Chapter 1

Nature, purpose and scope of financial management

financial management

a decision making process concerned with planning, acquiring and utilizing funds in a manner that achieves the firms’s desired goals

finance

financial management is a part of a larger discipline which is a body of facts, principles, and theories relating to raising money by individuals, businesses and government

goal of financial management

maximize the current value per share of existing stock/ ownership in a business firm

legal and ethical actions

maximization of value should achieved through these actions

role of finance manager

acquisition of funds, expanded to judicious and efficient use of funds available to the firm, keeping in view the objectives of the firms and expectations of the providers of funds

globalization

has caused to integrate the national economy with the global economy and has created a new financial environment which brings new opportunities and challenges to the business enterprises

total fund requirement, assets/resources to be acquired, best pattern of financing the assets

finance manager is expected to analyze the business firm and detemine the ff. ___,___,___

investment, financing, dividend

major types of decisions that the finance manager of modern business firm

investment decisions

determine how scarce or limited resources in terms of funds of the business firms are committed to projects.

financing decisions

assert that the mix of debt and equity chosen to finance investments should maximize the value of investments made. 

should consider the cost of finance available in different forms and the risks attached to it

principle of financial leverage or trading on equity

should be considered when selecting the debt-equity mix or capital structure decision

dividend decisions

concerned with the determination of quantum of profits to be distributed to the owners, the frequency of such payments and the amounts to be retained by the firm.

cash flow

the financial health of the firm depends on its ability to generate sufficient amounts of cash to pay its employees, suppliers, creditors, and owners 

accounting

discharges the function of systematic recording of transactions and summarizing the same for presentation in the financial statements

finance manager

will make use of the accounting information in the analysis and review of the firm’s business position in decision making

finance function

a distinct and separate function rather than simply an extension of accounting function

microeconomics

deals with the economic decisions of individual and firms. It focuses on the optimal operating strategies based on the economic data of individuals and firms

macroeconomics

looks at the economy as a whole

provides insight into policies by which economic activity is controlled