The Traditional Approach and The Modern Approach of Finance

A number of approaches are associated with finance function but for the
sake of convenience, various approaches are divided into two broad
categories:

2. The Modern Approach

The traditional approach to the finance function relates to the initial stages
of its evolution during 1920s and 1930s when the term ‘corporation finance’
was used to describe what is known in the academic world today as the
‘financial management’. According to this approach, the scope, of finance
function was confined to only procurement of funds needed by a business on
most suitable terms.

The utilisation of funds was considered beyond the purview of finance

function. It was felt that decisions regarding the application of funds are
taken somewhere else in the organisation. However, institutions and
instruments for raising funds were considered to be a part of finance
function.

The scope of the finance function, thus, revolved around the study of rapidly
growing capital market institutions, instruments and practices involved in
raising of external funds.

The traditional approach to the scope and functions of finance has

now been discarded as it suffers from many serious limitations:

(i) It is outsider-looking in approach that completely ignores internal decision

making as to the proper utilisation of funds.
(ii) The focus of traditional approach was on procurement of long-term funds.
Thus, it ignored the important issue of working capital finance and
management.

(iii) The issue of allocation of funds, which is so important today, is

completely ignored.

(iv) It does not lay focus on day to day financial problems of an organisation.

2. The Modern Approach:

The modern approach views finance function in broader sense. It includes

both rising of funds as well as their effective utilisation under the purview of
finance. The finance function does not stop only by finding out sources of
raising enough funds; their proper utilisation is also to be considered. The
cost of raising funds and the returns from their use should be compared.

The funds raised should be able to give more returns than the costs involved
in procuring them. The utilisation of funds requires decision making. Finance
has to be considered as an integral part of overall management. So finance
functions, according to this approach, covers financial planning, rising of
funds, allocation of funds, financial control etc.

The new approach is an analytical way of dealing with financial problems of a

firm. The techniques of models, mathematical programming, simulations and
financial engineering are used in financial management to solve complex
problems of present day finance.

The modern approach considers the three basic management decisions, i.e.,
investment decisions, financing decisions and dividend decisions within the
scope of finance function.

March 2018 finance report:

2018 started with the good news. The World Bank’s Global Economic
Prospects and the IMF’s World Economic Outlook both show that the global
economy is in a recovery. Furthermore, it is expected that the upturn is
broad-based as the growth is increasing in more than half of the world
economies growth in 2017 is estimated to have rebounded to 2.3 percent
while emerging and developing economies (EMDEs) were projected to have
higher-than-expected growth of 4.3 percent. Overall, global growth is
projected to edge up to 3.1 percent in 2018.

Uncertainty remains elevated due to other factors such as the consequences

of Brexit, possible changes to trade policies in US, and the concerns due to
the increasing political tension in Middle East. In the end, financial markets
are functioning but vulnerable, as the recent IIF report shows that EMDEs
portfolio outflows in February 2018 were the sharpest since the US
Presidential election.

However,Some sources of finance are short term and must be paid back

within a year. Other sources of finance are long term and can be paid back
over many years. Internal sources of finance are funds found inside the
business. For example, profits can be kept back to finance expansion.