Financial Management is broadly concerned with the acquisition and use of funds by a business firm. Its scope may be defined in terms of the following questions:
1. How large should the firm be and how fast should it grow?
2. What should be the composition of the firm’s assets?
3. What should be the mix of the firm’s financing?
4. How should the firm analyse, plan and control its financial affairs?
The entire gamut of management efforts concerned with the raising of funds at optimum cost and their effective utilisation with a view to maximising the wealth of the shareholders.
Financial Management is concerned with the efficient use of an important economic resource namely, capital funds. As Modern Financial Management performs several functions, it is a difficult task to identify the functional areas of modern financial management.
Thus, Financial Management includes – Anticipating Financial Needs, Acquiring Financial Resources and Allocating Funds in Business (i.e., Three A’s of financial management).
Some of the major financial management scope are as follows: 1. Investment Decision 2. Financing Decision 3. Dividend Decision 4. Working Capital Decision.
The investment decision involves the evaluation of risk, measurement of the cost of capital and estimation of expected benefits from a project. Capital budgeting and liquidity are the two major components of investment decision. Capital budgeting is concerned with the allocation of capital and commitment of funds in permanent assets which would yield earnings in future.
Capital budgeting also involves decisions with respect to replacement and renovation of old assets. The finance manager must maintain an appropriate balance between fixed and current assets in order to maximise profitability and to maintain desired liquidity in the firm.
2. Financing Decision: Financial Management Scope
While the investment decision involves decision with respect to composition or mix of assets, financing decision is concerned with the financing mix or financial structure of the firm. The raising of funds requires decisions regarding the methods and sources of finance, relative proportion and choice between alternative sources, time of flotation of securities, etc. In order to meet its investment needs, a firm can raise funds from various sources
3. Dividend Decision: Financial Management Scope
In order to achieve the wealth maximisation objective, an appropriate dividend policy must be developed. One aspect of dividend policy is to decide whether to distribute all the profits in the form of dividends or to distribute a part of the profits and retain the balance. While deciding the optimum dividend payout ratio (proportion of net profits to be paid out to shareholders).
4. Working Capital Decision: Financial Management Scope
Working capital decision is related to the investment in current assets and current liabilities. Current assets include cash, receivables, inventory, short-term securities, etc. Current liabilities consist of creditors, bills payable, outstanding expenses, bank overdraft, etc. Current assets are those assets which are convertible into a cash within a year. Similarly, current liabilities are those liabilities, which are likely to mature for payment within an accounting year.