Scope of Financial Management24/03/2020
The investment decision involves the evaluation of risk, measurement of cost of capital and estimation of expected benefits from a project. Capital budgeting and liquidity are the two major components of investment decision. Capital budgeting is concerned with the allocation of capital and commitment of funds in permanent assets which would yield earnings in future.
Capital budgeting also involves decisions with respect to replacement and renovation of old assets. The finance manager must maintain an appropriate balance between fixed and current assets in order to maximise profitability and to maintain desired liquidity in the firm.
Capital budgeting is a very important decision as it affects the long-term success and growth of a firm. At the same time it is a very difficult decision because it involves the estimation of costs and benefits which are uncertain and unknown.
While the investment decision involves decision with respect to composition or mix of assets, financing decision is concerned with the financing mix or financial structure of the firm. The raising of funds requires decisions regarding the methods and sources of finance, relative proportion and choice between alternative sources, time of floatation of securities, etc. In order to meet its investment needs, a firm can raise funds from various sources.
The finance manager must develop the best finance mix or optimum capital structure for the enterprise so as to maximize the long- term market price of the company’s shares. A proper balance between debt and equity is required so that the return to equity shareholders is high and their risk is low.
Use of debt or financial leverage effects both the return and risk to the equity shareholders. The market value per share is maximized when risk and return are properly matched. The finance department has also to decide the appropriate time to raise the funds and the method of issuing securities.
In order to achieve the wealth maximization objective, an appropriate dividend policy must be developed. One aspect of dividend policy is to decide whether to distribute all the profits in the form of dividends or to distribute a part of the profits and retain the balance. While deciding the optimum dividend payout ratio (proportion of net profits to be paid out to shareholders).
The finance manager should consider the investment opportunities available to the firm, plans for expansion and growth, etc. Decisions must also be made with respect to dividend stability, form of dividends, i.e., cash dividends or stock dividends, etc.
Working Capital Decision
Working capital decision is related to the investment in current assets and current liabilities. Current assets include cash, receivables, inventory, short-term securities, etc. Current liabilities consist of creditors, bills payable, outstanding expenses, bank overdraft, etc. Current assets are those assets which are convertible into cash within a year. Similarly, current liabilities are those liabilities, which are likely to mature for payment within an accounting year.
Preparation of Annual Financial Statements
This is the sixth scope of financial management and it means, financial statements includes Profit & Loss A/C and Balance Sheet. These two main aspects are shows the financial reputation or condition of the company during a working period usually a financial year. It shows the income and expenditure of the company also.
Financial Statements are designed by always keeps finance manager and its started from 1st April to 31st March (1 Year).
Estimation of Financial Performance
This is the seventh scope of financial management and it means an annually and time-to-time evaluation of performance is the very crucial task for financial management and financial manager. For doing the evaluation, there are various turnover variables like ratio analysis, trend analysis, net profit, cost per unit, and Return on Investment plays a very crucial role to judge the performance of a firm of past and current years.
Evaluating the Impact of New Financing
This is the eighth scope of financial management and it means, nature of modern management is becoming future-oriented and follow the objectivity. In this case, time-to-time growth and development are very important for doing a specific business because it helps the business to build a huge empire.
Now it’s the turn of finance, in this function finance plays an essential role to make a successful business for the purpose of development and growth.
This is the ninth scope of financial management and it means, the finance area is a very broad concept and it includes a bulk amount of scope or functions for determining the financial management. The number of functions includes tax-planning, management of the provident fund, gratuity, safety of securities, social insurance funds and so on.