Nature and Scope of Financial Management

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Finance links itself directly to several functional departments like marketing, production and personnel. Here we will list out some of the major scope of financial management notes and nature of financial management which will help you in your decision making process.

Financial management is one of the important aspects in finance. Nobody can ever think to start a business or a company without financial knowledge and management strategies.

Scope of Financial Management

Key scope of financial management are divided in four categories. Lets learn and understand about the nature and scope of financial management through the below details notes.

Investment Decision

Wikipedia of Finance- Scope of Financial Management in points-Short notes on Nature of Financial Management

Evaluating the risk involved, measuring the cost of fund and estimating expected benefits from a project comes under investment decision. It is one of the important scope 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 fixed and current assets in order to maximize profitability and to maintain desired liquidity in the firm for its smooth functioning.

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 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 be exchanged with cash within one calendar year. Similarly, the liabilities are to be settled 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 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 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.

Scope of financial management is to meet the expenses of the firm, a suitable capital structure for the enterprise should be developed 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 required between debt and equity.

Return and risk to the equity shareholders depends on how optimally the debts and financial leverages are used. Only when the risk and return are in synchronization, the market value per share is maximized. The apt timing for raising funds is to be decided by the financial manager time to raise the funds.

Nature of Financial Management

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

Risk and Returns Evaluation

Nature of financial management basically involves decision where risk and return are linked with investment. Generally high risk investment yield high returns on investments. So, role of financial manager is to effectively calculate the level of risk company is involve and take the appropriate decision which can satisfy shareholders, investors or founder of the company.

Capital Requirement Estimation

Using financial management to forecast working capital and fixed capital requirements for conducting business operations, it is possible to plan ahead of time for money. It is necessary to have a proper balance between debt and equity in order to keep the cost of capital as low as possible. Financial management determines the appropriate allocation of various securities (common equity, preferred equity and debt).

Wealth Management

The finance manager keeps track of all cash movements (both inflow and outflow) and guarantees that the company does not experience a cash shortage or surplus.

Valuation of Company

Primary nature of financial management focus towards valuation of company. That is the reason where all the financial decisions is directly linked with optimizing / maximization the value of a company. Finance functionality like investment, distribution of profit earnings, rising of capital, etc. are the part of management activities.

Improve Company’s Stock / Shareholder Value

Increase the amount of return to shareholders by lowering the cost of operations and increasing earnings, according to the company’s mission statement. The finance manager’s primary focus should be to increase revenue by obtaining cash from a variety of sources and investing.

Source of Funds

In every organization, the source of funding is a critical decision to make. There are long-term, medium-term and short-term source of funds. Every organization should thoroughly research and evaluate various sources of money (e.g., stocks, bonds, debentures, and so on) before selecting the most appropriate sources of funds with the least amount of risk.

Selective Investment

Before committing the funds, it is necessary to thoroughly examine and assess the investment proposal’s risk and return characteristics. Appropriate decision need to be made for selecting right type of investment options.

Control Management

The implementation of financial controls assists the firm in maintaining its real costs of operation within reasonable bounds and generating the projected profits.

Few Additional Nature and Scope of Financial Management

There are other techniques that may be used, such as setting specific standards for company in advance, comparing the actual cost or performance with pre-established criteria, and implementing all necessary corrective actions as needed. Few other scope and nature of financial management is listed below.

  • Finance is a foundation of economic activities. The person who Manages finance is called as financial manager. Important role of 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.
  • Financial Management is an important function in company’s management. Financial factors are considered in all the company’s decisions and all the departments of an organization. It affects success, growth and volatility of a company. Finance is said to end up being the lifeline of a business.
  • Finance management is one of the important education which has been realized word wide. 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 of financial management.
  • 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.
  • Approach of financial management is not limited to business functions but it is a backbone of commerce, economic and industry.

Nature and Scope of Financial Management PDF

This is just a high level overview of nature and scope of financial management. There is always a source for those who want to get in-depth knowledge on it. You can download free for “Nature of Financial Management pdf” and “Scope of Financial Management pdf” from the below link. Click on Nature and Scope of Financial Management to download PDF file for free.

Conclusion

Financial management is defined as “provision of money when required from time to time.” In this tutorial lesson we have learned about nature of financial management and scope of financial management. Also for in-depth knowledge you can also download pdf free available in this article. This knowledge will assist you in empowering your financial management decisions.

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1 thought on “Nature and Scope of Financial Management”

  1. Hi, You have a nice website, after reading your post on nature of financial management notes. I found interested to follow you. Thanks guys for sharing a valuable information 🙂

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