Financial Management Definition and Major Areas of Finance Finance is defined as the art and science of managing money.

The major areas of finance are (i) financial services,(ii)managerial finance/corporate finance /financial management. Financial services are concerned with design and delivery of advice and financial products to individuals, business and governments within the areas of banking and related institutions , personal financial planning, investments, real estates, insurance etc. , Financial management is concerned with the duties of financial managers actively manages the financial affairs of any type of business , namely, financial and non financial , private and public, large and small profit seeking and not for profit. They perform varied tasks like budgeting, financial forecasting, cash management, credit administration, investment analysis, fund management and so on. 2. Finance and Related Discipline Financial management is an integral is an integral part of over all management and is not a totally independent area. It is related to (a) economics, (b) accounting, (c) marketing (d) production and (d) quantitative methods. Finance and Economics-----The relevance of economics to financial management can be described in the light of two broad areas of economics----macro economics and micro economics. Macro economics is concerned with the overall institutional environment in which the firm operates. It looks at the economy as a whole. Macro economics is concerned with the overall institutional structure of the banking system, money and capital markets, financial intermediaries, monetary, credit and fiscal policies and economic policies. It deals with and controls the activities with in the economy. Since business firms operate in the macroeconomic environment the financial managers must understand the broad economic environment. They should recognize and understand (i) how monetary policy affects the cost and availability of funds, (ii) be well versed in fiscal policy and its effects on the economy, (iii) be aware of various financial institutions / financial out lets and (iv) understand the consequences of various levels of economic activity and changes in economic policy for their environment and so on. Microeconomics deals with economic decisions of individuals and organizations. It concerns itself with the determination of optimal operating strategies In other words the theories of microeconomics provide for effective operations of business firms. It includes supply and demand relation ship, profit maximization strategies, ,optimal sales, product pricing strategies, measurement of utility preference, risk and determination of values, rationale of depreciation of assets. In addition, the primary principle that applies to financial management is marginal
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analysis. It states that financial decision should be made on the basis of comparison between marginal revenue and marginal cost. Finance and Accounting---The relationship between and accounting have two dimensions. One accounting is an important input in financial decision making. Two, there are key differences in view points. Accounting function is a necessary input into the finance function. Accounting generates information / data relating to operation/ activities of the firm. The end product of accounting is preparation of financial statement such as balance sheet, income statement, (profit and loss account) and statement of change in final position / statement. The information contained in these statements and reports assists the financial manager in assessing past performance and future direction of the firm and meets the legal obligations such as payments of taxes, and so on. The finance (treasurer) and accounting (controller) are typically within the control of Vice President/ Director (finance) or Chief Finance Officer. These functions are closely related and generally overlap. The Treatment of Funds---The measurement of funds (income and expenses) in accounting is based on the accrual principle. It means revenue is recognized at the point of sale and not when collected. Similarly, expenses are recognized when they are incurred rather than when they actually paid. The accrual based accounting data do not reflect fully the financial circumstances of the firm. A firm may be quite profitable in the accounting sense in that it has earned profits (sales less expenses) but it may not be able to meet the current obligations owing to shortage of liquidity due to uncollectable receivables. Such a firm will not survive regardless of its level of profits. Treatment of Funds Decision Making---The primary focus of the function of accountants