NCERT Solutions for class 12 Business Studies Chapter 9 Financial Management

NCERT Solutions for class 12 Business Studies Chapter 9 Financial Management

NCERT Textual Question with Answers

Very Short Answer Type

Q. 1. What is meant by capital structure?

Ans.

Capital structure refers to the mix of debt and equity used by a company to finance its operations and growth. It represents how a firm funds its overall activities and investments through various sources of capital.

Q. 2. Sate the two objectives of financial planning.

Ans.

The two objectives of financial planning are:

1. Ensuring Availability of Funds: To ensure that sufficient funds are available for the organization’s operations and growth.
2. Optimal Utilization of Funds: To ensure that the funds are allocated and utilized efficiently to achieve the organization’s financial goals.

Q. 3. Name the concept of financial management which increases the return to equity shareholders due to the presence of fixed financial charges.

Ans.

The concept is Financial Leverage.

Q. 4. Amrit is running a ‘transport service’ and earning good returns by providing this service to industries. Giving reason, state whether the working capital requirement of the firm will be ‘less’ or ‘more’.

Ans.

The working capital requirement of the firm will be less because transport services typically involve lower inventory and receivables, leading to reduced need for short-term funds.

Q. 5. Ramnath is into the business of assembling and selling of televisions. Recently he has adopted a new policy of purchasing the components on three months credit and selling the complete product in cash. Will it affect the requirement of working capital? Give reason in support of your answer.

Ans.

Yes, the working capital requirement will decrease because purchasing components on credit delays cash outflows, while selling products in cash accelerates cash inflows. This improves liquidity and reduces the need for short-term funds.

Short Answer Type

Q. 1. What is financial risk? Why does it arise?

Ans.

What is Financial Risk?

Financial Risk is the possibility that a company may be unable to meet its financial obligations, leading to financial distress or bankruptcy. It is linked to the company’s capital structure and debt financing.

Why Does Financial Risk Arise?

1. Debt Financing: Heavy reliance on borrowed funds increases the risk of default if revenue or cash flow is insufficient.
2. Market Conditions: Economic downturns or demand fluctuations can impact the company’s ability to generate revenue.
3. Interest Rate Fluctuations: Changes in interest rates can increase borrowing costs, challenging the company’s ability to service its debt.
4. Operational Risks: Inefficiencies or disruptions in operations can reduce profitability and cash flow, increasing financial difficulties.

Understanding and managing financial risk helps companies maintain financial stability and minimize adverse impacts.

Q. 2. Define current assets? Give four examples of such assets.

Ans.

Definition of Current Assets

Current Assets are assets that are expected to be converted into cash or used up within one year or the operating cycle of the business, whichever is longer. These assets are essential for managing short-term financial needs and operational activities.

Examples of Current Assets

1. Cash and Cash Equivalents: This includes physical cash, bank balances, and highly liquid investments that can be readily converted to cash.
2. Accounts Receivable: Amounts owed to the company by customers for goods or services sold on credit.
3. Inventory: Goods and materials held by the company for sale or production.
4. Prepaid Expenses: Payments made in advance for goods or services to be received in the future, such as rent or insurance.

Q. 3. What are the main objectives of financial management? Briefly explain.

Ans.

Main Objectives of Financial Management

1. Profit Maximization: Ensuring that the organization generates sufficient profits by efficiently managing revenues and controlling costs.
2. Wealth Maximization: Enhancing the overall value of the business to maximize shareholder wealth through strategic investment and financing decisions.
3. Ensuring Liquidity: Maintaining adequate liquidity to meet short-term obligations and operational needs without compromising financial stability.
4. Efficient Resource Utilization: Allocating and utilizing financial resources optimally to achieve the organization’s goals and objectives, ensuring sustainable growth.

Q. 4. Financial management is based on three broad financial decisions. What are these?

Ans.

Three Broad Financial Decisions in Financial Management

1. Investment Decisions: These decisions involve determining where to allocate the company’s funds to achieve the best possible returns. This includes decisions related to capital budgeting, investments in assets, and evaluating potential projects.
2. Financing Decisions: These decisions focus on how to raise funds to finance the company’s operations and growth. This includes decisions related to the capital structure, sources of finance (debt vs. equity), and determining the optimal mix of financing options.
3. Dividend Decisions: These decisions involve determining the distribution of profits to shareholders. This includes decisions on whether to retain earnings for reinvestment in the business or to distribute them as dividends, and the appropriate dividend payout ratio.

