FINANCIAL MANAGEMENT

Handouts No. 2 Dr. Dionisio O. de la Torre, Jr.

First Semester Assistant Professor
September 11, 2024 Wednesday: 6:00-7:30 P.M. Face to face
Thursday : 7:30-9:00 P.M. Online

Nature and Scope of Financial Management

Financial management is one of the important aspects in finance. Nobody can ever think to start a
business or a company without financial knowledge and management strategies. Finance links
itself directly to several functional departments like marketing, production and personnel. Here we
will list out some of the major scope of financial management notes which will help you in your
decision making process.

Key Scope of Financial Management:

Major scope of financial management are divided in four categories. Lets learn and understand
about the nature and scope of financial management through the below details notes.

1. Investment Decision:
Evaluating the risk involved, measuring the cost of fund and estimating expected benefits from a
project comes under investment decision. It is one of the important scope of financial management.
The two major components of investment decision are – Capital budgeting and liquidity. Capital
budgeting is commonly known as the investment appraisal. It deals with the allocation of capital
and funds in such a manner that they will yield earnings in future. Capital budgeting determines
the long term investment which includes replacement and renovation of old assets. It is all about
maintaining an appropriate balance between fixed and current assets in order to maximize
profitability and to maintain desired liquidity in the firm for its smooth functioning.

2. Working Capital Decision:

Decisions related to working capital is another crucial scope of financial management. Decisions
involving around working capital and short term financing are known as working capital decision.
It also manages the relationship between short term assets and its liabilities. Short term assets
include cash in hand, receivables, inventory, short-term securities, etc. Creditors, bills payable,
outstanding expenses, bank overdraft, etc are a firm’s short term liabilities. Short term assets can
be exchanged with cash within one calendar year. Similarly, the liabilities are to be settled within
an accounting year.

3. Dividend Decision: The Dividend Decision plays a crucial role in today’s corporate era. It
determines the amount of taxation that stockholders pay. A good dividend policy helps to achieve
the objective of wealth maximization. Distributing the entire profit in the form of dividends or
distributing only a certain percentage of it is decided by dividend policy. It is known as deciding
the optimum dividend payout ratio i.e. proportion of net profits to be paid out to shareholders.
Stability of cash dividends and stock sets the parameter which determines the number of
investment opportunities. Expansion of an economic activity depends on effectiveness of dividend
decisions and scope of financial management.

4. Financing Decision: Financing Decisions focuses on the accountabilities and stockholders’

equity side of the firm’s balance sheet, for example decision to issue bonds is a kind of financing
decision. The main aim of financing decision is to cover expenses and investments. The decision
involves generating capitals by various methods, from different sources, in relative proportion and
considering opportunity costs, with respect to time of flotation of securities, etc.

Scope of financial management is to meet the expenses of the firm, a suitable capital structure for
the enterprise should be developed by the finance manager. Only an optimum finance mix can
maximize the market price of the company’s shares in the long run. To decrease the risk, a stable
equilibrium is required between debt and equity.

Return and risk to the equity shareholders depends on how optimally the debts and financial
leverages are used. Only when the risk and return are in synchronization, the market value per
share is maximized. The apt timing for raising funds is to be decided by the financial manager time
to raise the funds.

Nature of Financial Management:

Finance management is a long term decision making process which involves lot of planning,
allocation of funds, discipline and much more. Let us understand the nature of financial
management with reference of this discipline.

1. Finance management is one of the important education which has been realized word wide. Now
a day’s people are undergoing through various specialization courses of financial management.
Many people have chosen financial management as their profession.

2. The nature of financial management is never a separate entity. Even as an operational manager
or functional manager one has to take responsibility of financial management.

3. Finance is a foundation of economic activities. The person who Manages finance is called as
financial manager. Important role of financial manager is to control finance and implement the
plans. For any company financial manager plays a crucial role in it. Many times it happens that
lack of skills or wrong decisions can lead to heavy losses to an organization.

