Financial Management Meaning & Scope

Finance
Business concern needs finance to meet their requirements in the economic world. Any kind
of business activity depends on the finance. Hence, it is called as lifeblood of business
organization. Whether the business concerns are big or small, they need finance to fulfil their
business activities.
In the modern world, all the activities are concerned with the economic activities and very
particular to earning profit through any venture or activities. The entire business activities are
directly related with making profit. A business concern needs finance to meet all the
requirements. Hence finance may be called as capital, investment, fund etc., but each term is
having different meanings and unique characters. Increasing the profit is the main aim of any
kind of economic activity.
We can say, finance may be defined as the art and science of managing money. It includes
financial service and financial instruments. Finance also is referred as the provision of money
at the time when it is needed. Finance function is the procurement of funds and their effective
utilization in business concerns. The concept of finance includes capital, funds, money, and
amount. But each word is having unique meaning. Studying and understanding the concept of
finance become an important part of the business concern.
Finance is one of the important and integral part of business concerns, hence, it plays a major
role in every part of the business activities. It is used in all the area of the activities under the
different names. Finance can be classified into two major parts:

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First Private Finance includes income and expenditure of the private individuals
and private entities. It includes the Individual, Partnership Firms, Business or Corporate
Financial activities to meet the requirements.
Second Public Finance which concerns with revenue and disbursement of Government such as
Central Government, State Government and Semi-Government Financial matters. It means the
study of government activities, which may include spending, deficits, and taxation. The goals
of public finance are to recognize when, how and why the government should intervene in the
current economy and understand the possible outcomes of making changes in the market.

Benefits of financing

Both consumers and businesses benefit from financing programs because financing gives
customers more buying power and flexibility, and it helps businesses boost sales and improve
cash flow.
1. Boost sales - Financing can help your business close more sales by giving customers the
flexibility to make regular loan payments that work with their budget constraints. By
introducing financing options at the beginning of your sales conversations, you can eliminate
the biggest barrier to closing a sale: the high purchase price. Customers appreciate financing
because it gives them more buying power, enabling them to get exactly what they want without
having to pay the full price up front.
2. Increase average order value -You can use your financing program as an effective tool for
up-selling customers, which can help you drive up your business’s average order value. To
help increase your transaction sizes, just show customers how a slight increase in their monthly
loan payments can allow them to get the upgrades they want.
3. Improve cash flow
You can boost your business’s cash flow by using a third-party lender like Financeit.
(Financeit is the effortless, mobile-friendly way to pay for large purchases in low instalments).
Once Financeit approves your customer’s loan, you will receive the full purchase amount in
your bank account within a few business days. Not only does that help your business maintain
a healthy cash flow, it also ensures your company does not assume any risk associated with
financing. You can relax knowing that you will always get paid, while we manage your
customer’s regular payments. Even if your customer misses’ payments or defaults on the loan,
you will not be held accountable for the money.

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4. Attract new customers
When businesses offer financing programs, they grow their potential customer base by making
their products and services affordable for more consumers. Not everyone has the cash on hand
to fund a large purchase up front, like furniture or home renovations. Financing breaks down
large purchases into manageable payments that more people can afford, which widens the pool
of potential customers available to your business.
5. Earn repeat business
Your financing program can encourage customers to return to your business for future
purchases, building brand loyalty and helping you increase your revenue. Once customers
know that you offer financing and understand how it can benefit them, they’re more likely to
return to your business the next time they need to make a big purchase using financing, rather
than going to competitors that might not offer the same financing options.
Your financing program can offer great value to both your business and its customers, helping
you close more sales and helping your customers get exactly what they want, without blowing
their budgets.

Business Finance
Business finance is that business activity which concerns with the procurement and utilization
of capital funds in meeting financial needs and overall objectives of a business enterprise.
“Business finance can broadly be defined as the activity concerned with planning, raising,
controlling, directing of the funds used in the business”
Business Finance refers to money and credit employed in business. It involves procurement
and utilization of funds so that business firms may be able to carry out their operations
effectively and efficiently.
It means any organisation of any type who wants to operate their operations effectively and
efficiently, first they need to procure the funds, and after procuring they need to utilize those
funds in a better way.

Features of Business Finance:

(i) Business finance includes all types of funds either small or large used in business.
It means any type of funds like stocks, bonds, short term loans and many other
which is used in business must be included in the business finance.

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 (ii) Business finance is needed in all types of organisations either it’s a large
organisation or small organisation either it’s a manufacturing unit or trading unit.
(iii) The amount of business finance differs from one business firm to another depending
upon its nature and size and time.
(iv) Business finance involves estimation of funds. It is concerned with sources of funds
as well as uses of funds for different purposes.

Sources of funds means the transactions that increase the working capital.
Working Capital = Current Assets - Current Liabilities

Sources of Finance
Sources of finance means the provision of finance to a company to cover its short-term working
capital requirements and longer-term fixed assets and investments.
Sources of finance for business are equity, debt, debentures, retained earnings, term loans,
working capital loans, letter of credit, venture funding etc. These sources of funds are used in
different situations.
Sources of capital are the most explorable area especially for the entrepreneurs who are about
to start a new business. It is perhaps the toughest part of all the efforts. There are various capital
sources, we can classify on the basis of different parameters.
Having known that there are many alternatives to finance or capital, a company can choose
from. Choosing the right source and the right mix of finance is a key challenge for every
finance manager. The process of selecting the right source of finance involves in-depth analysis
of each and every source of fund. For analysing and comparing the sources, it needs the
understanding of all the characteristics of the financing sources.

