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Finance Scope and Objective

Financial management deals with procuring, planning, and controlling a firm's financial resources. A finance manager makes three key types of decisions: (1) investment decisions about long-term assets, (2) finance decisions regarding capital structure and raising funds, and (3) dividend decisions about distributing earnings. The finance manager's role is to effectively utilize financial resources to maximize profit and shareholder wealth.

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33 views12 pages

Finance Scope and Objective

Financial management deals with procuring, planning, and controlling a firm's financial resources. A finance manager makes three key types of decisions: (1) investment decisions about long-term assets, (2) finance decisions regarding capital structure and raising funds, and (3) dividend decisions about distributing earnings. The finance manager's role is to effectively utilize financial resources to maximize profit and shareholder wealth.

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namita_20005
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Financial Management

Financial Management is that managerial activity which is


concerned with the procuring, planning and controlling of the
firms financial resources.

Scope of Finance-
Scope of finance deals with the application of finance
Knowledge in different areas of organization.
Richa vohra
M.B.A 3RD SEM
Scope of Finance…..cont.
Management of Real and Financial Assets-
An organizations requires two type of assets to
carry out its business.
1.Real Assets-
1. Tangible Real assets-Like machinery, building
etc.
2. Intangible Real assets-Like Patent, copy right,
technological collaborations.
2. Financial Assets-
These assets also called financial securities-
stocks, bonds, debentures, loan.
Scope of Finance…cont.
Management of Financial Resources of
Organization
These are two types of funds that a firms can raise-
1. Equity Capital-
Equity capital is share capital, those supply this capital to the
organization are the legal owner of the company. A company
can raise the equity capital from two sources.
1. Common equity shapes-The holders of common equity
shares are called ordinary share holders and residual
profit is distributed to them as their share from the
company which is called dividend.
2. Preference Shares-Preference share holders get their
dividend at fixed rate from the company.
Scope of Finance…cont.
2. Debt Capital-
This is capital supplied by Creditors and Lenders to the
company in terms of loans or by purchasing some debt
securities of the company. Lenders are not the legal owner of
the company and they get their returns from the company at
fixed rate. Debt capital can be raised from two sources.
1. Banks and Financial Institutions in term of Loan.
2. From general investors by issuing the debentures to
them.
Financial Functions
The objective of the finance managers is to maximum utilization of
financial resources. The effective utilization of financial resources
generates higher return to the company, as well as it will reduce the
cost of capital. Cost of capital is that which capital is raised from
investors. A finance manager has to take strategic decisions mainly
in three broad areas.
1. Investment Decisions-
These decisions are related to effective investment of financial
resources into long terms assets.
2. Finance Decisions-
These decisions are related to raising of financial resources
from different sources.
3. Dividend Decisions-
These decisions are related to distribution of dividends among
Investment Decisions
Investment decisions are concerned with investment of
financial resources into long term assets. This investment is
made for expansion, modernization, setting up of new plant, R
& D expenditure, and replacement of old machinery.

Investment decisions are strategic decisions for the


company as it involves investment of funds for long time
period but company will start to realize return from that
investment after a long time period.
Financial Decisions
Financial decisions are related with raising of funds from
different sources like equity share holders, preference share
holders and debt sources. In fact this decision is related with
determining the optimum capital structure.
Some key issues in Financial decisions making-
1. What mix of debt and equity to be used?
2. Can value of company be changed by changing the
capital structure?
3. What is optimal debt-equity mix?
Financial Decisions….cont.

Investors
Perception
Risky or
Less Risky

Equity Debt Value Stock of company


In stock Market

Capital Structure
of the Company

The main objective of finance manager is to maximize the value of


stock of the company, so he will adopt that capital structure which
will balance the perception of investors and thereby increase the
value of stock in the stock market.
Dividend Decisions
Dividends decisions of a company are crucial financial decisions.
Dividend policy of company determines the amount of earnings to
be distributed to the shareholders and amount to be retained in the
firm. Dividend Policy of a company significantly affect the market
value of the stock of the company.
1. Net Sale
2. Cost of Good sold
3. Gross Profit (1-2)
4. Less-Selling and Administrative expenses.
5. Operating Income( 3-4)
6. Add other income
7. Earning before interest and tax (EBIT) (5+6)
8. Less interest (debenture and loans)
9. Profit before tax (PBT) (7-8)
10. Less tax
11. Profit after tax (9-10)
12. Less-Dividend to Preference share holders.
13. Residual profit for Common share holders (11-12).
Financial Goals
1.Profit Maximization-
Profit maximization refers to increase of the
profit of the company.
2. Wealth Maximization-
Wealth maximization refers to increase the
value of company i.e. increase the market
price of the stock of the company.
Role of Finance Manager
The finance manager is primarily responsible for effective utilization
of financial resources of the company. He has perform the following
roles to fulfill his responsibilities.
1.Fund raising-
Finance manager has to decide how much fund should be
raised from debt market and how much fund should be
raised from capital market.
2. Fund Allocation-
Fund allocation deals with how much funds should be
invested in long term assets and how much fund should be
invested in short term assets.
3. Profit Planning-
Profit planning refers to the operating decisions in the areas
of pricing, costs, volume of output.
4. Under standing of Financial Market-
A finance manager should have complete knowledge of
financial market.

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