Financial Management Introduction and Scope PDF

FINANCIAL MANAGEMENT INTRODUCTION BUSINESS FINANCE: AN ACTIVITY CONCERNED WITH: 1. PLANNING 2. RAISING 3. CONTROLLING and, 4. ADMINISTERING of funds used in the business. IT IS ALSO A PROCESS OF : 1. ACQUIRING 2. UTILIZING FUNDS by a business. FINANCI...

FINANCIAL MANAGEMENT INTRODUCTION BUSINESS FINANCE: AN ACTIVITY CONCERNED WITH: 1. PLANNING 2. RAISING 3. CONTROLLING and, 4. ADMINISTERING of funds used in the business. IT IS ALSO A PROCESS OF : 1. ACQUIRING 2. UTILIZING FUNDS by a business. FINANCIAL MANAGEMENT DEFINITIONS: According to Phillapatus: Financial management is concerned with the management decisions that result in the acquisition of long term and short term credits for the firm. As such, it deals with situations that require the selection of specific asset ( or combination of assets ), the selection of specific liability ( or combination of liabilities ) as well as the problem of size and growth of an enterprise. The analysis of these decisions is based on the expected infl ows and outfl ows of funds and their effect upon managerial objectives. According to Ezra Solomon: Financial management is concerned with the effi cient use of an important economic resource, namely, capital funds.  SCOPE (COVERAGE) OF FINANCIAL MANAGEMENT 1. OLD OR TRADITIONAL APPROACH. 2. NEW OR MODERN APPROACH. TRADITIONAL APPROACH Popular between 1920 and 1949 Role of FM was limited to only raising of funds Following aspects were covered – Raising loan from financial institutions. Raising funds by issuing shares, debentures etc. Look after legal and accounting relationships between company and suppliers of sources of funds. Financial manager had a limited role. Keep accurate financial records Prepare company’s financial status reports Manage cash. Term CORPORATE FINANCE was used instead of FINANCIAL MANAGEMENT LIMITATIONS Outsider looking in approach. Scope of the approach very limited. Narrow approach Ignored routine problems. Ignored non corporate enterprises. Ignored working capital financing. No emphasis on allocation of funds. Committing funds to certain purposes. Whether financial standards are met? How to set the financial standards? How does the cost of capital vary with the mixture of financing method used? MODERN APROACH Change in the business situations since mid 1950s. Technical improvements. Widened marketing operations. Development of strong corporate structure. Healthy business competitions. It forced management to make optimum use of the available fi nancial resources for continued survival. In 1960s computers helped fi nancial managers to make sound decisions. Capital budgeting techniques widened the scope of FM. Various pricing models, valuation models and investment portfolio theories also developed. MODERN APPROACH Wise application of the funds raised. The following questions were covered- What is the total amount of funds an enterprise must commit? What specific assets should the enterprise acquire? How should the funds required be raised? The above questions are answered by the following 4 managerial fi nance functions. (FINANCIAL DECISIONS) Funds requirement decisions. Financing decisions. Investment decisions. Dividend decisions. 1. FUNDS REQUIREMENT DECISIONS Most important function performed by finance manager. Careful estimate is made about the total funds required. Both fixed and working capital requirements are considered. Done by forecasting the physical activities of the enterprise. 2. FINANCING DECISONS Funds should be provided at the proper time. Every business activity requires funds. Finance manager has to ensure that the activity is not halted due to lack of finance. Sources from where funds can be raised has to be identified. Amount of funds to be raised and the cost of such funds should also be considered. Balance has to be kept between fixed and non fixed cost bearing securities. CONTD… Factors infl uencing financing decisions are: External factors : state of national economy, structure of capital markets, government regulations, taxation policy, lending policies of financial institutions, investors’ requirements etc… Internal factors : nature of the business, size of the business, age of the firm, structure of the organization, asset structure of the firm, expected future cash fl ows, etc… 3. INVESTMENT DECISIONS Concerned with allocating funds to investment proposals. Decision of investing funds in capital and current assets. Involves decision making in respect of the following: Where to invest the funds? Amount that should be invested in different investment proposals. Reallocation of resources, when an asset is economically not viable. Evaluate different capital investment proposals. Select the best proposal keeping in view expected returns, risk, and cost of capital. Investment in current assets should also be decided. ( credit policy and inventory policy of the fi rm) 4. DIVIDEND DECISIONS Determination of the percentage of profits to be distributed to the shareholders. Determination of the amount of profits to be retained by the firm. Who can make profitable use of funds? Shareholders? Or Company? Dividend decisions are also determined by – trend of earnings, tax position of the shareholders, shareholders’ preference, market price of shares, liquidity position etc.. SUBSIDIARY FUNCTIONS OF FINANCE MANAGER Ensure supply of funds to all parts of the organization. Evaluation of financial performance. Negotiate with bankers, financial institutions, and suppliers of credit. Keep track of stock exchange quotations and stock market price behaviour. Supervising cash receipts and cash payments and safeguard the cash balance. Custody and safeguarding of securities and other valuable papers. Record keeping, preparation, submission of financial reports.