The Scope and Environment of Financial Management

THE SCOPE AND ENVIRONMENT OF FINANCIAL MANAGEMENT
Meaning of Financial Management

Financial Management means planning, organizing, directing and controlling the financial activities
such as procurement and utilization of funds of the enterprise. It means applying general
management principles to financial resources of the enterprise.
Scope/Elements
1. Investment decisions includes investment in fixed assets (called as capital budgeting).

Investment in current assets are also a part of investment decisions called as working capital
decisions.
2. Financial decisions - They relate to the raising of finance from various resources which will
depend upon decision on type of source, period of financing, cost of financing and the
returns thereby.
3. Dividend decision - The finance manager has to take decision with regards to the net profit
distribution. Net profits are generally divided into two:
a. Dividend for shareholders- Dividend and the rate of it has to be decided.
b. Retained profits- Amount of retained profits has to be finalized which will depend
upon expansion and diversification plans of the enterprise.
Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and control of
financial resources of a concern. The objectives can be-
1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders which will depend upon the earning capacity,
market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization . Once the funds are procured, they should be utilized in
maximum possible way at least cost.
4. To ensure safety on investment , i.e., funds should be invested in safe ventures so that
adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be sound and fair composition of capital so
that a balance is maintained between debt and equity capital.
Functions of Financial Management
1. Estimation of capital requirements: A finance manager has to make estimation with

regards to capital requirements of the company. This will depend upon expected costs and
profits and future programmes and policies of a concern. Estimations have to be made in an
adequate manner which increases earning capacity of enterprise.
2. Determination of capital composition: Once the estimation have been made, the capital
structure have to be decided. This involves short- term and long- term debt equity analysis.
This will depend upon the proportion of equity capital a company is possessing and
additional funds which have to be raised from outside parties.
3. Choice of sources of funds: For additional funds to be procured (obtained, secured, gained,
got) a company has many choices like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.
Choice of factor will depend on relative (qualified) merits (advantage) and demerits
(disadvantage) of each source and period of financing.
4. Investment of funds: The finance manager has to decide to allocate funds into profitable
ventures so that there is safety on investment and regular returns is possible.
5. Disposal of surplus: The net profits decision have to be made by the finance manager. This
can be done in two ways:
a. Dividend declaration - Includes identifying the rate of dividends and other benefits
like bonus.
b. Retained profits - The volume has to be decided which will depend upon expansion,
innovation, diversification plans of the company.
6. Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and salaries,
payment of electricity and water bills, payment to creditors, meeting current liabilities,
maintenance of enough stock, purchase of raw materials, etc.
7. Financial controls: The finance manager has not only to plan, procure and utilize the funds
but he also has to exercise control over finances. This can be done through many techniques
like ratio analysis, financial forecasting, cost and profit control, etc.
The Goals of a Business. The primary purpose of a business is to maximize profits for its
owners or stakeholders while maintaining corporate social responsibility.
Profit maximization is the approach or process which increases the profit or Earnings per
Share (EPS) of the business. More specifically, profit maximization to optimum levels is the
focal point of investment or financing decisions.
LEGAL FORMS OF BUSINESS ORGANIZATION
Main functions of a Financial Manager:
1. Raising of Funds
In order to meet the obligation of the business it is important to have enough cash and
liquidity. A firm can raise funds by the way of equity and debt. It is the responsibility of a
financial manager to decide the ratio between debt and equity. It is important to maintain a
good balance between equity and debt.
2. Allocation of Funds
Once the funds are raised through different channels the next important function is to
allocate the funds. The funds should be allocated in such a manner that they are optimally
used. In order to allocate funds in the best possible manner the following point must be
considered
 The size of the firm and its growth capability

 Status of assets whether they are long-term or short-term
 Mode by which the funds are raised
These financial decisions directly and indirectly influence other managerial activities. Hence
formation of a good asset mix and proper allocation of funds is one of the most important
activity
3. Profit Planning
Profit earning is one of the prime functions of any business organization. Profit earning is
important for survival and sustenance of any organization. Profit planning refers to proper
usage of the profit generated by the firm.
Profit arises due to many factors such as pricing, industry competition, state of the economy,
mechanism of demand and supply, cost and output. A healthy mix of variable and fixed
factors of production can lead to an increase in the profitability of the firm.
Fixed costs are incurred by the use of fixed factors of production such as land and
machinery. In order to maintain a tandem it is important to continuously value the
depreciation cost of fixed cost of production. An opportunity cost must be calculated in
order to replace those factors of production which has gone thrown wear and tear. If this is
not noted then these fixed cost can cause huge fluctuations in profit.
4. Understanding Capital Markets
Shares of a company are traded on stock exchange and there is a continuous sale and
purchase of securities. Hence a clear understanding of capital market is an important
function of a financial manager. When securities are traded on stock market there involves a
huge amount of risk involved. Therefore a financial manger understands and calculates the
risk involved in this trading of shares and debentures.
It’s on the discretion of a financial manager as to how to distribute the profits. Many
investors do not like the firm to distribute the profits amongst shareholders as dividend
instead invest in the business itself to enhance growth. The practices of a financial manager
directly impact the operation in capital market.

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THE SCOPE AND ENVIRONMENT OF FINANCIAL MANAGEMENT

Meaning of Financial Management

1. Investment decisions includes investment in fixed assets (called as capital budgeting).

Objectives of Financial Management

1. To ensure regular and adequate supply of funds to the concern.

Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to make estimation with

Main functions of a Financial Manager:

 The size of the firm and its growth capability

4. Understanding Capital Markets

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