syllabus
4 units — open any unit for detailed topic-wise notes, diagrams and important exam questions
- Meaning
- scope and objectives of financial management
- functions and role of a financial manager
- time value of money — compounding and discounting techniques
- meaning and determination of cost of capital
Future value
FV = PV (1 + r)ⁿ
Present value
PV = FV / (1 + r)ⁿ
Annuity future value
A [(1 + r)ⁿ − 1] / r
Annuity present value
A [1 − (1 + r)⁻ⁿ] / r
Rule of 72
Years to double ≈ 72 / interest rate
Study guide
Financial management is about raising and using money wisely. You study its meaning, scope and objectives (profit versus wealth maximisation), the role of the finance manager, the time value of money through compounding and discounting, and the meaning and determination of the cost of capital. Master present value and future value problems first; almost every later topic depends on them.
- Meaning and features of capital structure decisions
- factors affecting capital structure
- theories of capital structure
- EBIT-EPS analysis
- financial and operating leverage
Operating leverage
Contribution / EBIT
Financial leverage
EBIT / EBT
Combined leverage
Operating leverage × financial leverage
EPS
(EBIT − interest)(1 − tax) / number of shares
Study guide
Capital structure is the mix of debt and equity a firm uses. You study its features and the factors affecting it, theories of capital structure, EBIT-EPS analysis and financial and operating leverage. Practise the leverage formulas and be able to explain what high financial leverage means for risk.
- Meaning and process of capital budgeting
- discounted and non-discounted evaluation methods (payback period, ARR, NPV, benefit-cost ratio, IRR)
- capital rationing
- determinants and types of dividend policy
- Walter's Model
- Gordon's Model
- MM Hypothesis
Payback period
Accept if payback is within the target
Ignores time value and later cash flows
ARR
Accept if above the target return
Uses accounting profit, not cash
NPV
Accept if NPV > 0
Needs a discount rate
IRR
Accept if IRR > cost of capital
Can give multiple rates
Study guide
Capital budgeting decides which long-term projects to accept. You study the process, the payback period, ARR, NPV, benefit-cost ratio and IRR methods, capital rationing, and dividend policy with Walter's model, Gordon's model and the MM hypothesis. NPV and IRR numericals are the most reliable marks, so practise them with cash flow tables.
- Planning and forecasting working capital
- importance of adequate working capital
- determinants of working capital requirement
- sources of working capital
- cash management
- receivables management
- inventory management
- 1. Cash: Pay for raw materials
- 2. Raw materials: Store and issue
- 3. Work in progress: Production
- 4. Finished goods: Ready to sell
- 5. Debtors: Credit sales collected as cash
Study guide
Working capital is the money needed for day-to-day operations. You study planning and forecasting, why adequate working capital matters, its determinants and sources, and cash, receivables and inventory management. Learn the operating cycle and be able to compute working capital requirement.
Why Financial Management Matters
Financial management is the core of corporate finance and a must-know for careers in banking, investment, accounting and management. NPV, IRR, leverage and working capital are staple topics for CA, CMA, MBA Finance and finance interviews.
How to Prepare for Financial Management
- Practise NPV, IRR and payback numericals until you can set up the cash flow table quickly.
- Learn the formulas for leverage and cost of capital on a single revision sheet.
- Compare dividend theories in a table.
Financial Management: Frequently Asked Questions
What is the difference between NPV and IRR?
NPV is the difference between the present value of cash inflows and outflows at a chosen discount rate, while IRR is the discount rate at which NPV becomes zero.
What is working capital?
Working capital is the difference between current assets and current liabilities and represents the funds available for day-to-day operations.