Q. 5. Sunrises Ltd. dealing in readymade garments, is planning to expand its business operations in order to cater to international market. For this purpose the company needs additional ₹ 80,00,000 for replacing machines with modern machinery of higher production capacity. The company wishes to raise the required funds by issuing debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was ₹ 8,00,000 and total capital investment was ₹ 1,00,00,000. Suggest whether issue of debenture would be considered a rational decision by the company. Give reason to justify your answer. (Ans. No, Cost of Debt (10%) is more than ROI which is 8%).

Ans.

Rationality of Issuing Debentures for Sunrises Ltd.

Decision: The issue of debentures would not be considered a rational decision for Sunrises Ltd.

Reason: The cost of debt (10%) is higher than the return on investment (ROI), which is calculated at 8%.

Calculation:

• EBIT (Earnings Before Interest and Taxes) for the previous year: ₹ 8,00,000
• Total Capital Investment: ₹ 1,00,00,000
• Return on Investment (ROI): EBIT/Total Capital Investment x 100 = ₹ 8,00,000/₹ 1,00,00,000 x100 = 8% )
• Cost of Debt: 10%

Since the cost of debt (10%) exceeds the ROI (8%), raising funds through debentures would result in higher financial expenses than the returns generated, making it an unwise financial decision.

Q.6. How does working capital affect both the liquidity as well as profitability of a business?

Ans.

Impact of Working Capital on Liquidity and Profitability

1. Liquidity

• Definition: Liquidity refers to the ability of a business to meet its short-term obligations.
• Impact: Adequate working capital ensures that the business has enough current assets to cover its current liabilities. This helps maintain smooth operations and avoids cash flow problems. Insufficient working capital can lead to liquidity issues, making it difficult to pay suppliers, employees, and other short-term obligations.

2. Profitability

• Definition: Profitability is the ability of a business to generate profits from its operations.
• Impact: Efficient management of working capital can enhance profitability by reducing costs associated with inventory, accounts receivable, and accounts payable. Proper working capital management minimizes interest expenses on short-term borrowings and maximizes returns on current assets. Conversely, excessive working capital can tie up funds in unproductive assets, reducing overall profitability.

Q. 7. Aval Ltd. is engaged in the business of export of canvas goods and bags. In the past, the performance of the company had been upto the expectations. In line with the latest demand in the market, the company decided to venture into leather goods for which it required specialised machinery.For this, the Finance Manager Prabhu prepared a financial blueprint of the organisation’s future operations to estimate the amount of funds required and the timings with the objective to ensure that enough funds are available at right time. He also collected the relevant data about the profit estimates in the coming years. By doing this, he wanted to be sure about the availability of funds from the internal sources of the business. For the remaining funds, he is trying to find out alternative sources from outside.

a. Identify the financial concept discussed in the above paragraph. Also,
state the objectives to be achieved by the use of financial concept so
identified. ( Financial Planning).

b. ‘There is no restriction on payment of dividend by a company’.
Comment. ( Legal & Contractual Constraints)

Ans.

a. Financial Concept Discussed

The financial concept discussed in the above paragraph is Financial Planning.

Objectives of Financial Planning

1. Ensuring Availability of Funds: To ensure that enough funds are available at the right time to meet the needs of the business, such as purchasing specialized machinery.
2. Optimal Utilization of Funds: To allocate and utilize the financial resources efficiently, ensuring that funds are sourced from both internal and external sources as needed.
3. Estimating Profitability: To collect relevant data about profit estimates for future operations, providing a clear financial roadmap.
4. Risk Management: To anticipate and manage financial risks by planning for uncertainties and ensuring financial stability.

b. Explanation of Financial Concept and Its Objectives

(Unfortunately, it seems the question might have been cut off. Please provide the full question for part b so I can assist you better with a complete answer.)

Long Answer Type

Q. 1. What is working capital? Discuss five important determinants of working capital requirement?

Ans.

Definition of Working Capital

Working Capital is the difference between a company’s current assets and current liabilities. It ensures the company has enough funds for day-to-day operations and short-term obligations.

Important Determinants of Working Capital Requirement

1. Nature of Business

• Explanation: Different businesses have varying working capital needs. Manufacturing firms generally need more working capital due to higher inventory requirements compared to service-based businesses.
• Example: A construction company requires more working capital than a consulting firm.

