FINANCIAL

MANAGEMENT
PREPARED BY: MS. IDA RAMOS

BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e

 CHAPTER 2:
NATURE, PURPOSE &
SCOPE OF FINANCIAL
MANAGEMENT
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
 Objectives:
● Describe the Concept of Financial Management
● Describe the Goals of Financial Management
○ Raising Finance
○ Allocation of Financial Resources
○ Maintaining Control over Resources
● Identify the Scope of Financial Management
● Describe the Significance of Financial Management
● Recognize the Core of Financial Management

BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e

Any company's financial health is crucial. Finances, like most other resources, are,
however, finite. Wants, on the other hand, are often limitless. As a result, it is
important for a company to effectively control its finances.
It is important for any company to invest the funds it receives in such a way that
the investment yields a higher return than the cost of capital. Financial
management, in a nutshell –
● Endeavours to reduce the cost of finance
● Ensures sufficient availability of funds
● Deals with the planning, organizing, and controlling of financial activities like
the procurement and utilization of funds

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Definitions of Financial Management
“Financial management is the activity concerned with planning, raising, controlling
and administering of funds used in the business.” – Guthman and Dougal
“Financial management is that area of business management devoted to a
judicious use of capital and a careful selection of the source of capital in order to
enable a spending unit to move in the direction of reaching the goals.” – J.F.
Brandley
“Financial management is the operational activity of a business that is responsible
for obtaining and effectively utilizing the funds necessary for efficient operations.”-
Massie

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Nature, Significance, and Scope of Financial
Management
Any company's financial management is a natural part of its operation. To procure
physical resources, carry out manufacturing activities and other business
operations, pay compensation to vendors, and so on, every company requires
funds. There are several financial accounting theories:

BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e

Nature, Significance, and Scope of Financial
Management
1. Some experts believe that Financial management is all about getting a
company the money it needs on the most attractive terms possible while
keeping its goals in mind. As a result, this strategy is mainly concerned with
the acquisition of assets, which can include instruments, institutions, and
fundraising activities. It also looks after the legal and accounting aspects of a
company's relationship with its funding source.

BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e

Nature, Significance, and Scope of Financial
Management
2. Another group of experts believes that money is all in finance. Since all
business transactions, whether directly or indirectly, include cash, finance is
concerned with everything the company does.

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Nature, Significance, and Scope of Financial
Management
3. The third and most commonly held viewpoint is that financial management
encompasses both the acquisition and effective use of funds. In the case
of a manufacturing company, for example, financial managers must ensure
that funds are sufficient for the installation of the manufacturing plant and
machinery. It must also ensure that earnings are sufficient to cover the costs
and risks faced by the company.

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Nature, Significance, and Scope of Financial
Management
Many companies can easily raise capital in a developed market. The real issue,
however, is maximizing capital use through successful financial planning
and control.
Furthermore, the company must ensure that it handles activities such as allocating
funds, handling them, investing them, controlling expenses, predicting financial
needs, preparing income and calculating returns on investment, evaluating
working capital, and so on.

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The Scope of Financial Management

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The Scope of Financial Management
Core Financial Management Decisions
Managers of companies make the following decisions in order to reduce the
costs of obtaining finance and to use it in the most efficient way possible:
● Investment Decisions
● Financing Decisions
● Dividend Decisions

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The Scope of Financial Management
❖ Investment Decisions: Managers must determine the amount of
investment available from existing funds, both long- and short-term.
There are two kinds of them:
➢ Capital Budgeting, also known as Long-term investment
decisions, imply committing funds for a long time, similar to fixed
assets. These decisions are normally irreversible and involve those
involving the purchase of a building and/or property, the acquisition
of new plants/machinery or the replacement of old ones, and so on.
These choices influence a company's financial goals and results.

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The Scope of Financial Management
❖ Investment Decisions: Managers must determine the amount of
investment available from existing funds, both long- and short-term. There
are two kinds of them:
➢ Working capital management, also known as short-term
investment decisions, refers to committing funds for a short period
of time, such as current assets. These decisions include cash, bank
deposits, and other short-term investments, as well as inventory
investment. They have a direct impact on a company's liquidity and
profitability.

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The Scope of Financial Management
❖ Financing Decisions: Managers must also make decisions on raising
funds from long-term (Capital Structure) and short-term sources (called
Working Capital). There are two kinds of them:
➢ Financial Planning Decisions that include estimating the origins
and applications of funds. It entails anticipating a company's financial
needs in order to ensure that sufficient funds are available. The
primary goal of financial planning is to prepare ahead of time to
ensure that funds are available when needed.

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The Scope of Financial Management
❖ Financing Decisions: Managers must also make decisions on raising
funds from long-term (Capital Structure) and short-term sources (called
Working Capital). There are two kinds of them:
➢ Capital Structure Decisions that include locating funding sources.
They also include decisions on whether to raise funds from external
sources such as selling shares, bonds, or borrowing from banks, or
from internal sources such as retained earnings.

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The Scope of Financial Management
❖ Dividend Decisions: These are decisions over how much of a
company's earnings will be paid as dividends. Shareholders often seek a
higher dividend, while management prefers to keep income for
operational purposes. As a result, this is a difficult managerial decision.

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 END OF CHAPTER :)

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