Subject: Commerce

Class: M. Com 1st Semester

Name of the Paper: Financial Management
Paper: Second
Titled : Nature and Scope of Financial Management
Key Words: Nature, Scope, Function, Finance.
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Dr. Manish Kumar Singh

Department of Commerce
Dr. Vibhuti Narayan Singh Campus Mahatma Gandhi
Kashi Vidyapith
Gangapur, Varanasi
Email: - singhmanishcom@gmail.com
Discussed Contents
Objective
An Introduction to Financial Management
Nature of Financial Management
Scope of Financial Management
Function of Finance Manager in Modern Age
Conclusion
References
Questions
Objective:
The objective of this E-content is to make the students know about concept and nature and scope of financial
management. Various functions of a finance manager in modern age have also been discussed.

An Introduction to Financial Management:

Finance may be defined as the art and science of managing the money. The major areas of finance are:
1. Financial Services
2. Managerial Finance
3. Corporate Finance
4. Financial Management

Financial management is concerned with the duties of the financial managers in a business firm. Financial managers
actively manages the financial affairs of any type of business, namely, financial and non-financial, private and public,
large and small, profit-Seeking and not for profit. They perform such a varied task as budgeting, financial forecasting
cash management, credit administration Investment analysis fund management and so on.
In short, financial management is the activity concerned with planning, raising, controlling and administrating of
funds to ensure its efficient utilization in a business.
Nature or Features or Characteristics of Financial Management:
Nature of financial management is concerned with its functions, its goals, trade-off with conflicting goals, its
indispensability, its systems, its relation with other subsystems in the firm, its environment, its relationship with
other disciplines, the procedural aspects and its equation with other divisions within the organisation.

1. Financial Management is an integral part of overall management. Financial considerations

are involved in all business decisions. So financial management is pervasive throughout the
organisation.

2. The central focus of financial management is valuation of the firm. That is financial
decisions are directed at increasing/maximization/ optimizing the value of the firm.

3. Financial management essentially involves risk-return trade-off Decisions on investment

involve choosing of types of assets which generate returns accompanied by risks. Generally
higher the risk, returns might be higher and vice versa. So, the financial manager has to
decide the level of risk the firm can assume and satisfy with the accompanying return.
4. Financial management affects the survival, growth and vitality of
the firm. Finance is said to be the life blood of business. It is to
business, what blood is to us. The amount, type, sources, conditions
and cost of finance squarely influence the functioning of the unit.

5. Finance functions, i.e., investment, rising of capital, distribution of

profit, are performed in all firms - business or non-business, big or
small, proprietary or corporate undertakings. Yes, financial
management is a concern of every concern.

6. Financial management is a sub-system of the business system

which has other subsystems like production, marketing, etc. In
systems arrangement financial sub-system is to be well-coordinated
with others and other sub-systems well matched with the financial
subsystem.
Finance Functions (Scope of Financial Management):
The finance function encompasses the activities of raising funds, investing them in assets and distributing returns
earned from assets to shareholders. While doing these activities, a firm attempts to balance cash inflow and
outflow.
It is evident that the finance function involves the four decisions viz., financing decision, investment decision,
dividend decision and liquidity decision. Thus, the finance function includes:

