Business finance and financial management

Business finance is the money a business needs: to start, to run from day to day, to modernise, to expand or to diversify.

Financial management is about raising that money and using it in the best way: getting funds at low cost and with controlled risk, and using them effectively, without leaving money idle.

Almost every figure in the balance sheet and the profit and loss account is shaped by financial decisions. For example, if ₹50 crore is spent on new plant, fixed assets rise by ₹50 crore, and the way it was raised changes the firm's debt or equity.

Its objective: to maximise shareholders' wealth, which means maximising the market price of the company's equity shares.

So every financial decision is tested in one way: a decision is good if its benefit is more than its cost, so that value is added. When a firm borrows to buy a machine, the machine must earn more than the cost of the borrowed money. Then value is added, and the share price tends to rise.

There are three key financial decisions: investment, financing and dividend.