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Meaning: Finance is said to be the life blood of business. Right from conceiving the idea of birth of business to its liquidation finance is required. So finance is the pivot around which whole business operations cluster.

Therefore, Financial management is concerned with the managerial decision that results in the acquisition of short term and long term credits for the business.


We may divide the scope of financial management under two different aspects. Traditional Approach:Under this role of financial manager was only restricted to procurement of funds and it includes: Study and analysis of of the institutions and sources of finance which can be used for raising funds.

Study and analysis of financial instruments which can be used for raising funds. Estimation of requirement of finance. Limitations of traditional approach: Limited scope. Ignores working capital financing. Ignores routine problems. Limited use,only corporate enterprises.

Modern approach: It enlarged the scope of financial management and it includes: What is the total volume of the funds an enterprise should commit. What specific assets should an enterprise acquire. In what form should the firm hold its asssets.

Modern approach encompasses three major decisions, namely: Investment decisions Financing decisions Dividend policy decisions


Formulation of objectives. Forecasting and estimating capital requirements. Designing the capital structure i.e. Debt to equity. Determining the suitable source of finance. Procurement of funds.

Investment of funds. Dispersal of profits. Maintaining the proper liquidity. Maintaining relations with outside agencies. Evaluating financial performance. Keeping touch with stock exchange quotations and behaviour of share prices.


Capital budgeting technique: The process of deciding on long term investment is known as capital budgeting. It is concerned with suitable investment in long term projects. Cost of capital: their are different sources of raising finance like equity shares, preference shares, debentures etc.Interest has to be paid on debentures and dividend on shares.

Leverage: Leverage means that how much debt should be incorporated so that equity share capital gets maximized. Cash management: It refers to a broad area of financeinvolving the collection, handling, and usage of cash.it involves assessing market liquidity,cash flows and investments. Recievables management: Recievables means current assets other than cash i.e. B/R, debtors etc.

Inventory management: Inventory management is very important function that determines the health of supply chain as well as the impact of financial health of the balancesheet.

A set of complex and closely connected institutions,agents,practices,markets, transactions,claims and liabilities in the economy. It is a market for creation and exchange of financial assets and servises. Indian financial system consists of financial markets, financial instruments, financial services, financial intermidiaries and regulatory frameworks.

Functions of financial system

Facilitating the pooling of funds and channelizing them into productive avenues. It provides with a huge information base. It provides a platform for transfer of resources, both temporary and permanent. It provides a payment mechanism for exchange of goods and services.

It ensures smooth functioning of all financial markets. It helps individuals and corporates in managing and controlling risk.

Participants of financial system

Financial markets: Nature of claim-Debt & Equity market. Seasoning of claim-Primary & Secondary markets. Maturity of claim-Money & Capital market. Organization structure-OTC & Exchange Traded Markets. Timing of delivery-Spot & derivative markets.

Financial Intermediaries: Banks Financial intermediaries. Insurance companies. NFBCs Financial service providers.

Financial instruments: 1.Money market instruments. Commercial papers:Unsecured promissory notes with maturity period from 15 days to 1 year. Certificate of deposits: Also unsecured and issued by the companies with god credit worthiness. Treasury bills:Issued by RBI on the behalf of govt.,also known as zero-coupan bond

Call or term money:It is inter bank transaction in which banks borrow money for 1 day.Rate of interest is high in call or term money. 2. Capital market instruments: Equity shares. Preference shares(Hybrid security). Debentures. Bonds. Fixed deposits.

Regulatory framework: RBI SEBI


The firms mainly have two major objectives i.e. Profit maximization and wealth maximization. Profit maximization was traditional concept, all the firms now look for wealth maximization.

Profit maximization
This implies that the finance manager has to take decision in such a manner so that the profit of the concern are maximized. This can be increased by increasing sales turnover and minimizing the manufacturing and financial cost.

Wealth maximization
Wealth maximization means maximizing the wealth of the shareholders in terms of market value of the shares and value of the firm. It is regarded operationally and managerially better objective because it considers: Time value of money Risk or uncertainty Effect of dividend policy on MP of shares.

Difference between
Profit maximization Wealth maximization

It does not specify the time value of money. It does not consider the risk factor. It doe not consider the effect of dividend policy on market price of shares It ignores the interest of outsiders. It does not differentiate between long term and short term profits.

It takes into account the time value of money. It considers the risk the factor. It consider the effect of dividend policy on market price of shares. It considers the interest of outsiders. It considers the fact.


The concept of time value of money refers to the fact that money received today is different in its worth than money received at some other time in future date. This preference for current money as against future money is known as time value of money.

Reasons for time preference of money

Future uncertainties. Preference for consumption. Inflationary economy. Investment opportunities.
A bird in hand is worth than two in the bush


The process of deciding on suitable long term investment is known as capital budgeting decision. It is concerned with sizeable investment long term projects. They can be tangible assets like plant & machinery,equipments or the intangible assets like patents,technology and trademark.

Features of capital budgeting decisions

Affects the firms strategic position many years hence. Huge amount is invested. Irreversible decision. Difficult to take as almost more than one alternative is present.

Process of capital budgeting decisions

Strategic planning. Investment opportunities. Preliminary screening. Feasibility study. Implementation. Post implementation audit.