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FINANCIAL MANAGEMENT

Introduction

Finance has emerged as a distinct area of study during second half of the twentieth century. But

even before that some direct or indirect references to finance function were made on a casual

basis. The evolution of finance function and the changes in its scope appeared due to two

factors namely

1. the continuous growth and diversity in business

2. the gradual appearance of new financial analytical tools.

Meaning of Financial Management

The term financial management has been defined differently by different authors. According to

Solomon financial management is concerned with the efficient use of an important economic

resource, namely capital fund.

Scope of Financial Management

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Financial management has undergone significant changes over the years as regards its scope

and coverage. As such the role of finance manager has also undergone fundamental changes

over the years. In order to have a better exposition to these changes over the years, In order to

have a better exposition to these changes, it will be appropriate to study both the traditional

concept and the modern concept of the finance function.

Traditional Concept

In the beginning of the present century, which was the starting point for the scholarly writings

on corporation finance, the function of finance was considered to be the task of providing funds

needed by the enterprise on terms that are most favorable to the operations of the enterprise.

The traditional scholars are of the view that the quantum and pattern of finance requirements

and

allocation of funds as among different assets, Is the concern of non financial executives.

According to them, the finance manager has to undertake the following three functions.

1. Arrangement of funds from financial institutions

2. Arrangement of funds through financial instruments

3. Loking after the legal and according relationship between a corporation and its sources of

funds.

Modern Concept

The traditional concept outlived its utility due to changed business situations since mid 1950s.

Technological improvements, widened marketing operations, development of a strong

corporate structure, keen and healthy business competition all made it imperative for the

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management to make optimum use of available financial resources for continued survival of the

firm.

Finance Functions

Although it maybe difficult to separate the finance functions from production, marketing and

other functions, yet the functions themselves can be readily identified. We may identify two

kinds of finance functions are managerial, and routine

There are four important managerial finance functions

1. Investment or long tern asset mix decision

2. Financing or capital mix decision

3. Dividend or profit allocation decision

4. Liquidity or short term asset mix decision.

Investment Decision

Investment decision or capital budgeting is the oldest area of the recent thinking in finance. It

relates to allocation of capital and involves decisions to commit funds to long term assets which

would yield benefits in future. Its one very significant aspect is the task of measuring the

prospective profitability of new investments. Future benefits are difficult to measure and cannot