There are many characteristics on the basis of which sources of finance are classified.

• On the basis of a time period, sources are classified as long-term, medium term, and
short term.
• On the basis of Ownership and control, sources of finance classified into owned and
borrowed capital.
• On the basis of generation, sources of capital are classified as, Internal sources and
external sources.

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Source of finance - : According to Time Period -
Sources of financing a business are classified based on the time period for which the money is
required. The time period is commonly classified into the following three:

1. Long-Term Sources of Finance

Long-term finance can be defined as any financial instrument with maturity exceeding
five years such as any long term loans, bonds, and other forms of debt finance.
Long-term financing means capital requirements is for a period of more than 5 years.
Capital expenditures in fixed assets like plant and machinery, land and building, etc. of
business are funded using long-term sources of finance. Part of working capital which
permanently stays with the business is also financed with long-term sources of funds.
Long-term financing sources can be:
• Share Capital or Equity Shares
• Preference Capital or Preference Shares
• Retained Earnings or Internal Accruals
• Debenture / Bonds or
• Term Loans from Financial Institutes, Government, and Commercial Banks etc.
2. Medium Term Sources of Finance
Medium term financing means financing for a period of 1 to 5 years and is used
generally for two reasons. Number one, when long-term capital is not available for the
time being and second when deferred revenue expenditures like advertisements are
made which are to be written off over a period of 1 to 5 years.
Medium term financing sources can in the form of:
• Preference Capital or Preference Shares
• Debenture / Bonds
• Medium Term Loans from Financial Institutes, Government and Commercial
Banks
• Lease Finance
• Hire Purchase Finance
3. Short Term Sources of Finance
Short term financing means financing for a period of less than 1 year. The need for
short-term finance arises to finance the current assets of a business like an inventory of
raw material and finished goods, debtors, minimum cash and bank balance etc. Short-

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 term financing is also named as working capital financing. Short term finances are
available in the form of:
• Trade Credit
• Short Term Loans like Working Capital Loans from Commercial Banks
• Fixed Deposits for a period of 1 year or less
• Advance received from customers
• Creditors
• Payables
• Bill Discounting etc.

Source of Finance - : According to Ownership and Control:

Sources of finances are classified based on ownership and control over the business. These two
parameters are an important consideration while selecting a source of funds for the business.
Whenever we bring in capital, there are two types of costs – one is the interest, and another is
sharing ownership and control. Some businesspersons may not like to reduce their ownership
rights in the business and others may believe in sharing the risk.
The Ownership and Control is classified into the following two:

Owned Capital
Owned capital also refers to equity. It is sourced from promoters of the company or from the
general public by issuing new equity shares. Promoters start the business by bringing in the
required money for a start-up. Following are the sources of Owned Capital:
• Equity
• Preference
• Retained Earnings
• Convertible Debentures
• Venture Fund or Private Equity
Further, when the business grows and internal accruals like profits of the company are not
enough to satisfy financing requirements, the promoters have a choice of selecting ownership
capital or non-ownership capital. This decision is up to the promoters.

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Borrowed Capital
Borrowed or debt capital is the finance arranged from outside sources. These sources of debt
financing include the following:
• Financial institutions,
• Commercial banks or
• The general public in case of debentures
In this type of capital, the borrower has a charge on the assets of the business which means the
company will pay the borrower by selling the assets in case of liquidation. Another feature of
the borrowed fund is a regular payment of fixed interest and repayment of capital.

Source of Finance - According to Source of Generation:

Based on the source of generation, the following are the internal and external sources of
finance:
The internal source of finance is the one which is generated internally by the business. These
are as follows:
• Retained profits
• Reduction or controlling of working capital
• Sale of assets etc.
The internal source of funds has the same features of owned capital. The best part of the internal
sourcing of capital is that the business grows by itself and does not depend on outside parties.
An external source of finance is the capital generated from outside the business. Apart from
the internal sources of funds, all the sources are external sources.
Deciding the right source of funds is a crucial business decision taken by top-level finance
managers. The usage of the wrong source increases the cost of funds which in turn would have
a direct impact on the feasibility of the project under concern. Improper match of the type of
capital with business requirements may go against the smooth functioning of the business. For
instance, if fixed assets, which derive benefits after 2 years, are financed through short-term
finances will create cash flow mismatch after one year and the manager will again have to look
for finances and pay the fee for raising capital again.

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Application of funds or Uses of funds
Application of funds refers to use of cash or funds by the company during a financial year on
various activities of the company

(a) Purchase of Fixed Assets or Investments: When fixed assets (like Plant and
Machinery, Land and Building, Furniture etc.) or investments are purchased there
is an outflow of funds.

(b) Payment of Dividend and Taxes: When dividend and taxes are paid, there is an
outflow of funds, for example an application of funds (for the actual amount so
paid). But if the dividends are proposed or if there is a provision for tax, there will
not be any outflow of funds. Outflow of funds will arise only when actual payment
is made.
(c) Redemption of Preference Shares: When Preference Shares are redeemed, the same
is treated as an outflow of fund since actual payment is made. But if Preference
Shares are redeemed at a premium or at a discount, net amount must be recorded as
an application of funds.
(d) Redemption of Debenture or Repayment of Loans: When debentures are redeemed,
or loans are repaid the same should also be treated as an outflow of funds. Only the
net amount should be considered and, if redeemed at a discount, the face value
minus discount should be the net amount.
(e) Other Non-trading Payments: If there is any non-trading payment, the same should
be treated as an outflow of funds.
(f) Funds Lost in Operation (i.e. Net Loss): If there is any trading loss, the same is
treated as an outflow of funds.

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