4. Nature of financial management is multi-disciplinary. Financial management depends upon

various other factors like: accounting, banking, inflation, economy, etc. for the better utilization of
finances.

5. Approach of financial management is not limited to business functions but it is a backbone of

commerce, economic and industry.

Conclusion:

Financial management is defined as “provision of money when required from time to time.” In
this tutorial lesson we have learned about nature of financial management and scope of financial
management. This knowledge will assist you in empowering your financial management decisions.

Read more at: http://wikifinancepedia.com/finance/financial-management/nature-and-scope-of-

financial-management
Handouts No. 3 Dr. Dionisio O. de la Torre, Jr.
First Semester Assistant Professor
September 12, 2024 Wednesday: 6:00-7:30 P.M. Face to face
Thursday : 7:30-9:00 P.M. Online

Short-term and Long-term Financial Management

In any corporate structure, there are two types of financial management: short-term and long-
term. These two crucial elements of corporate financial management are important to understand
and require planning. Short-term and long-term goals can either stand alone or work together, and
it’s vital to properly oversee these two aspects as you build on your business.

Short-term and long-term financial management both work to meet your budgeting and investing
goals as a business. The short-term, especially, focuses on these components. However, with the
proper planning and handling, financial management can help to combat potential issues and
deficits, setting your business up for success even in times of struggle and over the long term.

So what are the differences between these two types of financial planning, and how can you better
work on your short-term management of finances? First, look at how you can manage your
business with its short-term and long-term goals and the crucial elements of short-term financial
management.

What is Short-Term Financial Management?

Short-term financial management, simply put, is anything less than a year out. Though some long-
term finances may be part of the short-term equation (such as office mortgage loan payments and
long-term business costs), this type of financial management usually stays under the year mark.
Where these factors into your business are the more immediate future or outcomes with sooner
deadlines.

Short-term financial management involves planning and controlling a company's financial

resources over a short period of time, typically one year or less. It includes managing cash flow,
accounts receivable, accounts payable, inventory, and other short-term assets and liabilities. The
goal is to ensure a company can meet its current obligations and maintain smooth operations. It
also involves managing fluctuations in foreign currency and product cycles.

Short-term financial planning deals primarily with balancing short-term income and expenses,
including cash, accounts payable and receivable, and inventory. With businesses, short-term
financial management may require making budgets per department to better detail transitory costs,
like marketing, over-time fees, and one-off expenses.

Loans are another potential short-term finance consideration since promotional interest rates can
end after a certain period and cause increased payments. Daily costs and revolving debts can be in
a business owner’s short-term financial management, since these things can change weekly or
monthly.

Anything that requires immediate attention, whether due to certain deadlines or rates, can be added
to short-term financial management. If the consideration goes beyond a year or has more wiggle
room, it may serve better under the long-term umbrella.

Long-Term Financial Management Explained

Though short-term financial management is less than a year, long-term finances focus on anything
more than a year away. Long-term finance includes investments like stocks, bonds, and other
financial instruments. While short-term planning relies on solving immediate problems and
strategizing for solutions, long-term finance focuses on building your strategy over time. It’s more
of a “where you see yourself in 5 or 10 years” type of planning rather than the more definitive and
clear goals of short-term finances.

Long-term financial management includes paying off your business’s mortgage, planning
employee benefits and savings accounts, and paying off debt. Here, you project your future
revenues and expenditures and plan accordingly, keeping in mind certain economic conditions,
such as a recession. Though long-term goals are sometimes fluid, they should be well-defined like
your short-term goals are.

Having the right balance of income statements, cash flow projections, and balance sheets will
better prepare you for your long-term financial management and how to achieve these
expectations. Since planning for the future can be uncertain, it’s important to hone in on your short-
term goals and determine how they will factor into your long-term objectives.

In Conclusion
When it comes to financial management, looking at the short-term and long-term will give you a
comprehensive overview of what to expect.

Short-term thinking and planning will allow you to problem solve and strategize for the future,
while long-term management allows you to decipher where you hope to be and how you can best
get there.