introduction to finance

1. 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

2. 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

3. 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

4. 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

5. 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

6. 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
(1+k) (1+k)
2
(1+k)
n
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.

7. 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