FINANCE MANAGEMENT

Prepared By : Asst.Prof.Dattani Preksha

Unit – 1 Nature and scope of financial
Management
Content-
Meaning , Nature , Scope and Importance of financial management

Traditional Approach & Modern approach of finance

Profit Maximization and wealth maximization

Role of central bank of India

concept of capital market and money market

Finance is defined as the management of money and includes activities like investing,
borrowing , budgeting , saving.

Financial management is concerned with the efficient use of of capital funds.

The finance managers must see that the funds are procured ,allocated, controlled in a
manner that managerial objective of profit were is achieved through optimum
.utilization of funds .

In which risk, cost and control aspects are properly balanced.

“ It is concerned with the managerial decisions that results in the acquisition and financing of long
term and short tem credits to the firm”
- Philippatus

Financial management is the activity concerned with planning, raising, controlling and administering
of funds used in the business.”
– Guthman and Dougal

Financial management is the operational activity of a business that is responsible for obtaining and
effectively utilizing the funds necessary for efficient operations.”

- Massie
“Bad production management and bad sales management has slain hundreds but faulty
financial management has slain in thousands”

1)Financial Planning.

Management activity always start with planning, which includes what to do ? How to do? When to do? Financial
management helps to determine the financial requirement of the business concern and leads to take financial planning.
It includes long term and short term planning. Planning should be done properly. So it is giving proper guidance in
advance.

2)Acquisition of Funds.

Financial management involves the acquisition of required finance to the business concern. Acquiring needed funds
play a major part of the financial management, which involve possible source of finance at minimum cost.
 Cont….
3)Proper Use of Funds.
• Proper use and allocation of funds leads to improve the operational efficiency of the business concern.
When the finance manager uses the funds properly, they can reduce the cost of capital and increase the
value of the firm.

4)Financial Decision.
• Financial management helps to take sound financial decision in the business concern. Financial decision
will affect the entire business operation of the concern. Because there is a direct relationship with various
department functions such as marketing, production personnel, etc.
 Cont…
5)Improve Profitability .
• Profitability is the main concern of any firm. If company is doing proper planning and management then
companies can easily attempt its operation effectively. Its improve customer services. Ultimately it enhance
the growth of profitability.

6)Increase the Value of the Firm.

• Financial management is very important in the field of increasing the wealth of the investors and the
business concern. Ultimate aim of any business concern will achieve the maximum profit and higher
profitability leads to maximize the wealth of the investors as well as the nation.
Cont…
7)Promoting Savings.
Savings are possible only when the business concern earns higher profitability and maximizing wealth.
Effective financial management helps to promoting individual and corporate savings.

Now days financial management is also popularly known as business finance or corporate finances. The
business concern or corporate sectors cannot function without the importance of the financial management.
• Financial management is a functional area of management. It deals with money or funds.

• It is blend of Economics, Accounting, taxation, Law. Along with this it involves all the
functions Of management like planning , organizing, directing ,motivating, controlling.

• Planning and controlling areas are the major areas in financial management. It involves three
major decisions
• Which is 1) Investment Decision
2) Financing Decision
3) Dividend Decision
• All this decisions are affected by internal and External environment of business and human
behavior ,Technology and management system also affect it
Cont….
• In the ancient time finance management is not consider separately. It is linked up with other
departments like Marketing, Production. So there is no separate status like modern era.

• Financial management is multi-disciplinary in approach. It depends on other disciplines, like

Economics, Accounting etc., for a better procurement and utilization of finances.

• For example, macro-economic guides financial management as to banking and financial

institutions to enable the finance manager decide about the best sources of finances, under the
economic conditions, the economy is passing through.

• Micro-economics points out to the finance manager techniques for profit maximization, with
the limited finances of the enterprise. again, provides data to the finance manager for better
and improved financial decision making in future.
Cont…
• Financial management is growing as a profession. Young educated persons, aspiring for a
career in management

• The finance manager is often called the Controller; and the financial management function is
given name of controllership function.

