Scope of Financial Management

To understand the financial management scope, first, it is essential to understand the approaches that
are divided into two sections.

Traditional Approach

Modern Approach

Recommended Read:

MCQs on Financial Management

Important Questions for Financial Management

Approach 1: Traditional Approach to Finance Function

During the 20th century, the traditional approach was also known as corporate finance. This approach
was initiated to procure and manage funds for the company. For studying financial management, the
following three points were used

(i) Institutional sources of finance.

(ii) Issue of financial devices to collect refunds from the capital market.

(iii) Accounting and legal relationship l between the source of finance and business.

In this approach, finance was required not for regular business operations but occasional events like
reorganization, promotion, liquidation, expansion, etc. It was considered essential to have funds for such
events and regarded as one of the crucial functions of a financial manager.

Though he was not accountable for the effective utilization of funds, however, his responsibility was to
get the required funds from external partners on a fair term. The traditional approach of finance
management stayed until the 5th decade of the 20th century. The traditional approach only emphasized
on the fund’s procurement only by corporations. Hence, this approach is regarded as narrow and
defective.
Also Read: Types of Financial Statements

Limitations of Traditional Approach

One-sided approach- It is more considerate towards the fund procurement and the issues related to
their administration, however, it pays no attention to the effective utilization of funds.

Gives importance to the Financial Problems of Corporations- It only focuses on the financial problems of
corporate enterprises, so it narrows the opportunity of the finance function.

Attention to Irregular Events- It provides funds to irregular events like consolidation, incorporation,
reorganization, and mergers, etc. And does not give attention to everyday business operations.

More Emphasis on Long Term Funds- It deals with the issues of long-term financing.

Approach 2: Modern Approach to Finance Function

With technological improvement, increase competition, and the development of strong corporate, it
was important for Management to use the available financial resources in its best possible way.
Therefore, the traditional approach became inefficient in a growing business environment.

The modern approach had a more comprehensive analytical viewpoint with a focus on the procurement
of funds and its active and optimum use. The fund arrangement is an essential feature of the entire
finance function.

The main elements of this approach are an evaluation of alternative utilisation of funds, capital
budgeting, financial planning, ascertainment of financial standards for the business success,
determination of cost of capital, working capital management, Management of income, etc. The three
critical decisions taken under this approach are.

(i) Investment Decision

(ii) Financing Decision

(iii) Dividend Decision

Features of Modern Approach

The following are the main features of a modern approach.

Continuous Function- The modern approach is a constant activity where the financial manager makes
different financing decisions unlike the traditional method,

Broader View- It gives importance not only to optimum use of finance also abut the fund’s procurement.
Similarly, it also incorporates features relating to the cost of capital, capital budgeting, and financial
planning, etc.

The measure of Performance- Performance of a firm is also affected by the financial decision taken by
the Management or finance manager. Therefore, to maximize revenue, the modern approach keeps a
balance between liquidity and profitability.

The other scope of financial management also includes the acquisition of funds, gathering funds for the
company from different sources, assessment and evaluation of financial plans and policies, allocation of
funds, use of funds to buy fixed and current assets, appropriation of funds, dividing and distribution of
profits, and the anticipation of funds along with estimation of financial needs of the company.

Roles of Financial Management:

Taking part in utilising the funds and controlling productivity.

Recognizing the requisites of capital (funds) and picking up the sources for that capital.

Investment accords incorporate investment in fixed assets known as capital budgeting. Investing in
current assets are part and parcel of investment decisions known as working capital decisions.

Financial decisions associated with the finance raised from different sources which would rely upon the
accord on – the kind of resource, when is the financing done, cost incurred and the returns as well.

In the case of dividend decision, the finance manager is the who is responsible for the accord that is
taken by him or her; regarding the net profit distribution (NPD). However, Net profits are classified into
two(2) types:

Dividend for shareholders: The rate of dividend and the amount of dividend has to be decided

Retained profits: The amount of contained (retained) gains has to be ascertained which would rely upon
the development and variety of strategies of the trading concern

Also Check: Important Roles of Financial Management

The concept of ‘Scope of Financial Management’ is explained in detail in this article, which is very helpful
for the Commerce students. To learn more such interesting concepts, stay tuned to BYJU’S.
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1 Comment

juma omary baruwa DECEMBER 30, 2020 AT 8:49 PM

It was interesting

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