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Scope of Financial Management

Traditional Approach
 Dominant upto early fifties
 Concerned with procurement of funds:
 Institutional arrangement
 Financial instruments & procedural aspects of
capital markets
 Legalities between firms & sources of funds
Limitations of traditional approach
 Ignored internal decision- making
 Focused on corporate enterprises only
 Built around episodic events
 Focus on long term financing
Scope of Financial Management
Modern approach
 Provides conceptual & analytical framework for
financial decision making i.e….
 It is concerned with planning,raising,controlling &
administering of funds used in the business
 It covers acquisition of funds as well as their efficient
& wise allocation to various uses.
Finance function
 What specific assets should an enterprise acquire?
(the investment decision)

 How are these resources to be financed? Should it be

out of own money or should it be borrowed money?
(the financing decision )

 How should the profits from business be treated -

should it be distributed to the owners or should it be
reinvested? (the reward/dividend decision)
Functions of finance
Investment Decision
 It relates to the selection of assets in which funds will
be invested by a firm
 The assets to be acquired fall into 2 groups:

Long-term assets Short term assets

Capital Budgeting Working capital Mgmt.
 Selection of asset/proposal Profitability –Liquidity trade off
 Risk & uncertainty Mgmt. of individual current assets
 Cost of capital
Functions of finance
Financing Decision
 It is concerned with the financing mix or
capital structure
 It is concerned with determining the proportion
of debt & equity for maximising the return to
the shareholders.
 Thus it covers 2 aspects viz.:
 Capital structure theory &
 Capital structure decision
Functions of finance
Dividend Policy Decision
 It is a decision regarding whether the profits should be
distributed as dividends to the shareholders in the form of
dividends or should it be reinvested in the business.
 It has to be analysed w.r.t. financing decision of the firm
 Major aspects to be covered:
 Determining the dividend payout ratio
 The factors determining dividend policy of a firm
Fund flow V/S Cash flow
 The difference between closing and opening
cash/bank/marketable securities balance is explained
through cash flow statement is a statement of
cash inflows and outflows reflecting the efficiency in
the acquisition and use of cash during a particular
 The term ‘funds’ is a wider concept and involves
working capital in contrast to ‘cash’ which is one of
the elements of funds(W.C.)
• Share capital
• Equity Capital structure
• Preference and cost of capital
• Reserves and surplus
• Secured loans
• Debentures
• Loans and advances
• Unsecured loans Working capital
• Current liabilities and provisions financing policy
• Trade creditors
• Provisions
• Fixed assets (net)
• Gross block Capital budgeting
• Less: depreciation
• Investments Portfolio management
• Current assets, loans and advances
• Cash and bank Cash management

• Receivables Credit management

• Inventories Inventory management

• Miscellaneous expenditure and losses
Objectives of financial management

 The objective provides a framework for

optimum financial decision making
 It helps in designing a method of operating the
internal investment & financing of a firm.
 Two approaches:
 Profit maximisation
 Wealth maximisation
Profit maximisation
 Investing,financing & dividend decisions should be
oriented to the maximisation of profits.
 It implies that :select assets,projects & decisions
which are profitable and reject those which are not.
 Limitations of the approach:
 Ambiguity
 Timing of benefits
 Quality of benefits
Wealth Maximisation
 Also known as Value maximisation or Net present value
 Universally accepted as an appropriate operational
decision criterion for financial management decisions.
 Removes the limitations of profit maximisation
approach by satisfying 3 operational requirements e.g.
 Precision
 Time value of money &
 Quality of benefits(Uncertainty)
Role of finance manager
Trends & facts
 Strong job outlook
 Strategic & global thinker
 Team player
 Value based management
 Integrated risk management
 Quantitative skills
Trends & facts
 Benefits focus
 Negotiation skills
 Leadership skills
 Centralised corporate finance function
Changing role of finance manager
 Mergers & acquisitions-valuation & other legal
 Cost cutting to improve profitability & productivity
to sustain & grow in the competitive world
 Industrial licensing has been relaxed
 Heavy dependence on capital markets
 Emergence of a number of investment opportunities
 Demanding investors
 Various options available for raising loans