Nature And Scope of Financial Management

1
Nature And Scope of Financial Management

• Financial management is such a managerial process
  which is concerned with the planning and control
  of financial resources. In the initial years of
  its development, financial management was
  concerned only with collection of funds for
  business. But according to modern viewpoint, not
  only collection of funds but also their proper
  utilisation are the basic functions of financial
  management. Financial manager has become as
  important constituent of business and he provides
  his significant contribution to all business
  activities. He estimates the requirement of
  funds, plans the different sources of funds and
  performs the functions of collection of funds and
  their effective utilisation. As all the business
  activities like marketing, purchase, production
  etc include the creation and utilisation of
  funds, financial manger must be clear about his
  duties and responsibilities in relation to these
  activities.
• Characteristics of Modern Approach
• More Emphasis on Financial Decision
• Financial Management as an Important Component of
  Business Management
• Continuous Function
• Broader View
• Measure of Performance

2
Approaches to Finance Function or Financial
Management

• 1. Traditional Approach to Finance Function
  Under this approach, financial management was
  used to procure and administer funds for the
  corporation. The following three things were used
  to be studied for the procurement of finance.
• Institutional sources of finance.
• Issue of financial instruments to collect
  necessary funds from the capital market.
• Legal and accounting relationship between the
  business and source of finance.
• According to this approach, finance manager was
  not responsible for the efficient use of funds.
• Limitations of Traditional Concept -
• 1. One sided Approach
• 2. More Emphasis on the Financial Problems of
  Corporations
• 3. More importance to Sporadic (Long Term
  effect) Event
• 4. More Emphasis on Long term funds

3
Modern Approach to Finance Function

• According to this approach, financial management
  considers the broader and analytical viewpoint.
  According to this approach, financial management
  is concerned with both acquisition of funds and
  their effective and optimum utilisation. This
  viewpoint not only considers the sporadic events
  but also the long term and short-term financial
  problems. Three decisions are taken under
  financial management -
• Investment Decision
• Financing Decision
• Dividend Decision

4
Meaning of Financial Management

• J.L. Massie - Financial Management is the
  operational activity of a business that is
  responsible for obtaining and effectively
  utilising the funds necessary for efficient
  operations.
• Functions of Financial Management
• Financial Planning
• Financial Decision
• Investment Decision
• Dividend Policy Decision
• Financial Control
• Incidental Functions

5
Objectives of Financial Management

• Profit Maximisation Approach
• Wealth Maximisation Approach
• Profit Maximisation Approach - According to this
  approach, a firm should undertake all those
  activities which add to its profits and
  eliminates all others which reduce its profits.
• Criticism
• Ambiguity
• Time Value of Money
• Risk Factor

6

• Wealth Maximisation Approach - According to this
  approach, financial management should take such
  decisions which increase net present value of the
  firm.
• W A1 A2 . An - C
• (1k) (1k)2
  (1k)n
• W Net Present Value
• A1 A2 . An Stream of expected cash
  benefits from a course of action over a period of
  time.
• K Appropriate discount rate to measure risk and
  timing
• C Initial outlay to acquire that asset or
  pursue the course of action.
• If W is positive, the decision should be taken.
  On the other hand if W is negative, the decision
  should not be taken.

7
Importance of Financial Management

1. Significant part of Business Management
2. Liquidity and Profitability
3. Value of firm
4. Centralised Nature
5. Benefits to shareholders Benefits to Investors
6. Other Benefits