FINANCIAL

MANAGEMENT ITS MEANING

,SCOPE
& objectives.
By:
ANURAG

Introduction
FM may be defined as the art & science of managing money.
FM is concerned with the duties of the financial managers in
the business firm.
Relationship of financial management and other supportive
disciplines is:
Financial Decision Areas
1.
2.
3.
4.
5.
6.

Investment analysis
Working Capital Management
Sources and cost of funds
Determination of capital structure
Dividend Policy
Analysis of risk and returns

Support

Primary Disciplines
1.
2.
3.

Accounting
Macroeconomics
Microeconomics

Support Other Related Disciplines

Resulting in
Shareholder wealth maximization

1.
2.
3.

Marketing
Production
Quantitative methods

Scope of Financial Management

Scope of FM is divided for the purpose of
exposition into two broad categories :
The Traditional Approach
The Modern Approach

The traditional approach

Evolved during the 1920s and 1930s known as
Corporation Finance. The field of study dealing with finance
as encompassing three related aspects of raising and
administering resources from outside.
The institutional arrangement in the form of financial
institutions which comprise the organisation of the capital
market.
The financial instruments through which funds are raised from
the Capital markets and the related aspects of practices and the
procedural aspects of capital markets.
The legal and accounting relationship between a firm and its
sources of funds.

Limitations of Traditional Approach :

The traditional approach was, in other words, the outsider looking approach. The
limitation was that internal decision making (i.e. insider looking out ) was
completely ignored.
Related to procurement of funds and financing problems by corporate enterprise,
i.e. confined only to a segment of the industrial enterprise as the non-corporate
organisation lay outside its scope.
The treatment in traditional approach was built too closely around episodic events
such as incorporation, promotion, merger, consolidation, reorganisation and so on
which hampered day to day financial problems of the company did not receive
much attention.
The traditional treatment was found to have a lacuna to the extent that the focus
was only on long term financing and ignored that issues involved in the working
capital management.
It ignored the central issues of financial management such as the cost of capital
funds to the enterprise, financial standards of performance, and so on.

THE MODERN APPROACH

The modern approach views FM in a broad sense
and provides a analytical and conceptual
framework for financial decision making. The
principal contents of modern approach are
How large should an enterprise be, how fast it
should grow.
In what form should it hold assets.
What should be the composition of its
liabilities.

Functions of Finance under

Modern Approach
Financial Management in the modern sense
of the firm can be broken down into three
major decisions as functions of finance. These
are :
The investment decision
The financing decision
The dividend decision

Organisation of Finance Function

Board of Directors
Managing Director /Chairman
Vice President /Director (Finance)/ Chief finance Officer
(CFO)
Treasurer

Financial
planning and
fund-raising
manager

Capital
Expenditure
Manager

Cash
Manager

Controller

Credit
Manager

Foreign
Exchange
Manager

Pension
Fund
Manager

Tax
Manager

Corporate
Accounting
Manager

Cost
Accounting
Manager
Financial
Accounting
Manager

The Investment Decision

The investment decision relates to the selection of
assets in which funds will be invested by a firm. The
assets which can be acquired fall into two broad
categories
Long term assets (which yield return over a period over
a time in future.) Capital Budgeting.
Short term or current assets (convertible into cash
usually within one year.) Working Capital
Management.

Capital Budgeting
Capital budgeting is the most crucial financial decision of the
firm. It refers to selection of an asset or investment proposal or
course of action whose benefits are likely to be available in future
over the lifetime of the project. The main elements of capital
budgeting are:
Choice of the new assets out of the alternatives available or
relocation of the capital when an existing asset fails to justify the
funds committed.
Capital budgeting decision is the analysis of risk and uncertainty.
The concept and measurement of cost of capital.

Working Capital Management (wcm)

WCM is concerned with the management of current
assets. The key strategies and considerations in ensuring a
tradeoff between profitability and liquidity is one of the major
dimensions of WCM. The management of working capital has
two basic ingredients:
An overview of working capital management as a
whole
Efficient management of the individual current
assets such as cash, receivables and inventory.

The Financing Decision

The investment decision is broadly concerned
with the assetsmix or the composition of the assets
of the firm. A capital structure with a reasonable
proportion of debt and equity capital is called the
Optimal Capital Structure. The two aspects of
financing decision are :
The of capital structure theory
The capital structure decision

The Dividend Decision

The dividend should be analysed in relation to the
financing decision of the firm. Two alternatives are available
in dealing with the profits of a firm:

They can be distributed to the shareholders in the

form of the dividends
They can be retained in the business itself.
The decision as to which course should be followed
depends largely on the significant dividend decision, the
dividend pay out ratio, i.e. what proportion of net profits
should be paid out to the shareholders.

OBJECTIVES OF FINANCIAL
MANAGEMENT
The objective provide a framework for
optimum financial decision making. They are
concerned with designing a method of
operating the internal investment and
financing of a firm.there are two widely
discussed approaches under this, these are:
Profit Maximisation
Wealth Maximisation

Profit Maximisation
Profit /EPS maximisation should be undertaken and those
that decrease profits or EPS are to be avoided. Profit is the test
of economic efficiency. It leads to efficient allocation of
resources, as resources tend to be directed to uses which in
terms of profitability are the most desirable. Financial
management is mainly concerned with the efficient economic
resources namely capital. The main technical flaws of this
criteria are :
Ambiguity
Timing of benefits
Quality of benefits.

Wealth Maximisation
Wealth maximisation is also known as Value or Net
present worth maximisation. Its operational features satisfy
all the three requirements of the operational of the financial
course of action namely, exactness, quality of benefits, and the
time value of money. Two important issues related to the
value/share price maximisation are:

Focus on stakeholders ,stakeholders include groups

such as employees, customers, suppliers, creditors,
owners and others who have a direct link to the firm.

EVA (Economic Value Added) EVA is equal to the

after-tax operating profits of a firm less the cost of the
firm to finance investments.

CASE STUDY : Reliance INDUSTRIES LTD.

Reliance is an industry that contributes to the economic and social need of

India and attaining global leadership in all its major initiatives. Pursuing this vision
strategy of Reliance for the next few years will be:
Reinforcing competitive advantage of existing business through new capacities and
synergistic acquisitions
Scaling sizeable opportunities in petroleum exploration and production
Forward integrating into retailing transportation fuels and creating new customer
experiences
Building the BSES acquisitions, now Reliance Energy to a major electricity utility
Addressing the significant information's and communications market opportunity in
India and in the world
Leveraging its strong balance sheet, cash flows, managerial capacities to create
value by adding new capacities, acquisitions and turnaround of under performing
assets.
Developing strategic alliances in technology and product market domains with
global majors
Fostering new higher education institutions for knowledge and sharing.
Leveraging its formidable strengths beyond Indian borders.
Reliance is driven by his vision and continues to pursue a trajectory of
growth, productivity and global leadership.