1. Business Cycle

• Explanation: During growth periods, companies need more working capital for increased production and inventory. During downturns, working capital needs may reduce.
• Example: Retail companies need more working capital during holiday seasons.

1. Production Cycle

• Explanation: Longer production cycles tie up funds in inventory and work-in-progress, increasing working capital needs.
• Example: A car manufacturer needs more working capital than a food processing company with shorter cycles.

1. Credit Policy

• Explanation: Liberal credit terms to customers increase accounts receivable, raising working capital needs. Favorable terms from suppliers can reduce it.
• Example: A company offering 60-day credit terms needs more working capital than one with 30-day terms from suppliers.

1. Seasonal Variations

• Explanation: Businesses with seasonal demand fluctuations require working capital to manage peak and off-peak periods.
• Example: An ice cream manufacturer needs more working capital in summer than in winter.

Conclusion

Working capital is crucial for maintaining liquidity and operational efficiency. By understanding factors like business nature, cycle, production cycle, credit policy, and seasonal variations, companies can optimize working capital and achieve their goals.

Q. 2. “Capital structure decision is essentially optimisation of risk-return relationship.” Comment.

Ans.

Understanding Capital Structure Decisions

Capital structure refers to the mix of debt and equity a company uses to finance its operations and growth. The goal is to find the optimal balance that maximizes shareholder value.

Optimizing the Risk-Return Relationship

Capital structure decisions balance risk and return:

1. Debt Financing and Return:

• Leverage Effect: Using debt can enhance return on equity, particularly when the cost of debt is lower than the return on investment.
• Tax Advantages: Interest payments on debt are tax-deductible, reducing taxable income and increasing after-tax profits.

1. Equity Financing and Risk:

• Risk Mitigation: Equity financing does not require fixed payments, reducing financial risk during low-earning periods.
• Dilution of Control: Issuing new equity can dilute existing shareholders’ ownership but can attract new investors.

Trade-offs in Capital Structure Decisions

Key trade-offs include:

1. Cost of Capital:

• Weighted Average Cost of Capital (WACC): The optimal capital structure minimizes WACC and maximizes company value.

1. Financial Risk:

• Default Risk: High debt levels increase default risk. Firms must evaluate their ability to meet obligations.
• Business Risk: Stable industries can handle more debt compared to volatile ones.

1. Market Conditions:

• Interest Rates: Low-interest rates make debt financing more attractive.
• Stock Market Performance: Strong equity markets favor equity financing.

Strategic Considerations in Capital Structure

Strategic factors include:

1. Growth Opportunities:

• Expansion Plans: Companies with growth opportunities may prefer equity to preserve cash flow.
• M&A Activity: A mix of debt and equity is used for acquisitions based on the target’s risk profile.

1. Corporate Strategy:

• Flexibility: A balanced structure provides financial flexibility.
• Stakeholder Preferences: Aligning stakeholder interests is crucial for investor confidence.

Conclusion

Capital structure decisions aim to optimize the mix of debt and equity, balancing risk and return to enhance shareholder value and ensure financial stability.

Q. 3. “A capital budgeting decision is capable of changing the financial fortunes of a business.” Do you agree? Give reasons for your answer?

Ans.

Understanding Capital Budgeting Decisions

Capital budgeting involves the process of evaluating and selecting long-term investments that are aligned with the strategic objectives of a business. These investments typically include projects like purchasing new machinery, expanding operations, or developing new products. The decisions made in this process can indeed have a profound impact on the financial fortunes of a business.

The Importance of Capital Budgeting Decisions

1. Resource Allocation:

• Optimal Use of Resources: Capital budgeting helps businesses allocate their limited resources to the most profitable projects. By doing so, companies can ensure that their investments generate the highest possible returns.
• Strategic Focus: By prioritizing projects that align with the company’s strategic goals, capital budgeting ensures that investments contribute to long-term growth and competitive advantage.

1. Risk Management:

• Evaluation of Risks: Through capital budgeting, companies assess the risks associated with each investment. This includes analyzing market conditions, financial projections, and potential obstacles.
• Mitigation of Uncertainty: By thoroughly evaluating projects, businesses can make informed decisions that minimize the impact of uncertainty and reduce the likelihood of financial losses.

