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
1.
More Emphasis on Financial Decision
2.
Financial Management as an Important Component of
Business Management
3.
Continuous Function

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.
i.
Institutional sources of finance.
ii.
Issue of financial instruments to collect necessary funds from
the capital market.
iii. 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

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 :i.
Investment Decision
ii. Financing Decision
iii. Dividend Decision

J.L.

Meaning of Financial
Management
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
1. Financial Planning
2. Financial Decision
3. Investment Decision
4. Dividend Policy Decision
5. Financial Control
6. Incidental Functions

Objectives of Financial Management

(i) Profit Maximisation Approach
(ii) Wealth Maximisation Approach
(i) 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
(i) Ambiguity
(ii) Time Value of Money
(iii) Risk Factor

Wealth Maximisation Approach :- According to this

approach, financial management should take such
decisions which increase net present value of the firm.
W = A1

2
(1+k)

(1+k)
W = Net Present

A2

+ . +

An

-C

n
(1+k)

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.

Importance of Financial
(1) SignificantManagement
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