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Nature And Scope of Financial Management

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Nature And Scope of Financial Management Financial management is such a managerial process which is concerned with the planning and control of financial resources. – PowerPoint PPT presentation

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Title: 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
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