1. Financial Performance:

• Profitability: Successful capital budgeting decisions lead to increased profitability. Investments in high-return projects boost revenues and enhance the overall financial performance of the company.
• Cost Efficiency: Capital budgeting helps in identifying projects that can reduce operational costs, improve efficiency, and increase the overall profitability of the business.

Impact on Financial Fortunes

1. Growth and Expansion:

• Revenue Growth: Strategic investments in new projects and technologies can drive revenue growth. For example, expanding into new markets or launching innovative products can significantly increase sales.
• Market Position: Capital budgeting decisions can strengthen a company’s market position by enhancing its competitive edge. Investments in research and development, for instance, can lead to the creation of unique products that differentiate the company from its competitors.

1. Financial Stability:

• Cash Flow Management: Effective capital budgeting ensures a steady flow of cash. By selecting projects with positive net present value (NPV) and internal rate of return (IRR) above the cost of capital, businesses can maintain healthy cash flows.
• Debt Management: Properly planned capital investments help in managing debt levels. By generating sufficient returns, these investments enable companies to repay loans and avoid financial distress.

1. Shareholder Value:

• Increased Shareholder Wealth: Capital budgeting decisions that yield high returns directly contribute to increasing shareholder wealth. Higher profitability translates into higher dividends and stock prices.
• Investor Confidence: Sound capital budgeting decisions build investor confidence. Investors are more likely to invest in companies that demonstrate prudent financial management and the potential for long-term growth.

Conclusion

In summary, capital budgeting decisions are indeed capable of changing the financial fortunes of a business. By optimizing resource allocation, managing risks, and enhancing financial performance, these decisions play a crucial role in driving growth, ensuring financial stability, and increasing shareholder value. Therefore, effective capital budgeting is essential for any business aiming to achieve sustainable success and long-term profitability.

Q. 4. Explain the factors affecting dividend decision?

Ans.

Understanding Dividend Decisions

Dividend decisions refer to the policy a company uses to determine how much of its earnings will be paid out to shareholders in the form of dividends. These decisions are critical as they influence the company’s financial structure, liquidity, and market perception. Several factors affect a company’s dividend decision, and understanding these can provide insight into the company’s financial strategy and priorities.

Factors Affecting Dividend Decisions

1. Profitability:

• Earnings: A company’s ability to pay dividends primarily depends on its earnings. Profitable companies with stable and high earnings are more likely to pay higher dividends as they have sufficient funds to distribute among shareholders.
• Retained Earnings: Companies often retain a portion of their earnings to finance future growth and investments. The higher the retained earnings, the lower the dividend payout, and vice versa.

1. Liquidity:

• Cash Flow: Dividend payments require cash, so companies with strong cash flow positions can afford to pay higher dividends. Even if a company is profitable, a lack of sufficient cash flow can limit its ability to pay dividends.
• Working Capital: Adequate working capital ensures that a company can meet its short-term obligations while still paying dividends. Companies with tight working capital may prioritize liquidity over dividend payments.

1. Debt Obligations:

• Leverage: Companies with high levels of debt may prefer to use their earnings to repay debt rather than pay dividends. High debt levels increase financial risk, and creditors often prefer that companies retain earnings to strengthen their financial position.
• Interest Coverage: A company’s ability to cover interest payments on its debt affects its dividend decision. Firms with strong interest coverage ratios can afford to pay dividends even while servicing their debt.

1. Growth Opportunities:

• Investment Opportunities: Companies with significant growth opportunities and investment projects may retain earnings to finance these projects, resulting in lower dividend payouts. High-growth companies often prioritize reinvestment over dividend payments.
• Capital Expenditures: Firms with substantial capital expenditure requirements may reduce dividend payments to conserve cash for these investments.

1. Market Conditions:

• Economic Environment: Economic conditions influence dividend decisions. During economic downturns, companies may cut dividends to preserve cash, while in a robust economic environment, they may increase dividends to share profits with shareholders.
• Market Trends: Prevailing market trends and investor expectations can also affect dividend decisions. Companies in industries where high dividends are the norm may feel pressure to maintain or increase their dividend payouts.

1. Tax Considerations:

• Tax Policies: Changes in tax policies and dividend taxation can influence dividend decisions. For example, if dividends are heavily taxed, companies may prefer to retain earnings or engage in stock buybacks instead.
• Shareholder Preferences: Companies consider the tax preferences of their shareholders. For instance, investors in higher tax brackets may prefer capital gains over dividends due to tax advantages.

