CHAPTER NO.

1
Nature & Scope of
Financial Management
 INTRODUCTION
Finance
Finance is defined as the provision of money at the time when it
is required. Every enterprise, whether big, medium , or small
needs finance to carry on its operations and to achieve its
targets. So, it is rightly said to be the lifeblood of an enterprise.

Classification of Finance
Finance deals with the requirements, receipts and
disbursements of funds in the public institutions as well as in
the private institutions. On the basis of these finance is
classified in to following two parts.
1. Traditional classification
2. Modern classification
 Classification of Finance in Traditional way

BUSINESS FINANCE
PUBLIC FINANCE PRIVATE FINANCE

1. GOVERNMENT
INSTITUTIONS 3. LOCAL SELF 1. PERSONAL FINANCE
GOVERNMENTS 2. BUSINESS FINANCE
2. STATE
GOVERNMENTS 4. CENTRAL 3. FINANCE OF NON
GOVERNMENTS PROFIT ORGANISATIONS
Classification of Finance in Modern way

SOLE-
PROPRITORY
FINANCE

COMPANY OR
PARTNERSHIP
CORPORATIO
FINANCE
N FINANCE

BUSINESS
FINANCE
 APPROACHES TO BUSINESS FINANCE
Business finance connotes finance of business activities.
It is composed of two words (I) business( state of being
busy related with all creative human activities) (ii)
finance (provision of money when it is required) so,
business finance concerned with the application of
skills in the use and control of money.
Three main approaches to finance indicated in
traditional and modern approaches.
(i) Providing of funds
(ii) Finance to cash
(iii) raising of funds and effective utilization.
 Financial Management and Definition

Financial Management refers to :-

1. Part of management activity
2. Planning and controlling financial resources
3. Finding out various sources for raising funds
4. Suitable and economical sources
5. Proper use of funds
So, Financial management is an area of financial decision
making , harmonising individual motives & enterprise goals.
Definition
“The area of the business management devoted to a judicious use of
capital and a careful selection of sources of capital in order to
enable a spending unit to move in the direction of reaching its
goals”
J. F. Bradley
 EVOLUTION OF FINANCIAL MANAGEMENT

THREE STAGES
• EMERGENCE as distinct field & FORMATION of large sized business
undertakings
INITIAL STAGE
• 1930 economic recession creates difficulties in raising finance & find out
(1930) improved methods for sound financial structure

• EMPHASIZED on reorganization of industries & selection of sound financial

structure
• SHIFTING to profitability to liquidity , techniques of analyzing capital
IN EARLY 1950 investment & widened the scope of financial management

• DISCIPLINE of financial management become more analytical & development

of theory , methods, models like CAPM, OPTION PRICING THEORY.
MODERN PHASE • NEW sources of finance like PCD’s, FCD’s, PD’S etc.
AFTER 1960
IMPORTANCE OF FINANCIAL MANAGEMENT

#
FOR FINANCIAL PLANNING & SUCCESSFUL
PROMOTION

ACQUISITION
OF FUNDS AT PROPER USE AND
MINIMUM ALLOCATION OF FUNDS
COST
SOUND INCREASING THE WEALTH
IMPROVING
FINANCIAL OF INVESTORS & NATION
PROFITABILITY
DECISION
AIMS OF FINANCE FUNCTION
 1. Acquiring sufficient funds
 2. Proper utilization of funds
 3. Increasing profitability
 4. Maximizing firm value
SCOPE OF FINANCE FUNCTION
# Estimating financial
requirements
# Deciding capital structure
# Selecting a source of finance
# Selecting a pattern of
investment
# proper cash management
#Implementing financial controls
# proper use of surpluses
RELATIONSHIP OF FINANCE WITH
OTHER BUSINESS FUNCTIONS
• PURCHASE FUNCTION • PRODUCTION
FUNCTION

