Before knowing the Nature and scope of financial management we will know what is Financial Management and what is its scope, the nature and scope of financial management, and the scope and objectives of financial management.
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.Note:- Finance is the life blood of business
Nature and Scope of financial management
In the definition of nature and scope of financial management, I am telling you below how it does its work.
Nature of Financial management
Define 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
Scope of Financial Management
Explain the scope of financial management
Define 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 business needs to secure the funds which is required for day to day ativities
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, but it should also help the firm for short term partially
③ Selecting the sources of Finance
- If firm needs the finance for a Short time, then what finance sources are needed
- If depend 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 Invetment
- 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, Building, 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 this is Estimation of Financial Management
⑨ 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
⑩ 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
⑪ Maintainance if 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
⑫ Easy available of funds
Financial management is easily available for funds. The management ensures that funds should be available whenever needed arises.
⑬ Optimal use of funds
Financial Control aims to optimum use of funds by maintaining the balance between liquidity and solvency
In Financial Management, Which decisions does financial management take?
Financial Management Decisions
We will read mainly Three things in financial management
- Financial Decisions
- Investment Decisions
- Dividend Decisions
① Financial Decisions
Finance Decision, It refers to decision about the best sources of finance. It means choose or selecet best source of finance for the raising of finance for short-term or lomgterm. It must ensure easy available of funds.That means, Raisily Finance and long-term & short-term
- Funds Required
- Capital Structure
② Investment Decisions
Investment decisions, Where to invest. It refers to invest funds in short-term and lomg-term assets.(a) Long term Investment decisions :- long term investment decisions also called Capital Budgeting decisions. It refers to invest in fixed assets such as building, furniture, machine etc.
(b) Short term investment decisions :- short term investment decisions it also called working capital decisions. it refers to invest in current assets.
- Capital Budgeting
- Working Capital Mangement
③ Divident Decisons
Dividend Decisions, It refers to decision about how much finance destributed to shareholders and how much retained in business for long period to meet any uncertainly
- Dividend Policy
- Retained Earning
Approaches to Finance Function
There are two approaches in the finance function
- The Traditional Approach
- The Modern aproach
① 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.In the 1920s or 1930s, what we knew as Corporation Finance
Limitation of its
- Narrow Sense
- The outsider looking in approach
- Focus on only procurement of funds
- Ignored allocation of funds
- No importance to routline financial problems
- Checks the viewpoint of only External Financing members
- Finance is taken for only Episodic events
- Focus on long-term finance
② Modern Approach
Focus on procurement as well as effective utilization of funds, Covers financial planning, raising of funds, allocation of funds, financial contro etc.that means, Today finance managers deals in various operations of the finance. Study of finance have changed to the analytics and normative theories.
Procurement of fund has changed to the management of assets, allocation of funds and valuation of firm.
Emphasis on the viewpoint of the supplier to the internal financing members.
This modern approach of financial management is concerned with three decisions.
Considers three basic management decisions
- Investment decision
- Financing decision
- Dividend decision
Functions of financial management
① Determining the financial needsHow much is the financial requirement of the company, how much money is needed for the stock of my company, how much money is needed for working, this whole thing is a concern with financial management
② Selecting the source of fundsWhere to take money from, such as from which organization sector or whether to take it from the bank or borrow to friends
③ Financial analysis and interpretationAnalyzing the financial control to their reports about what impact they are getting, or preparing the reports as to what resources will come next
④ Capital budgetingThe money is with the company organization, but how much money should be invested in it and where’ill invest, it all comes in this function
⑤ Cost Volume profit analysisIn this we decide how to make maximum profit by investing minimum
⑥ Profit Planning and controlThe profit that came, how to use it, all comes under finance management
⑦ Dividend policyHow to keep distribution among share holders etc.
Scope and 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.
Objectives of Financial Management
- 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
Financial management assume two Objectives
- Profit Maximisation
- Wealth Maximisation
① 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 maximisation as ObjectiveVague, Risk and Narrow
② Wealth Maximisation
The primary goal should be maximizing value
Increase the net present value of economics profits or firm
Wealth Maximisation considers time value and risk aspects
Investors invest in a company to make return and it is possible if value of share goes upShare value, influenced by many factors and growths in sales investment decisions & financing decisions – No decisons should affect value
FAQ [frequiently Asked Question]
What is the scope of financial management?
There are many points in the Scope of Financial Management, which I will describe someone by one is ①.Estimation of Financial management ②.Decision Regarding optimal capital structure ③.Selection Of Source of finance and more…
What is the nature and scope of financial management?
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 and more…
What are the 3 scopes of financial management?
We will read mainly Three things in financial management, that is 1. Financial Decisions
2. Investment Decisions
3. Dividend Decisions
What are the scope and objectives of financial management?
Scope:-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
Objectives:-Financial can have very objectives but broadly it assumes objectives that mean, Every business has an objective function that it should grow maximum profit.
What are the functions of financial management?
The financial requirement of the company, how much money is needed for the stock of my company, how much money is needed for working, this whole thing is a concern with financial management
What are the 7 functions of financial management?
① Determining the financial needs
How much is the financial requirement of the company, how much money is needed for the stock of my company, how much money is needed for working, this whole thing is a concern with financial management
② Selecting the source of funds
Where to take money from, such as from which organization sector or whether to take it from the bank or borrow from friends
③ Financial analysis and interpretation
Analyzing the financial control to their reports about what impact they are getting, or preparing the reports as to what resources will come next
④ Capital budgeting
The money is with the company organization, but how much money should be invested in it and where will invest, it all comes in this function
⑤ Cost Volume profit analysis
In this, we decide how to make maximum profit by investing minimum
⑥ Profit Planning and control
The profit that came, how to use it, all comes under finance management
⑦ Dividend policy
How to keep distribution among shareholders etc.
What are the main objectives of financial management?
The business has an objective function that it should grow maximum profit.
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Summary & Conclusion
So you must have understood by looking at so, the scope of financial management, nature and the scope of financial management, scope and objectives of financial management, Functions, Approaches and more than how financial management works and financial management three decisions take like,
Note- Financial management three decisions take like,
- Financial Decisions
- Investment Decisions
- Divident Decisions
And all these points come under the scope of financial management.
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