Explain the Nature and Scope of Financial Management

Scope of financial management is that Finance is the workmanship and study of handling cash and this administration refers to the administration of accounts. It is the successful and effective use of monetary assets.

Definition of Financial Management

Finance is the art and science of managing money and that management refers to the management of finances. It is the effective and efficient use of financial resources.

It creates a balance between financial planning, fundraising, profit management, and sources of funding.

That means Financial management is basically that we manage our financial resources inside it. Like where should we invest, from where we will get good returns, all things are concerned inside the decision making, that is financial management.

In the definition of the nature and scope of financial management, I am telling you below how it does its works.

What is The Nature of Financial management?

• It is an integral part of overall management

• The central Focus is the Valuation of the Firm

• Acquiring sufficient funds

• Involves risk-return trade-off decisions

• Affect the survival, vitality, and growth of the firm

• It is a subsystem of the business system.

• Proper utilization of funds

What is The Scope of Financial Management?

⦿ There are many points in the Scope of Financial Management, which I will describe one by one:

1. Analyze the Needs of Finance

• Long-term and Short-term Sources of Finance
• The Important Departments in business are Finance, Production, Marketing, HRM
• Whether the firm needs the finance to finance their daily activities or to finance their fixed assets
• Sometimes the business needs the finance to manage the fixed assets or the business needs to secure the funds which are required for day-to-day activities

2. Decide the Capital Structure

• What Proportion of Finance is required for taking the finance, the firm also has to give some securities.
• What type of funds are Required-Borrowed Funds or Equity funds
• Whether it is taken for the long-term, it should also help the firm in short term partially

3. Selecting the sources of Finance

• If a firm needs the finance for a Short time, then what finance sources are needed
• If depend on firm needs the finance for the Long-term, then will it be the Equity Shares, Preference Shares, Debentures, etc
• Ideally, the firm should maintain the Capital Structure in the middle of both the finance sources.

4. Selecting the Pattern of Investment

• How many funds will be used for the day-to-day operations of the business?
• How many funds will be used to purchase the fixed assets?
• How many Funds will be used for the Tangible Real Assets-Furniture, buildings, etc. and Intangible assets like Trademark, Patents, Copyrights, etc

5. Cash Management

Where the Cash usually required for the business

• Purchasing of Raw Material
• Transportation Charges
• Payment to the Creditors, Suppliers, etc

6. Proper Finance Control

• Return on Investment (ROI)
• Break-Even Analysis
• Ratio Analysis
• Cost Control

7. Proper Use of Profit

• After paying the interest and dividends to the Debentures Shareholders, some portion of the profit is retained for the uncertain future

8. Estimation of Financial management

That is, how much do I need in my funds, that is, how much funds are required in my business, to estimate how much I need funds.

If I want to do this work then I need these funds so much, if I want to invest short team then I need funds, or will I invest for the long term then I need this much.

The process of estimating all of this is the Estimation of Financial Management:

⦿ Decision Regarding optimal capital structure

Capital structure is the proportion of different securities used for financing the operation of the business. financial management various decisions for the optimal capital structure

⦿ Selection Of Source of finance

There are many sources of finance such as Shares, Debentures, etc.

Financial management is concerned with the selection of the best source of finance

⦿ Maintainance Liquidity

Liquidity refers to adequate cash available in business every time to meet the day-to-day needs of concern. Financial management involved maintaining liquidity in business for smooth running

⦿ Easy availability of funds

Financial management is easily available for funds. The management ensures that funds should be available whenever needed arises.

⦿ Optimal use of funds

Financial Control aims to optimum use of funds by maintaining the balance between liquidity and solvency

What are The Financial Management Decisions?

⦿ We will read mainly Three things in financial management are:

1. Financial Decisions
2. Investment Decisions
3. Dividend Decisions

① Financial Decisions

A finance Decision refers to a decision about the best sources of finance. It means choosing or selecting the best source of finance for the raising of finance for the short-term or long-term. It must ensure the easy availability of funds.

• Funds Required
• Capital Structure

② Investment Decisions

Investment decisions, Where to invest. It refers to investing funds in short-term and long-term assets.

(b) Short-term investment decisions:- short term investment decisions it also called working capital decisions. it refers to investing in current assets.

• Capital Budgeting
• Working Capital Management

③ Dividend Decisions

Dividend Decisions refer to decisions about how much finance is distributed to shareholders and how much is retained in the business for a long period to meet any uncertainly

• Dividend Policy
• Retained Earnings

What are The Approaches to Finance Function?

⦿ There are two approaches to the finance function

1. The Traditional Approach
2. The Modern approach

What is the role of the Traditional Approach

We Know the Tradition Approach as “Corporate Finance” Traditional Approach Under the traditional approach, The main concern is to fundamentals of corporate finance enterprises to raise and administer the funds,

In this, financing is required for episodic-like incorporation, merger, acquisition, promoting, etc.

⦿ Limitation of its:

• Narrow Sense
• The outsider looking in approach
• Focus on only procurement of funds
• Ignored allocation of funds
• No importance to routine financial problems
• Checks the viewpoint of only External Financing members
• Finance is taken for only Episodic events
• Focus on long-term finance

What is the Role of the Modern Approach

Focus on procurement as well as effective utilization of funds, Covers financial planning, raising of funds, allocation of funds, financial control, etc.

This modern approach to financial management is concerned with three decisions.

⦿ Considers three basic management decisions

• Investment decision
• Financing decision
• Dividend decision

What Are The Functions of financial management

1. Determining the financial needs
2. Selecting the source of funds
3. Financial analysis and interpretation
4. Capital budgeting
5. Cost Volume profit analysis
6. Profit Planning and control
7. Dividend policy

What are the Objectives of Financial Management?

Financial can have very objectives but broadly it assumes objectives that mean, Every business has an objective function that it should grow maximum profit.

• Maximization of profits
• Maximization of shareholders’ wealth
• a regular and adequate supply of funds
• Optimum funds utilization
• Plan a sound capital structure
• Safety of funds

What is The Financial management assuming Two Objectives?

1. Profit Maximisation
2. Wealth Maximisation

Profit Maximisation

• Primary Objectives of any Business
• Each and every decision to be taken after considering the effect on profit
• It cannot be a sole objective but a limited objectives

Problems with profit maximization as Objective

Wealth Maximisation

• The primary goal should be maximizing value
• Increase the net present value of economic profits or firm
• Wealth Maximisation considers time value and risk aspects

Investors invest in a company to make a return and it is possible if the value of a share goes up

FAQ [frequiently Asked Question]

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Summary & Conclusion

So you must have understood by looking at so, the scope of financial management, the nature and the scope of financial management, the scope and objectives of financial management, Functions, Approaches, and more than how financial management works and financial management three decisions take like,

⦿ Financial management three decisions take like,

• Financial Decisions
• Investment Decisions
• Dividend Decisions

And all these points come under the scope of financial management.

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