• It is integral part of organization and it is continue in nature. It is having wide scope.

• It helps to improve the performance of employee and convenient way for decision making in
top management.

• It is pervasive in nature. whether business is small or big financial management must be done
properly.
Approaches of finance management
A number of financial approaches are associated with the financial function but for
the sake of convenience , various approaches divided in two categories.

1) Traditional Approach
2) Modern Approach
 Traditional Approach
The traditional approach to the finance function introduce on before 1950.
1) Arrangement of funds from financial institutions.
2) Raising it through shares and debentures etc.
3) Looks various legal, accounting aspects.

• In this approach, finance was required not for regular business operations but occasional events like
reorganization, promotion, liquidation, expansion, etc. It was considered essential to have funds for
such events and regarded as one of the crucial functions of a financial manager.

• Though he was not accountable for the effective utilization of funds, however, his responsibility
was to get the required funds from external partners on a fair term

• .
Cont..
• It short it is conclude that traditional approach only focus on raising and managing the fund. Liquidity
and profitability are main objective of it.
• The traditional approach continue till early nineteen fifties

Limitations of Traditional Approach

1)One-sided approach- It is more considerate towards the fund procurement and the issues related to their
administration, however, it pays no attention to the effective utilization of funds.

2)Gives importance to the Financial Problems of Corporations- It only focuses on the financial problems of
corporate enterprises, so it narrows the opportunity of the finance function.

3)Attention to Irregular Events- It provides funds to irregular events like , reorganization, and mergers, etc.
and does not give attention to everyday business operations.
4)More Emphasis on Long Term Funds- It deals with the issues of long-term financing.
Modern Approach
• Modern Approach ( starts from mid 1950’s)
• With technological improvement, increase competition, and the development of strong corporate, it was important for Management to use the
available financial resources in its best possible way. Therefore, the traditional approach became inefficient in a growing business environment.

The main content covered under this approach:

1) what is the total volume of fund an enterprise should commit? It was called capitalization.
2) what should be mix of source of finance? It is called capital structure analysis.
3)Which assets selected for acquisition? Includes capital budgeting and capital expenditure

• The modern approach had a more comprehensive analytical viewpoint with a focus on the procurement of funds and its active and optimum use.
The fund arrangement is an essential feature of the entire finance function.

• The main element of this approach are an evaluation of alternative utilization of funds, financial planning, following financial standards for the
business success, determination of cost of capital, working capital management, Management of income, etc. The three critical decisions taken
under this approach are.

• (i) Investment Decision

• (ii) Financing Decision
• (iii) Dividend Decision
Cont..
• Features of Modern Approach
The following are the main features of a modern approach.
1)More Emphasis on Financial Decisions- This approach is more analytic and less descriptive as the right
decisions for a business can be taken only on the base of accounting and statistical data.

2)Continuous Function- The modern approach is a constant activity where the financial manager makes
different financing decisions unlike the traditional method.

3)Broader View- It gives importance not only to optimum use of finance also about the fund’s
procurement. Similarly, it also features relating to the cost of capital, capital budgeting, and financial
planning, etc.

4)The measure of Performance- Performance of a firm is also affected by the financial decision taken by
the Management or finance manager. Therefore, to maximize revenue, the modern approach keeps a
balance between liquidity and profitability.
Difference between Traditional & Modern Approach

SR. Traditional Approach Modern Approach

1. Narrowly defined concept of FM Comparatively a wide concept

2. Only concerned with raising long term Concerns with both raising as well as
funds. use of funds.
3. Era before 1950 Era after 1950

4 Only long term decisions were taken Long as well as short term decisions
are taken
5 It is descriptive approach It is an analytical approach
 functions
SCOPE OF FINANCE MANAGEMENT

• Finance is the lifeline of any business. However, finances, like most other resources, are always limited. On
the other hand, wants are always unlimited. Therefore, it is important for a business to manage its finances
efficiently.