Investment decision

Financing decision

Dividend decision

Liquidity decision
 Investment Decision
The investment decision, also known as capital budgeting, is concerned with the selection of an investment proposal/
proposals and the investment of funds in the selected proposal. A capital budgeting decision involves the decision of
allocation of funds to long-term assets that would yield cash flows in the future. Two important aspects of investment
decisions are:
I. The evaluation of the prospective profitability of new investments, and
II. The measurement of a cut-off rate against that the prospective return of new investments could be compared.
Future benefits of investments are difficult to measure and cannot be predicted with certainty. Risk in investment arises
because of the uncertain returns. Investment proposals should, therefore, be evaluated in terms of both expected return
and risk. Besides the decision to commit funds in new investment proposals, capital budgeting also involves replacement
decision, that is decision of recommitting funds when an asset become less productive or non-profitable. The computation
of the risk-adjusted return and the required rate of return, selection of the project on these bases, forms the subject-
matter of the investment decision.
Long-term investment decisions may be both internal and external. In the former, the finance manager has to determine
which capital expenditure projects have to be undertaken, the amount of funds to be committed and the ways in which the
funds are to be allocated among different investment outlets. In the latter case, the finance manager is concerned with the
investment of funds outside the business for merger with, or acquisition of, another firm.
 Financing Dividend
Decision Decision
Dividend decision is the third major financial decision. The
financial manager must decide whether the firm should
distribute all profits, or retain them, or distribute a portion
Financing decision is the second important function to be and return the balance. The proportion of profits distributed
performed by the financial manager. Broadly, he or she as dividends is called the dividend-pay-out ratio and the
must decide when, from where and how to acquire funds retained portion of profits is known as the retention ratio.
to meet the firm’s investment needs. The central issue Like the debt policy, the dividend policy should be
before him or her is to determine the appropriate determined in terms of its impact on the shareholders’
proportion of equity and debt. The mix of debt and equity value. The optimum dividend policy is one that maximizes
is known as the firm’s capital structure. The financial the market value of the firm’s shares. Thus, if shareholders
manager must strive to obtain the best financing mix or are not indifferent to the firm’s dividend policy, the financial
the optimum capital structure for his or her firm. The manager must determine the optimum dividend-pay-out
firm’s capital structure is considered optimum when the ratio. Dividends are generally paid in cash. But a firm may
market value of shares is maximized. issue bonus shares. Bonus shares are shares issued to the
existing shareholders without any charge. The financial
manager should consider the questions of dividend stability,
bonus shares and cash dividends in practice.
 Liquidity Decision
Investment in current assets affects the firm’s profitability and liquidity.
Current assets should be managed efficiently for safeguarding the firm
against the risk of illiquidity. Lack of liquidity in extreme situations can lead
to the firm’s insolvency. A conflict exists between profitability and liquidity
while managing current assets. If the firm does not invest sufficient funds in
current assets, it may become illiquid and therefore, risky. But if the firm
invests heavily in the current assets, then it would lose interest as idle
current assets would not earn anything. Thus, a proper trade-off must be
achieved between profitability and liquidity. The profitability-liquidity
trade-off requires that the financial manager should develop sound
techniques of managing current assets and make sure that funds would be
made available when needed.
Function of Finance Manager in Modern Age:
Financial Manager is the executive who manages the financial matters of a business. Financial managers have the
responsibility of overseeing the finances of major companies, agencies and everything in between. Along with
their teams, they coordinate accounting and produce financial reports, cash-flow statements and profit
projections. To comply with various laws and regulations, they must pay attention to detail. Aside from working
with numbers, financial managers must also help other members of their organization understand their complex
reports, which requires significant communication skills.

Some of the major functions of a financial manager in modern age are as follows-

Estimating the Amount of Capital Required

This is the foremost function of the financial manager. Business firms require capital for:

I. Purchase of fixed assets

II. Meeting working capital requirements, and

III. Modernization and expansion of business

The financial manager makes estimates of funds required for both short-term and long-term.
Determining Capital Structure
• Once the requirement of capital funds has been determined, a decision regarding the kind
and proportion of various sources of funds has to be taken. For this, financial manager has
to determine the proper mix of equity and debt and short-term and long-term debt ratio.
This is done to achieve minimum cost of capital and maximize shareholders wealth.

Choice of Sources of Funds

• Before the actual procurement of funds, the finance manager has to decide the sources
from which the funds are to be raised. The management can raise finance from various
sources like equity shareholders, preference shareholders, debenture- holders, banks and
other financial institutions, public deposits, etc.

Procurement of Funds
• The financial manager takes steps to procure the funds required for the business. It might
require negotiation with creditors and financial institutions, issue of prospectus, etc. The
procurement of funds is dependent not only upon cost of raising funds but also on other
factors like general market conditions, choice of investors, government policy, etc.
Utilisation of Funds
• The funds procured by the financial manager are to be prudently invested in various assets so as to maximize the
return on investment: While taking investment decisions, management should be guided by three important
principles, viz., safety, profitability, and liquidity.

Disposal of Profits or Surplus

• The financial manager has to decide how much to retain for ploughing back and how much to distribute as dividend
to shareholders out of the profits of the company. The factors which influence these decisions include the trend of
earnings of the company, the trend of the market price of its shares, the requirements of funds for self- financing the
future programs and so on.

Management of Cash
• Management of cash and other current assets is an important task of financial manager. It involves forecasting the
cash inflows and outflows to ensure that there is neither shortage nor surplus of cash with the firm. Sufficient funds
must be available for purchase of materials, payment of wages and meeting day-to-day expenses.

Financial Control
• Evaluation of financial performance is also an important function of financial manager. The overall measure of
evaluation is Return on Investment (ROI). The other techniques of financial control and evaluation include budgetary
control, cost control, internal audit, break-even analysis and ratio analysis. The financial manager must lay emphasis
on financial planning as well.
Conclusion:
Financial management is concerned with the duties of the finance manager in a business firm. He performs
such a varied task as budgeting, financial forecasting, cash management, credit administration, investment
analysis and funds procurement. The recent trends toward globalisation of business activity has created new
demands and opportunities in managerial finance.
Refences:
1. Jain P.K & Khan Financial Management, McGraw Hill Education.
2. https://freebcomnotes.blogspot.com/2016/11/financial-management-meaning-nature-
and.html?m=1
3. https://theintactone.com/2019/03/03/fmcf-u1-topic-4-function-of-finance-manager-in-modern-
age/

Questions:
1. What is the nature and scope of financial management?
2. What are the different functions of a finance manager?
3. What are the various tasks performed by a finance manager in Modern business enterprise?
4. Discuss the concept of financial management?