Nature And Scope of Financial Nature And Scope of Financial ManagementManagement

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

Characteristics of Modern ApproachCharacteristics of Modern Approach1.1. More Emphasis on Financial DecisionMore Emphasis on Financial Decision2.2. Financial Management as an Important Component of Financial Management as an Important Component of

Business ManagementBusiness Management3.3. Continuous FunctionContinuous Function4.4. Broader ViewBroader View5.5. Measure of PerformanceMeasure of Performance

Approaches to Finance Function or Financial Approaches to Finance Function or Financial ManagementManagement

1. 1. Traditional Approach to Finance FunctionTraditional Approach to Finance Function : : Under this Under this approach, financial management was used to procure and approach, financial management was used to procure and administer funds for the corporation. The following three administer funds for the corporation. The following three things were used to be studied for the procurement of finance.things were used to be studied for the procurement of finance.

i.i. Institutional sources of finance.Institutional sources of finance.ii.ii. Issue of financial instruments to collect necessary funds from Issue of financial instruments to collect necessary funds from

the capital market.the capital market.iii.iii. Legal and accounting relationship between the business and Legal and accounting relationship between the business and

source of finance.source of finance.According to this approach, finance manager was not According to this approach, finance manager was not responsible for the efficient use of funds.responsible for the efficient use of funds.

Limitations of Traditional Concept Limitations of Traditional Concept :-:-1. One sided Approach1. One sided Approach2. More Emphasis on the Financial Problems of Corporations2. More Emphasis on the Financial Problems of Corporations

3. More importance to Sporadic (Long Term effect) Event3. More importance to Sporadic (Long Term effect) Event

4. More Emphasis on Long term funds4. More Emphasis on Long term funds

Modern Approach to Finance Modern Approach to Finance FunctionFunction

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

i.i. Investment DecisionInvestment Decision

ii.ii. Financing DecisionFinancing Decision

iii.iii. Dividend Decision Dividend Decision

Meaning of Financial Meaning of Financial ManagementManagement

J.L. Massie :- “Financial Management is the J.L. Massie :- “Financial Management is the operational activity of a business that is operational activity of a business that is responsible for obtaining and effectively responsible for obtaining and effectively utilising the funds necessary for efficient utilising the funds necessary for efficient operations.”operations.”

Functions of Financial ManagementFunctions of Financial Management

1.1. Financial PlanningFinancial Planning

2.2. Financial DecisionFinancial Decision

3.3. Investment DecisionInvestment Decision

4.4. Dividend Policy DecisionDividend Policy Decision

5.5. Financial ControlFinancial Control

6.6. Incidental Functions Incidental Functions

Objectives of Financial ManagementObjectives of Financial Management

(i)(i) Profit Maximisation ApproachProfit Maximisation Approach

(ii)(ii) Wealth Maximisation ApproachWealth Maximisation Approach

(i)(i) Profit Maximisation Approach Profit Maximisation Approach :- According :- According to this approach, a firm should undertake all to this approach, a firm should undertake all those activities which add to its profits and those activities which add to its profits and eliminates all others which reduce its profits.eliminates all others which reduce its profits.

CriticismCriticism

(i)(i) AmbiguityAmbiguity

(ii)(ii) Time Value of MoneyTime Value of Money

(iii)(iii) Risk FactorRisk Factor

Wealth Maximisation ApproachWealth Maximisation Approach :- According to this :- According to this approach, financial management should take such approach, financial management should take such decisions which increase net present value of the firm.decisions which increase net present value of the firm.

W = W = AA11 ++ AA22 + …………. + + …………. + AAnn - C- C

(1+k)(1+k) (1+k) (1+k)22

(1+k) (1+k)nn

W = Net PresentW = Net Present Value Value

AA11++ AA22 + …………. + + …………. + AAn n = Stream of expected cash = Stream of expected cash benefits from a course of action over a period of time.benefits from a course of action over a period of time.

K = Appropriate discount rate to measure risk and K = Appropriate discount rate to measure risk and timingtiming

C = Initial outlay to acquire that asset or pursue the C = Initial outlay to acquire that asset or pursue the course of action.course of action.

If W is positive, the decision should be taken. On the If W is positive, the decision should be taken. On the other hand if W is negative, the decision should not be other hand if W is negative, the decision should not be taken. taken.

Importance of Financial Importance of Financial ManagementManagement

(1)(1) Significant part of Business Significant part of Business ManagementManagement

(2)(2) Liquidity and ProfitabilityLiquidity and Profitability

(3)(3) Value of firmValue of firm

(4)(4) Centralised NatureCentralised Nature

(5)(5) Benefits to shareholders Benefits to Benefits to shareholders Benefits to InvestorsInvestors

(6)(6) Other BenefitsOther Benefits