Nature, Purpose and Scope of

Financial Management
(Financial Management 1)
2nd Trimester, AY 2020-2021
 Nature, Purpose and Scope of
Financial Management
Learning Outcomes:
1. Describe the nature, goal and basic scope of financial
management
2. Explain briefly the 3 major types of decisions that the
Finance Manager makes
3. Discuss the importance or significance of financial
management
4. Describe the relationship between Financial Management
and Accounting
5. Describe the relationship between Financial Management
and Economics
 Nature of Financial Management
• also known as managerial finance, corporate finance
and business finance,
• is a decision making process concerned with the
planning, acquiring and utilizing funds in a manner that
achieves the firm’s desired goals.
• it is also described as the process for and the analysis
of making financial decisions in the business context.
 What is Finance?
• is a body of facts, principles and theories relating to
raising and using money by individuals, businesses and
governments.
• concerns both financial management of profit oriented
business organizations particularly the corporate form of
business, as well as, concepts and techniques that are
applicable to individuals and to governments.
 Goal of Financial Management
• To maximize the current value per share of the existing
stock or ownership in a business firm.
ü For firms listed in the stock market, the goal is to increase its
market value
ü For the owner of a business firm who is not listed in the stock
market, the goal is to increase the capital of the owner through
profit generation his business
• The stated goal considers the shareholders as residual
owners, entitled only to what is left after anyone with a
legitimate claim are paid their due.
• The financial manager should best serve the owners by
identifying goods and services that add value to the firm
because they are desired and valued in the free market
place.
 Scope of Financial Management
• Primarily concerned with the acquisition, financing and
management of assets of business concern in order to
maximize the wealth of the firm for its owners.
• Finance manager responsibility is to acquire funds needed
by the firm and investing those funds in profitable ventures
that will maximize the firm’s wealth, generating returns to the
business concern.
 Functions of a Finance Manager
1. Procurement of short-term as well as long term funds
from financial institutions.
2. Mobilization of funds through financial instruments
such as equity shares, preference shares, debentures,
bonds, notes and so forth.
3. Compliance with legal and regulatory provisions
relating to funds procurement, use and distribution as
well as coordination of the finance function with the
accounting function.
4. Judicious and efficient use of funds available to the
firm, keeping in view the objectives of the firms and
expectations of the providers of funds.
 3 Types of Financial Decisions

1. Investment Decisions - determines how scarce or

limited resources in terms of funds of business firms are
committed to projects.

2. Financing Decisions – assert that the mix of debt and

equity chosen to finance investments should maximize
the value of investments made.

3. Dividend Decisions – is concerned with the

determination of quantum of profits to be distributed to
the owners, the frequency of such payments and the
amounts to be retained by the firm.
Significance of Financial Management
Broad Applicability
– the principles of finance are applicable wherever there
is cash flow. The concept of cash flow is one of the central
elements of financial analysis, planning, control and
resource allocation decisions.
– cash flow is important because the financial heath of the
firm depends on its ability to generate sufficient amounts
of cash to pay its employees, suppliers, creditors and
owners.
Significance of Financial Management
Reduction of Chances of Failure
– a firm having latest technology, sophisticated
machinery, high caliber marketing and technical experts
may still fail unless its finances are managed on sound
principles of financial management.
– The strength of the business lies in its financial
discipline.
– Finance function is treated as primordial which enables
other functions like production, marketing, purchasing and
personnel to be effective in the achievement of
organizational goal and objectives.
Significance of Financial Management
Measurement of Return on Investment
– anybody who invests his money will expect to earn a
reasonable return on his investment.
– Owners of business try to maximize their wealth.
– Financial management studies the risk-return
perception of the owners and the time value of money.
– Considers the amount of cash flow to be generated
including the risk associated with it.
 Relationship Between Financial
Management, Accounting and Economics
Financial Management and Accounting:
• Financial management is more than the art of accounting
and bookkeeping.
• Accounting function discharges the systematic recording of
transactions relating to the firm’s activities in the books of
accounts and summarizing the same for presentation in the
financial statements.
• Finance manager uses the accounting information provided
to him in the analysis and review of the firm’s business
position in decision making.
• He uses capital budgeting techniques, statistical and
mathematical models and computer applications in decision
making to meet his goal of maximizing the value of the firm.
 Relationship Between Financial
Management, Accounting and Economics
Financial Management and Economics:
• Financial managers can make better decisions if they apply
basic economic theories like best allocation of resources.
• He try to find the mix of available resources that will achieve
the highest return at the least risk within the confines of an
expected change in the economic climate.
• Financial managers should understand how to respond
effectively to changes in supply, demand, and prices (firm
related micro factors) and to overall economic factors
(macro factors).
• The finance manager must be familiar with the
microeconomic and macroeconomic environment aspects of
business.
Microeconomics vs. Macroeconomics
Microeconomics – deals with economic decisions of
individuals and firms . This concept helps the finance
manager in decisions like:
– Pricing
– Taxation
– Determination of capacity at operating levels
– Break-even analysis
– Volume-cost profit analysis
– Capital structure decisions
– Dividend distribution decisions
– Profitable product-mix decisions
– Fixation of levels of inventory
– Setting the optimum cash balance , etc.
Microeconomics vs. Macroeconomics
Macroeconomics – looks at the economy as a whole in
which a particular business is operating.
The finance manager looks into macroeconomic factors
like:
– Inflation rate
– Real interest rates
– Level of economic activity
– Trade cycles
– Market competition
– International business conditions
– Foreign exchange rates
– Bargaining power of buyers
– Unionization of labor
– Availability of funds in capital markets etc.
 Financial Management &
Public Responsibility
• Finance is a very challenging and rewarding field.
• Financial managers are responsible to plan the future
growth and direction of a firm.
• The decision of a finance manager represents a blend of
theoretical, technical and judgmental matters that must
reflect the concerns of society.
• Finance managers must reconcile social and
environmental requirements with profit making motive.
• Although they may be a conflict in promoting socially
responsible programs and the profit motive, maintaining
concern for social needs when pursuing the goal of
maximizing the wealth of the firm is its primary
responsibility.
OPEN FORUM

•QUESTIONS????
•REACTIONS!!!!!
END OF PRESENTATION