1. Financial Planning-
• This is the primary scope of financial management and it means planning is the process of determining the
objectives, goals, and ideas for the business in previously (Thinking in advance). It is also the estimation of
identifying the goals, initial policies, and programmes to achieve the predetermined goals. Financial
Planning includes various points like:-
• Deciding Financial Objective
• Establishment of Policies and Procedures
• Arrangement of Financial Plan
Cont….
2. Securing Capital Funds-
• This is the secondary scope of financial management and it means when capital structure has been designed,
company should require to collect adequate fund. Company have two options can select equity or debt capital.
Proper balance should be maintained. Debt fund can not be increase more than equity fund.

3. Financial Supervision-
• This is the third scope of financial management and it means to supervise the collection of funds for doing a
proper job. Once the source of capital will be carefully selected and the funds of capital have been received, then
after, the company or organization work for the welfare of the particular company. It includes various steps for
defining the supervision aspects:
• Establish Effective Assets Management-
• It helps to establish a proper fixed assets management and formulating the new capital-budgeting techniques.
Once the assets are properly established, then the responsibility of the company is to utilize fixed assets in a
proper manner and do proper maintenance with the production department.
• Maintaining Optimum Level of Liquidity-
• In every organization, the finance department always keep our eye constant for watching a cash-in-flows and
cash-outflows for assuming and determining the “Surplus” and “Deficit Cash” and make the proper
arrangements for reducing the overflows and underflows and make try to maintain the optimum level of liquidity
or cash
Cont…
4. Financial Control-

• This is a fourth scope of financial management which includes proper utilization of investment Financial
control is formulated through a budgetary control system through which the actual cost of the company will
be kept within limits and targeted profits earned by the company. It includes various process like:
• It helps to fix the standards of the company in advance.

• It helps to build the sustained comparison between actual cost and pre-determined standards.

• It helps to outline the remedial action.

• It helps to establish the follow-up system.

• It helps to modify the standards and norms.

Cont…

5. Preparation of Annual Financial Statements-

• This is the fifth scope of financial management and it means, financial statements includes Profit & Loss
A/C and Balance Sheet. These two main aspects are shows the financial reputation or condition of the
company during a working period usually a financial year. It shows the income and expenditure of the
company also.
• Financial Statements are designed by always keeps finance manager and its started from 1st April to 31st
March (1 Year).

6. Estimation of Financial Performance-

• This is the sixth scope of financial management and it means an annually and time-to-time evaluation of
performance is the very crucial task for financial management and financial manager. For doing the
evaluation, there are various turnover variables like net profit, cost per unit, and Return on
Investment plays a very crucial role to judge the performance of a firm of past and current years.
Cont…
7. Evaluating the Impact of New Financing-
• This is the seventh scope of financial management and it means, nature of modern management is becoming
future-oriented and follow the objectivity. In this case, time-to-time growth and development are very
important for doing a specific business because it helps the business to build a huge empire.
• Now it’s the turn of finance, in this function finance plays an essential role to make a successful business
for the purpose of development and growth.

8. Miscellaneous Functions-
• This is the eighth scope of financial management and it means, the finance area is a very broad concept and
it includes a bulk amount of scope or functions for determining the financial management. The number of
functions includes tax-planning, management of the provident fund, gratuity, safety of securities, social
insurance funds and so on.
OBJECTIVE OF FINANCE MANAGEMENT

• For optimum financial decisions, it is essential to define objectives of finance management. These
objectives serve as a decision-criterion.

• Financing is functional area of business and therefore ,the objectives of financial management must
be in tune with the overall objectives of the business.
• The main objectives of business are survival and growth.

• In order to survive in the business and grow a business must earn sufficient profits.

• It should also provide maximization of owners economic welfare. It consider two aspects
1) Profit Maximization
2) Wealth Maximization
Profit Maximization
• According to this criterion ,the financial decisions ( Investment, financing, dividend) of a firm
should be oriented to the maximization of profit i.e. select those assets, projects and decisions which
are profitable and reject those which are not profitable .

