Explain the Nature and Scope 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

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

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

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?

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

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

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 to 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’ill 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 share holders etc.

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

1. Profit Maximisation
2. Wealth Maximisation

① Profit Maximisation

Problems with profit maximisation as Objective

Vague, Risk and Narrow

② Wealth Maximisation

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

Share value, influenced by many factors and growths in sales investment decisions & financing decisions – No decisons should affect value

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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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