PRESONNEL
FUNCTION

RESARCH AND
DEVELOPMENT
FUNCTION

• ACCOUNTIONG • DISTRIBUTION
FUNCTION FUNCTION
OBJECTIVES OF FINANCIAL MANAGEMENT
1. OBJECTIVE PROFIT MAXIMISATION
 Arguments in favour Arguments in against
# Profit maximization is the $ Ambiguity
obvious objectives when $ Ignores time value of money
profit s the main aim. $ Ignores risk factors
# Profitability is a barometer for $ Dividend policy
measuring efficiency &
prosperity of a business
# To survive In unfavorable
situation
# For the expansion and
diversification
# For fulfilling social goals
2.OBJECTIVE WEALTH MAXIMISATION
Arguments in favour Arguments in against
@ It serves the interest of all
shareholders
@ Owners economic welfare
@ Long run survival and
growth
@ Consider risk factors and
the time value of money
@Increase the market value of
the shares
@Value maximization of
equity shareholders by
increasing price per share
* Objective is not
descriptive
* Not socially desirable
* Controversial point that
it increases firm’s value
or shareholder wealth
* Wealth maximization is
difficult when ownership
and management are
separated
MEASURING SHAREHOLDERS VALUE CREATION
Economic value added
EVA is a measure of performance evaluation employed
by Stewart & Co. It is now used to measure the surplus
value created by an investment or a portfolio of
investments.
EVA = Net profit after tax – Cost of capital x Capital invested

 Market value added

MVA is the sum total of all the present values of future
economic value added. It can also defined as

MVA = Current market value of the firm – Book value of capital employed
 FINANCIAL DECISIONS & INTER RELATION OF FINANCIAL DECISIONS

FINANCIAL DECISIONS INTER RELATION OF INVESTMENT

DECISION

1. Investment FINANCIAL DECISION----

decision
2. Financing FINANCING
DECISION
DIVIDEND
DECISION

decision FINANCIAL MANAGEMENT CONCERNED WITH

3. Dividend 1. FINANCING

decision
DECISION
2.
INVESTMENT ANALYSIS
DECISION RETURN
RISK
3. DIVIDEND RELATIONSHIP
DECISION

TO ACHIEVE THE GOALS

OF WEALTH
MAXIMISATION
FACTORS INFLUENCING FINANCIAL DECISION

INTERNAL FACTORS EXTERNAL FACTORS

A. State of economy • Nature and size of business
B. Structure of capital and • Expected return, cost, risk
money markets • Composition of assets
C. Requirements of investors • Structure of ownership
D. Government policy • Trend of earnings
E. Taxation policy • Age of the firm
F. Lending policy of financial • Liquidity position
institutions • Working capital requirements
• Conditions of debt agreements
RISK RETURN TRADE OFF

INVESTMENT DECISION
1. CAPITAL BUDGETING
2. WORKING CAPITAL
MANAGEMENT

RISK

FINANCING DECISION MARKET

# CAPITAL STRUCTURE VALUE OF
THE FIRM
RETURN

DIVIDEND DECISION
* DIVIDEND POLICY
FUNCTIONAL AREAS OF FM FUNCTIONS OF A FINANCE MANAGER

∞ Determining financial 1. Financial forecasting and

needs Planning
∞ Selecting the sources of 2. Acquisition of funds
funds 3. Investment of funds
∞Financial analysis and 4. Helping in valuation
interpretation decisions
∞Cost-Volume-Profit analysis 5. Maintain proper liquidity
∞Capital budgeting
∞Working capital
management
∞Profit planning and control
∞Dividend policy
FINANCIAL ENGINEERING
Designing and developing new financial
instruments
# Formulating new processes
$ Formulating creative
solutions to financial problems.
ORGANISATION OF THE FINANCE FUNCTION
Board of Directors

Managing Director

Vice President Vice President Vice President

Production Finance Sales

Financial Treasures
Controller

Planning & Annual Profit Accounting

Budgeting
Control Reports Analysis Payroll

Protect Relation with

Additional Cash
Audit Funds & Banks & Financial
Funds Management
Securities Institutions
The Financial Controller Vs. Treasurer
Treasurer Controller

1 Provision of capital 1 Accounting

2 Relation with banks and other 2 Preparation of financial reports

financial institutions
3 Cash management 3 Reporting and interpreting

4 Receivables management 4 Planning and control

5 Protect funds and securities 5 Internal audit

6 Investors relations 6 Tax administration

7 audit 7 Reporting to government

THANKS