• Hence, actions that increase the firms profit are undertaken while those that decreases profit are
avoided.

• Under perfect competition ,profit maximization behaviour by firms leads to an efficient allocation of
resources with maximum social welfare .

• Since the capital is a scarce material ,the finance manager should use these capital funds in most
efficient manner for achieving profit maximization

• It is therefore argued that profit maximization should serve as the basic criterion for the ultimate
financial management decisions.
Cont…

• Merits of Profit Maximization

1) Excellent allocation of resources

2) Main source of inspiration

3) Enhance growth and brand name

4) Better decision making

Cont…

• Demerit of Profit Maximization

1) It is vague( Uncertain)

2) It ignores time value of money

3) It ignores risk

4) It ignores social responsibility

5) Ignores the quality

Wealth Maximization
Wealth maximization is a modern approach of financial management. Maximization of profit used to be the main aim of a
business and financial management till the concept of wealth maximization came into being.

It is a superior goal compared to profit maximization as it takes broader arena into consideration.
Wealth or Value of a business is define.

It is a combination of two words wealth and maximization. A wealth of a shareholder maximizes when the net worth of a
company maximizes.

To be even more meticulous, a shareholder holds share in the company/business and his wealth will improve if the share price
in the market increases which in turn is a function of net worth.

This is because wealth maximization is also known as net worth maximization as the market price of the capital invested
by shareholders.

• Finance managers are the agents of shareholders and their job is to look after the interest of the shareholders. The objective of
any shareholder or investor would be a good return on their capital and safety of their capital. Both these objectives are well
served by wealth maximization as a decision criterion for business.
Cont…
• Superiority of wealth maximization

• It measures income in terms of cash flows ,avoid the ambiguity not associated with
accounting profits as, income from investments is measured on the basis of cash flows rather
than on accounting profits.

• It recognize time value of money.

• It analyze risk and uncertainty so the best alternative will be selected.

• It is not in conflict with other motives like maximization of sales or market value of shares. it
helps to achieve other objectives.
Cont…
• Unfavorable arguments for Wealth Maximization objective

• Creates owner-management problem: The concept of wealth maximization creates owner-management

problem as owners want to maximize their profits and management want to maximize shareholder’s wealth.

• Ignores other stakeholders: This objective has been criticized on the ground that it is inclined towards
wealth maximization of shareholders only and ignores other stakeholders such as creditors, suppliers,
employees etc.

• Criteria of market value is not fair: The criteria of wealth maximization is based on market value of
shares which is not a correct measure. Because value of shares could increase or decrease due to other
economic factors which are beyond the control of the firm.

• It is just another form of profit maximization: Ultimate aim is to earn maximum profits. Without earning
profits wealth cannot be maximized.

• Management alone enjoy certain benefits.

Difference between Profit maximization & Wealth
maximization
Sr.no Profit Maximization Wealth Maximization

1. It’s main objective is to It’s main objective is to

earn large amount of achieve highest market
profit. value of stock.
2. It emphasis short term. It emphasis long term.

3. It ignores time value of It considers time value of

money. money.
4. It ignores risk & It recognize risk and
uncertainty. certainty.
5. It ignores timing of return It recognize the timing of
return
Capital Market & Money Market
• Financial markets are a primary factor determining the success of any country.

• The main objective of the financial market is to ensure the availability of funds and
help investors generate returns. financial markets help in stabilizing the money
supply by ensuring surplus funds in the economy reach those who need it.

• There are two main types of financial markets – Money market and Capital
market.

• To understand how each of these financial markets functions and contributes

towards the economy, it is even more important to know the differences between
money market vs. capital market.
Types of Financial Market

Types of
financial
market

Money Capital
Market Market

Organized Unorganized Primary Secondary

Market Market Market Market
Money Market
• Money market is typically the market place where short-term lenders and
borrowers meet and fulfill their fund and interest requirements.