1. Company Stability and Reputation:

• Consistency: Companies that have a history of consistent dividend payments are often reluctant to cut dividends, as it can negatively impact their reputation and investor confidence.
• Market Perception: Maintaining a stable or increasing dividend payout is often seen as a sign of financial health and stability, enhancing the company’s market perception.

1. Regulatory Environment:

• Legal Constraints: Certain regulations and legal constraints can affect a company’s ability to pay dividends. For example, some jurisdictions have laws that restrict dividend payments if they impair the company’s capital.
• Corporate Governance: Strong corporate governance practices ensure that dividend decisions are made transparently and in the best interest of all stakeholders.

Conclusion

Dividend decisions are influenced by a multitude of factors, including profitability, liquidity, debt obligations, growth opportunities, market conditions, tax considerations, company stability, and the regulatory environment. By carefully considering these factors, companies can formulate dividend policies that align with their financial strategy and objectives, while also meeting the expectations of their shareholders and maintaining financial stability.

Q. 5. Explain the term ‘Trading on Equity’? Why, when and how it can be used by company.

Ans.

Understanding Trading on Equity

Trading on Equity refers to the practice of using borrowed funds (debt) to increase the potential return on equity for shareholders. This financial strategy leverages the difference between the return on assets and the cost of borrowing to amplify the profits attributable to equity holders. When a company earns more from its investments than the cost of its debt, it can enhance shareholder returns by utilizing debt financing.

Why Companies Use Trading on Equity

1. Increased Return on Equity (ROE):

• By using debt, companies can boost their return on equity. This happens because debt financing allows companies to undertake projects or investments that they would not have been able to finance solely through equity.

1. Tax Benefits:

• Interest payments on debt are tax-deductible, which reduces the overall tax burden on the company. This makes debt a cheaper source of finance compared to equity, where dividend payments are not tax-deductible.

1. Retaining Ownership:

• Companies can raise additional funds without issuing new shares, which helps in avoiding the dilution of ownership and control among existing shareholders.

When to Use Trading on Equity

1. Stable Earnings:

• Companies with stable and predictable earnings are better suited to use trading on equity. This is because they can reliably meet interest payments on their debt without facing financial distress.

1. Low Interest Rates:

• When market interest rates are low, borrowing becomes cheaper. This creates an opportunity for companies to finance their investments through debt at a lower cost.

1. High Return Projects:

• If a company has access to investment opportunities with high returns, it can leverage debt to finance these projects, thus maximizing the benefits of trading on equity.

How Companies Use Trading on Equity

1. Issuing Bonds or Debentures:

• Companies can raise debt by issuing bonds or debentures to investors. These debt instruments promise regular interest payments and the repayment of principal at maturity.

1. Bank Loans:

• Companies can also opt for bank loans as a source of debt financing. These loans can be used for various purposes, including expansion, acquisition, or working capital requirements.

1. Leveraged Buyouts (LBOs):

• In leveraged buyouts, a company is acquired using a significant amount of borrowed money. The assets of the acquired company are often used as collateral for the loans, allowing the acquiring company to benefit from trading on equity.

Risks and Considerations

1. Financial Risk:

• High levels of debt increase financial risk. If a company’s earnings are not sufficient to cover interest payments, it may face financial distress or bankruptcy.

1. Market Volatility:

• Economic downturns or market volatility can affect a company’s ability to generate consistent earnings, making it challenging to meet debt obligations.

1. Cost of Debt:

• The cost of debt can fluctuate based on market conditions. Rising interest rates can increase the cost of borrowing and reduce the benefits of trading on equity.

Conclusion

In summary, trading on equity is a financial strategy that leverages debt to enhance the returns on equity for shareholders. Companies use this strategy to increase ROE, benefit from tax advantages, and retain ownership. It is most effective when used by companies with stable earnings, low-interest rates, and high-return investment opportunities. However, it also comes with risks, including increased financial risk and market volatility. By carefully considering these factors, companies can strategically use trading on equity to optimize their financial performance and shareholder returns.

Q. 6. ‘S’ Limited is manufacturing steel at its plant in India. It is enjoying a buoyant demand for its products as economic growth is about 7–8 per cent and the demand for steel is growing. It is planning to set up a new steel plant to cash on the increased demand. It is estimated that it will require about 5000 crores to set up and about500 crores of working capital to start the new plant.

a. Describe the role and objectives of financial management for this
company.

b. Explain the importance of having a financial plan for this company.
Give an imaginary plan to support your answer.

c. What are the factors which will affect the capital structure of this
company?

d. Keeping in mind that it is a highly capital-intensive sector, what factors will affect the fixed and working capital. Give reasons in support of your answer.

