Nature And Scope of Financial Management

Financial management is such a managerial process which is concerned with the

planning and control of financial resources. In the initial years of its
development, financial management was concerned only with collection of
funds for business. But according to modern viewpoint, not only collection
of funds but also their proper utilisation are the basic functions of financial
management. Financial manager has become as important constituent of
business and he provides his significant contribution to all business
activities. He estimates the requirement of funds, plans the different
sources of funds and performs the functions of collection of funds and their
effective utilisation. As all the business activities like marketing, purchase,
production etc include the creation and utilisation of funds, financial manger
must be clear about his duties and responsibilities in relation to these
activities.
Characteristics of Modern Approach
1. More Emphasis on Financial Decision
2. Financial Management as an Important Component of Business
Management
3. Continuous Function
4. Broader View
5. Measure of Performance
 Approaches to Finance Function or Financial Management

1. Traditional Approach to Finance Function : Under this approach, financial

management was used to procure and administer funds for the
corporation. The following three things were used to be studied for the
procurement of finance.
i. Institutional sources of finance.
ii. Issue of financial instruments to collect necessary funds from the
capital market.
iii. Legal and accounting relationship between the business and source of
finance.
According to this approach, finance manager was not responsible for
the efficient use of funds.

Limitations of Traditional Concept :-

1. One sided Approach
2. More Emphasis on the Financial Problems of Corporations
3. More importance to Sporadic (Long Term effect) Event
4. More Emphasis on Long term funds
 Modern Approach to Finance Function
According to this approach, financial management considers the
broader and analytical viewpoint. According to this
approach, financial management is concerned with both
acquisition of funds and their effective and optimum
utilisation. This viewpoint not only considers the sporadic
events but also the long term and short-term financial
problems. Three decisions are taken under financial
management :-
i. Investment Decision
ii. Financing Decision
iii. Dividend Decision
 Meaning of Financial Management
J.L. Massie :- “Financial Management is the operational activity
of a business that is responsible for obtaining and
effectively utilising the funds necessary for efficient
operations.”
Functions of Financial Management
1. Financial Planning
2. Financial Decision
3. Investment Decision
4. Dividend Policy Decision
5. Financial Control
6. Incidental Functions
 Objectives of Financial Management

(i) Profit Maximisation Approach

(ii) Wealth Maximisation Approach

(i) Profit Maximisation Approach :- According to this

approach, a firm should undertake all those activities which
add to its profits and eliminates all others which reduce its
profits.
Criticism
(i) Ambiguity
(ii) Time Value of Money
(iii) Risk Factor
Wealth Maximisation Approach :- According to this approach,
financial management should take such decisions which
increase net present value of the firm.

W= A1 + A2 + …………. + An -C
2 n
(1+k) (1+k) (1+k)

W = Net Present Value

A1 + A2 + …………. + An = Stream of expected cash benefits
from a course of action over a period of time.
K = Appropriate discount rate to measure risk and timing
C = Initial outlay to acquire that asset or pursue the course of
action.
If W is positive, the decision should be taken. On the other hand
if W is negative, the decision should not be taken.
 Importance of Financial Management
(1) Significant part of Business Management
(2) Liquidity and Profitability
(3) Value of firm
(4) Centralised Nature
(5) Benefits to shareholders Benefits to Investors
(6) Other Benefits