• The payback period in the money market is somewhere between overnight and one
year. Companies, financial institutions, as well as, government agencies usually
take this route to meet their short-term funds requirements.

• various organizations and entities such as banks, mutual funds and so on who
benefit from the money market and are active participants.

• Money market is all about professional terms and pure competition. The borrower
here looks for liquid funds, while the lender is looking for a quick return.
Types of Money market

Types of
Money Market

Organized Unorganized
Market Market

1) Organized Market: Here all the transactions are done under rules and regulations gives by
prescribed institutions . So we can say that all the transactions are safe and secure. So
investors can freely invest money

2) Unorganized Market: Here it is completely opposite of organized market . Transactions are not
done under rules and regulation . So we can say that investments are not call legal. So safety of
investment might not be here. Careful concentration must be gives while investing in this type
of organization
Functions of money market
• 1. A money market by providing profitable investment opportunities for short-term surplus funds
helps to enhance the profit of financial institutions.

• 2. A money market enhances the amount of liquidity available to the entire country.

• 3. A well-developed money market helps to avoid wide seasonal fluctuations in the interest rates.

• 4. A well-developed money market, through quick transfer of funds from one place to another, helps
to avoid the regional gluts and stringencies of funds.

• 5. By providing various kinds of credit instru-ments suitable and attractive for different sections, a
money market augments the supply of funds.

• 6. A well organized money market is essen-tial for the successful operation of the central bank-ing
policies.
 Instrument of Money Market

1. Call Money:
• The money borrowed or lent on demand for a short period which is generally one day. Sundays and other
holidays are excluded for this purpose. Mostly Banks use call money. When one bank faces temporary shortage
of cash then the bank with surplus cash lends to bank in shortage for one or two days.

2. Treasury Bills (T. Bills):

• Treasury bills are issued by Reserve Bank of India on behalf of the Government of India. These bills enable
government to get short term borrowings as these bills are sold to banks and general public. These bills are
negotiable instruments and are freely transferable. These are issued at a discount. These are considered safest
investment as these are issued by R.B.I. The maturity period of Treasury Bills varies from 14 to 364 days.

3. Commercial Bills:
• Trade bills or accommodation bills are bills drawn by one business firm on another. These are common
instruments used in credit purchase and sale. These have short term maturity period generally 90days.
Capital Market
• capital market deals in financial instruments and commodities that are long-term securities.
They have a maturity of at least more than one year.

• Capital markets perform the same functions as the money market. It provides a link between
the savings/investors and the wealth creators.

• The funds will be used for productive purposes and create wealth in the economy in the long
term.

• One of the important functions of the capital markets is to provide ease of transactions for
both the investors and the companies.

• Both parties should be able to find each other with ease and the legal aspect of things should
go smoothly. Now let us take a look at the two major types of capital markets.
 Types of capital market

Types of capital
market

Primary Secondary
Market Market

1) Primary Market :The most important type of capital market is the primary market. It is what we call the new issue
market. It exclusively deals with the issue of new securities, i.e. securities that are issued to investors for the very
first time. That is called IPO(Initial Public Offering)

The main function of the primary market is capital formation for the likes of companies, governments, institutions etc. It
helps investors invest their savings and extra funds in companies starting new projects or enterprises looking to expand
their companies.

Methods of Raising funds

1) Through Prospectus 2)Right issue
3) E-IPO
Cont…
• Secondary Market:
After the primary market is the secondary capital market. This is more commonly known as the stock market or
the stock exchange.

Here the securities (shares, debentures, bonds, bills etc) are bought and sold by the investors.

The main point of difference between the primary and the secondary market is that in the primary market only new
securities were issued, whereas in the secondary market the trading is for already existing securities. There is no
fresh issue in the secondary market.

The securities are traded in a highly regularized and legalized market within strict rules and regulations.

