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How to Explain Nature and Scope of Financial Management - ilearnlot

How to Explain Nature and Scope of Financial Management?

Learn, Explanation of Nature and Scope of Financial Management


Financial management is one of the important aspects of finance. Nobody can ever think to start a business or a company without financial knowledge and management strategies. Finance links itself directly to several functional departments like marketing, production, and personnel. Here we will list out some of the major scopes of financial management notes which will help you in your decision-making process. Also learn, Types of Financial Decisions, How to Explain Nature and Scope of Financial Management?

Financial management has a wide scope. According to Dr. S. C. Saxena, the scope of financial management includes the following five A’s.

  • Anticipation: Financial management estimates the financial needs of the company. That is, it finds out how much finance is requiring the company.
  • Acquisition: It collects finance for the company from different sources.
  • Allocation: It uses this collected finance to purchase fix and current assets for the company.
  • Appropriation: It divides the company’s profits among the shareholders, debenture holders, etc. It keeps a part of the profits as reserves.
  • Assessment: It also controls all the financial activities of the company. Financial management is the most important functional area of management. All other functional areas such as production management, marketing management, personnel management, etc. depend on Financial management. Efficient financial management is required for survival, growth, and success of the company or firm.

Key Scope of Financial Management!

The major scope of financial management is dividing into four categories. Let’s learn and understand the nature and scope of financial management through the below details notes.

Investment Decision:

Evaluating the risk involve, measuring the cost of fund and estimating expected benefits from a project comes under investment decision. It is one of the important scopes of financial management. The two major components of investment decision are Capital budgeting and liquidity. Capital budgeting is commonly known as the investment appraisal. It deals with the allocation of capital and funds in such a manner that they will yield earnings in future. Capital budgeting determines the long-term investment which includes replacement and renovation of old assets. It is all about maintaining an appropriate balance between fix and current assets in order to maximize profitability and to maintain desired liquidity in the firm for its smooth functioning.

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Working Capital Decision:

Decisions related to working capital is another crucial scope of financial management. Decisions involving around working capital and short-term financing are known as a working capital decision. It also manages the relationship between short-term assets and its liabilities. Short-term assets include cash in hand, receivables, inventory, short-term securities, etc. Creditors, bills payable, outstanding expenses, bank overdraft, etc are a firm’s short-term liabilities. Short-term assets can exchange for cash within one calendar year. Similarly, the liabilities are to settle within an accounting year.

Dividend Decision:

The Dividend Decision plays a crucial role in today’s corporate era. It determines the amount of taxation that stockholders pay. A good dividend policy helps to achieve the objective of wealth maximization. Distributing the entire profit in the form of dividends or distributing only a certain percentage of it is decided by dividend policy. It is known as deciding the optimum dividend payout ratio i.e. proportion of net profits to be paid out to shareholders. Stability of cash dividends and stock sets the parameter which determines the number of investment opportunities. Expansion of an economic activity depends on the effectiveness of dividend decisions and scope of financial management.

Financing Decision:

Financing Decisions focuses on the accountabilities and stockholders’ equity side of the firm’s balance sheet, for example, the decision to issue bonds is a kind of financing decision. The main aim of financing decision is to cover expenses and investments. The decision involves generating capitals by various methods, from different sources, in relative proportion and considering opportunity costs, with respect to time of flotation of securities, etc.

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The scope of financial management is to meet the expenses of the firm, a suitable capital structure for the enterprise should develop by the finance manager. Only an optimum finance mix can maximize the market price of the company’s shares in the long run. To decrease the risk, a stable equilibrium is requiring between debt and equity. Return and risk to the equity shareholders depend on how optimally the debts and financial leverages are using. Only when the risk and return are in synchronization, the market value per share is maximizing. The apt timing for raising funds is to decide by the financial manager time to raise the funds.

Nature of Financial Management!

Finance management is a long-term decision-making process which involves a lot of planning, allocation of funds, discipline and much more. Let us understand the nature of financial management with reference to this discipline.

  • Finance management is one of the important education which has to realize worldwide. Now a day’s people are undergoing through various specialization courses of financial management. Many people have chosen financial management as their profession.
  • The nature of financial management is never a separate entity. Even as an operational manager or functional manager one has to take responsibility for financial management.
  • Finance is a foundation of economic activities. The person who Manages finance is called the financial manager. An important role of a financial manager is to control finance and implement the plans. For any company financial manager plays a crucial role in it. Many times it happens that lack of skills or wrong decisions can lead to heavy losses to an organization.
  • Nature of financial management is multi-disciplinary. Financial management depends upon various other factors like accounting, banking, inflation, economy, etc. for the better utilization of finances.
  • An approach to financial management is no limit to business functions but it is a backbone of commerce, economic and industry.
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Scope & Elements of Financial Management!

  • Investment decisions: Include investment in fixed assets (call as capital budgeting). Investment in current assets is also a part of investment decisions call for working capital decisions.
  • Financial decisions: They relate to the raising of finance from various resources which will depend upon the decision on the type of source, the period of financing, cost of financing and the returns thereby.
  • Dividend decision: The finance manager has to take a decision with regards to the net profit distribution. Net profits are generally divided into two: 1) The dividend for shareholders- Dividend and the rate of it has to decide. 2) Retained profits- Amount of retained profits has to finalize which will depend upon expansion and diversification plans of the enterprise.

How to Explain Nature and Scope of Financial Management - ilearnlot

Reference

1. Key Scope of Financial Management – http://wikifinancepedia.com/finance/financial-management/nature-and-scope-of-financial-management
2. The scope of Financial Management – http://kalyan-city.blogspot.in/2011/09/what-is-financial-management-meaning.html
3. Scope & Elements – http://www.managementstudyguide.com/financial-management.htm


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