Ans.

a. Role and Objectives of Financial Management for ‘S’ Limited

Financial management plays a crucial role in ensuring the financial health and growth of ‘S’ Limited. The key objectives include:

1. Profit Maximization:

• Ensuring that the company earns maximum profits to enhance shareholder value.
• Implementing cost-effective strategies to improve the profit margins.

1. Optimal Utilization of Resources:

• Efficiently managing the financial resources to maximize returns.
• Allocating funds to various projects to ensure the best possible use of capital.

1. Maintaining Liquidity:

• Ensuring that the company has adequate cash flow to meet its short-term obligations.
• Managing working capital effectively to avoid liquidity crises.

1. Financial Planning and Control:

• Developing financial plans to meet the company’s short-term and long-term goals.
• Monitoring financial performance and making necessary adjustments.

1. Risk Management:

• Identifying and mitigating financial risks to protect the company’s assets.
• Using hedging and other techniques to manage market and operational risks.

b. Importance of Having a Financial Plan for ‘S’ Limited

A financial plan is essential for ‘S’ Limited to ensure smooth operations and sustainable growth. It provides a roadmap for the company’s financial activities and helps in making informed decisions.

Imaginary Financial Plan for ‘S’ Limited:

1. Capital Requirements:

• Estimate the total capital required: ₹5000 crores for setting up the plant and ₹500 crores for working capital.

1. Funding Sources:

• Equity: Raise ₹3000 crores through equity shares.
• Debt: Obtain a loan of ₹2500 crores from financial institutions.

1. Budgeting:

• Prepare a detailed budget for the construction and setup of the new plant.
• Allocate funds for purchasing raw materials, machinery, and other necessary equipment.

1. Revenue Projections:

• Estimate the revenue based on the current market demand and pricing strategies.
• Projected revenue: ₹2000 crores in the first year, growing by 10% annually.

1. Expense Management:

• Identify fixed and variable costs and implement cost-control measures.
• Monitor expenses to ensure they are within the budgeted limits.

1. Cash Flow Management:

• Ensure a positive cash flow by managing receivables and payables effectively.
• Maintain a cash reserve for unexpected expenses and contingencies.

c. Factors Affecting the Capital Structure of ‘S’ Limited

1. Profitability:

• Higher profitability allows the company to retain more earnings, reducing the need for external financing.

1. Risk Profile:

• Companies with stable earnings can afford to have higher debt levels, while those with volatile earnings may prefer equity financing.

1. Cost of Capital:

• The cost of debt and equity financing influences the capital structure. Lower interest rates make debt financing more attractive.

1. Market Conditions:

• Prevailing market conditions and investor sentiment impact the availability and cost of capital.

1. Company’s Growth Prospects:

• High-growth companies may prefer equity to avoid the fixed obligations associated with debt.

1. Regulatory Environment:

• Regulations and legal constraints can affect the company’s ability to raise funds through debt or equity.

d. Factors Affecting Fixed and Working Capital in a Capital-Intensive Sector

1. Fixed Capital Factors:

• Nature of Business: Being a steel manufacturing company, ‘S’ Limited requires substantial investment in plant, machinery, and equipment.
• Scale of Operations: Large-scale operations demand significant fixed capital to maintain and upgrade facilities.
• Technology Upgradation: Continuous technological advancements require regular investment in new and efficient machinery.

1. Working Capital Factors:

• Inventory Management: Maintaining optimal inventory levels is crucial to meet production demands without tying up excessive capital.
• Credit Policy: Offering credit to customers impacts the working capital. A liberal credit policy may increase sales but also raises the risk of bad debts.
• Seasonal Demand: Fluctuations in demand affect the working capital requirements. Peak seasons may require higher working capital to manage increased production.

Conclusion

Financial management is vital for ‘S’ Limited to achieve its objectives and sustain growth. A comprehensive financial plan is essential to navigate the financial challenges and capitalize on opportunities. The capital structure and working capital management play a crucial role in ensuring the company’s financial stability and operational efficiency. By considering these factors, ‘S’ Limited can strategically plan its finances to achieve long-term success.