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Financial Management

The document discusses the nature and scope of financial management. It covers traditional and modern approaches to financial management, defining key terms. The modern approach considers acquisition and use of funds. Functions of financial management include determining financial needs, financing, investment decisions, working capital decisions and dividend policy decisions. Objectives are profit maximization and wealth maximization.

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19 views

Financial Management

The document discusses the nature and scope of financial management. It covers traditional and modern approaches to financial management, defining key terms. The modern approach considers acquisition and use of funds. Functions of financial management include determining financial needs, financing, investment decisions, working capital decisions and dividend policy decisions. Objectives are profit maximization and wealth maximization.

Uploaded by

prerna194btcse21
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Financial Management

UNIT-I
Nature and Scope
Introduction
Finance is defined as the provision
of money at the time when it is
required. The role of finance in
business enterprise needs no
emphasis. Every enterprise
whether big or small, needs
finance to carry on and expand its
operations. Finance holds keys to
all the business activities and
firm’s success and in fact, its
survival is dependent upon how
efficiently is able to acquire and
utilize the funds.
Traditional Approach
Under this approach the role of financial management
was limited to the procurement of funds on suitable
terms. The utilisation of funds was considered out of
the scope of FM,

 Institutional source finance


 Issue of financial instruments through which funds
are raised from capital market
 Legal and accounting relationship between a
business and its source of funds.
Limitations of Traditional Approach
 More emphasis of raising funds
 Ignores the financial problems of Non corporate
enterprises
 More concerned to problems of raising finance on
occurrence of special events
 Special attention on long term financing
Modern Approach of Finance
The modern approach considers the term FM in broad
sense. According to this approach the finance function
covers both acquisition of funds as well as their
efficient utilisation. This approach presents an analysis
way of looking into financial problems of business.
According to this approach the FM is concerned with
solution three major problems relating to finance :

 What is the total volume of funds an enterprise


should commit ?
 How should the funds be raised?
 In what specific assets the enterprise should invest it
funds?
Characteristics of Modern Approach
 FM is an essential part of top management

 Less descriptive and more analytical

 Continuous function

 Different from accounting function

 Wide scope

 Centralised nature
 Measurement of performance

 Inseparable relationship between finance and other


activities

 Applicable to all types of organisation


Meaning and Definition of FM
Financial management is vital and an integral part of
business management. It refers to that part of
management activity which is concerned with
planning & controlling of financial resources of the
Enterprise. It deals with raising finance for enterprise
and the efficient utilisation od such finance.
“The finance function is the process of acquiring and
utilising funds by a business” R.C Osborn
Functions of FM
Determining of Financial Financing Needs
Needs

 Short Term  Proportion of Debt &


 Long Term Equity
 Existing Debt level
 Nature of business  Leverage
 General economic
circumstances
Investment Decision Working Capital Decision

 Capital Budgeting  Management of current


assets
 Risk assessment
 Liquidity
 Minimum required  Risk of bankruptcy
return
Dividend Policy Decision Routine Functions

 Dividend pay out ratio  Cash Management

 Opening bank accounts


 Retained Earnings
& marinating them

 Bonus Share  Maintaining records


and preparation of
 Dividend Policy reports

 Establishing a proper
system of internal
audit
Objectives or Goals of FM
It is duty of top management to lay down the
objectives or goals which are to be achieved by the
business. The choice of such a criterion lies between
profit & wealth maximization
Profit Maximization
All activities which increase profits
should be undertaken others not. It
says financial decision should be
guided by one test which maximize
the profits-

 Efficient allocation and utilisation


of resources
 Source of incentives
 Helpful in facing adverse business
adverse condition
 Helpful in growth
Wealth Maximization
This approach is now universally
accepted as an appropriate criterion for
making financial decisions. Also known
as NPV approach.
The worth of an asset is measured in
terms of benefit received from its use
less then cost of acquisition. Benefits
are measured in terms of cash flows
rather then profit.
Also it incorporates the concepts of
Time value of money.
Functions of Financial Manager

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