This ensures that the investors can trade without the fear of being cheated. In the last decade or so due to the
advancement of technology, the secondary capital market in India has seen a great boom.
Functions of Capital Market
• It acts in linking investors and savers

• Facilitates the movement of capital to be used more profitability and productively to boost the national
income

• Boosts economic growth

• Mobilization of savings to finance long term investment

• Facilitates trading of securities

• Minimization of transaction and information cost

• Encourages a massive range of ownership of productive assets

• Quick valuations of financial instruments

Role of Central Bank Of India
• RBI( Reserve Bank of India) is the central bank of India.

• It established in 1st April,1935. It’s headquarter is in Mumbai. It’s nationalized in 1st January ,1949.It has 22
regional office.

• The first governor of RBI was C.D.Desmukh. The current governor of RBI is shanktikant Das.

• The Reserve Bank of India (RBI) is India's central bank, which controls the issue and supply of the Indian
rupee. RBI is the regulator of the entire Banking in India. RBI plays an important part in the Development Strategy
of the Government of India.

• RBI regulates commercial banks and non-banking finance companies working in India. It serves as the leader of the
banking system and the money market. It regulates money supply and credit in the country.

• The RBI carries out India's monetary policy and exercises supervision and control over banks and non-banking
finance companies in India. RBI was set up in 1935 under the Reserve Bank of India Act,1934.
Cont…
• RBI performs various functions like control on monetary policy, maintenance of foreign exchange, control
on working of other banks and providing guidance ,deciding interest rate, lastly maintain the stable
economy of the particular country.

• Each and every country have their own central bank ,but it’s name are different but the working and
functions are quite similar in nature.

• In US the central bank is known as Federal Reserve System. While the UK central bank is Bank of England.

• So lastly it can be said that central bank play vital role in the development of any countries economy. It
provides one kind of financial working system of countries for smooth running of functioning.
 Cont…
Functions of Reserve Bank

1. Issue of Notes -The Reserve Bank has a monopoly for printing the currency notes in the country. It has the only right
to issue currency notes except one rupee note (which is issued by the Ministry of Finance).

2. Banker to the Government-The second important function of the Reserve Bank is to act as the Banker, Agent and
Adviser to the Government of India and states. It performs all the banking functions of the State and Central
Government. It also advice government for monetary policy or any economic matter.

3. Banker’s Bank:- The Reserve Bank performs the same functions for the other commercial banks as the other banks
ordinarily perform for their customers. RBI lends money to all the commercial banks of the country. RBI regulates the
working of bank. It provides the different Interest rates. Whenever any bank faces crisis RBI assist them and providing
support to them.

4. Controller of the Credit:- The RBI undertakes the responsibility of controlling credit created by commercial banks.
In the inflation period interest rate of loan decreces and in the recession period it increases. So due to this supply and
demand of money can maintain balance. The economy can function effectively .
Cont…
5.Regular of foreign exchange: RBI generally do the management of foreign exchange. As now a days
there is existence of globalization. So it is necessary for the country to maintain adequate foreign
exchange. When the prices of foreign exchange is low at that time RBI purchase the foreign
currency.

6. Other Functions:
1) collect and publish economic data
2) Acts as the representative of government of India in International Monetary fund ( IMF)
3) Granting license to bank
4) Controlling non – banking financial institutions.
5) management of government securities . Buying and selling of government securities.

•
Cont…
RBI consists of the following members:
➤ One- Governor
➤ Four- Deputy Governor
➤ Fourteen- Directors
➤ Two- Government Officers

RBI Governors: Powers

• The RBI Governors carries many powers. We can understand them with the help of the
following points:
➤ Banker’s banker
➤ Heads all the commercial banks
➤ Influence on micro and macro economies
➤ Control over stock market
➤ Signatures on currency notes
➤ Control over monetary, currency and credit system
 Central Bank
(RBI)

Private Bank Public Bank

State Bank of Punjab

Axis Bank Bandhan Bank
India National Bank