Financial Management Introduction – Part 1

Finance is the art and science of managing money. The discipline of finance is concerned with the procurement, allocation, application and disbursement of money by a business entity in order to maximize its return on invested capital. It includes financial services and financial instruments.

The subject of finance is divided into two broad categories:

  1. Public Finance

  2. Private Finance

While public finance deals with the procurement, allocation and disbursement of funds in the public sector institutions (Central, State and Local government institutions), Private Finance is concerned with the procurement, allocation and disbursement of funds in the private sector firms (Individual firms, profit making businesses and non-profit organizations. Private Finance can be further divided into Personal Finance, Business Finance and Finance of Non-profit organizations.

Concept of Finance:

As every business needs finance to carry on its operations and to achieve its objectives Finance may also be simply defined as provision of money at the time of need.

However there are three main approaches to finance:

  1. The first approach views finance as an activity of providing funds to a business entity at the time of need and on favourable terms keeping in mind the firm`s objectives.

  2. The second approach relates finance to cash. It views finance as broad-based function and relates it to all activities taking place in a business

  3. According to the third approach Finance is concerned with raising of funds and their effective utilization in a business.

Finance Function: Every firm secures the capital it needs and employs it in activities which generate return on invested capital. Finance Function refers to the procurement of funds and their effective utilization in the business concern.

Nature of Finance Function:

  1. It is an integral and central function to all business organizations

  2. It plays a significant role in long-term growth and survival of a business

  3. It helps in managerial decision making through analysis and interpretation of financial data

  4. It is interrelated to other primary business functions like marketing, human resource planning, production planning etc.

  5. It helps in valuation of a business

Scope of Finance Function:

Its scope lies in the following activities-

  1. Estimating Financial Requirements of a business

  2. Selecting a source of Finance

  3. Making good investment decisions

  4. Determining the Capital structure of a firm

  5. Management of Cash Flows

  6. Implementing Financial Control

Meaning of Financial Management:

Financial management is that managerial activity which is concerned with the planning and controlling of a firm’s financial resources. It is a permanent and continuous process for every business concern.

According to Solomon: “Financial Management is concerned with the efficient use of an important economic resource, namely, Capital Funds”

According to Howard and Upton: “Financial Management is an application of general managerial principles is to the area of financial decision making”

Financial Management Process:

Financial Management Process

Factors influencing Financial Management decisions-

External Factors-

  1. State of Economy

  2. Structure of Capital and Money markets

  3. Requirements of Investors

  4. Government Policy

  5. Taxation Policy

  6. Lending policy of financial institutions

Internal Factors-

  1. Nature and Size of business

  2. Expected Return, Cost and Risk Involved

  3. Composition of Assets

  4. Structure of Ownership

  5. Trend of Earnings

  6. Age of the Firm

  7. Liquidity position

  8. Working capital requirements

  9. Conditions of debt agreements

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