FINANCIAL MANAGEMENT -AN OVERVIEW
INTRODUCTION
Finance
may be defined as the art and science of managing money. The major areas of
finance are: (1) financial services and (2) managerial finance/corporate finance/financial
management. While financial services is concerned with the design and delivery
of advice and financial products to individuals, businesses and governments
within the areas of banking and related institutions, personal financial
planning, investments, real estate, insurance and so on, financial management
is concerned with the duties of the financial managers in the business firm.
Financial managers actively manage the financial affairs of any type of
business, namely, financial and non-financial, private and public, large and
small, profit-seeking and not-for-profit. They perform such varied tasks as
budgeting, financial forecasting, cash management, credit administration,
investment analysis, funds management and so on. In recent years, the changing
regulatory and economic environments coupled with the globalisation of business
activities have increased, the complexity as well as the importance of the
financial managers' duties. As a result, the financial management
function has become more demanding and complex. This Chapter provides an
overview of financial management function. It is organised into seven Sections:
.
Relationship of finance and related disciplines
.
Scope of financial management
.
Goal /objectives ,of financial management
.
Agency problem
.
Organisation of the finance function
.
Emerging role of finance managers in India
.
An overview
FINANCE
–FINANCE AND RELATED DISCIPLINE
Financial
management, as an integral part of overall management, is not a totally
independent area. It draws heavily on related disciplines and fields of study,
such as economics, "accounting, marketing, production and quantitative
methods. Although these disciplines are interrelated, there are key differences
among them. In this Section, we discuss these relationships.
Finance and Economics
The
relevance of economics. to financial management can be described in the light
of the two
broad
areas of economics: macroeconomics and microeconomics.
Macroeconomics
is concerned with the overall institutional environment in which the firm
operates. It looks at the economy as a whole. Macroeconomics is concerned with
the institutional structure of the banking system, money and capital markets,
financial intermediaries, monetary, credit and fiscal policies and economic
policies dealing with, and controlling level of, activity within an economy.
Since business firms operate in the macroeconomic environment, it is important
for financial managers to understand the broad economic environment.
Specifically, they should (1) recognise and understand how monetary policy
affects the cost and the availability of funds; (2) be versed in fiscal policy
and its effects on the economy; (3) be ware of the various financial
institutions/financing outlets; (4) understand the consequences of various
levels of economic activity and changes in economic policy for their decision
environment and so on. Microeconomics deals with the economic decisions of
individuals and organisations. It concerns itself with the determination of
optimal operating strategies. In other words, the theories of microeconomics
provide for effective operations of business firms. They are concerned with
defining actions that will permit the firms to achieve success. The concepts
and theories of microeconomics relevant to financial management are, for
instance, those involving (1) supply and demand relationships and profit
maximisation strategies, (2) issues related to the mix of productive factors,
'optimal' sales level and product pricing strategies, (3) measurement of
utility preference, risk and the determination of value, and (4) the rationale
of depreciating assets. In addition, the primary principle that applies in
financial management is marginal analysis; it suggests that financial decisions
should be made on the basis of comparison of marginal revenue and marginal
cost. Such decisions will lead to an increase in profits of the firm. It is,
therefore, important that financial managers must be familiar with basic
microeconomics.
To
illustrate, the financial manager of a department store is contemplating to
replace one of its online computers with a new, more sophisticated one that
would both speed up processing time and handle a large volume of transactions.
The new computer would require a cash outlay of Rs 8,00,000 and the old
computer could be sold to net Rs 2,80,000. The total benefits from the new
computer and the old computer would be Rs 10,00,000 and Rs 3,50,000
respectively. Applying marginal analysis, we get:
Benefits with new
computer Rs
10,00,000
Less:
Benefits with old computer Marginal benefits (a) Cost of new
computer 3,50,000
Marginal
Benefits (a)
Rs 6,50,000
Cost of new
computer
Rs 8,00,000
Less:
Proceeds from sale of old computer Marginal cost (b) Net
benefits [(a) - (b)] Rs 2,80,000
Marginal cost (b)
Rs 5,20,000
Net benefits (a) –(b)
1,30,0000
As
the store would get a net benefit of Rs 1,30,000, the old computer should be
replaced by the new one.
Thus, a knowledge of economics is necessary
for a financial manager to understand both the financial environment and the
decision theories which underline contemporary financial management. He should
be familiar with these two areas of economics. Macroeconomics provides the
financial manager with an insight into policies by which economic activity is controlled.
Operating within that institutional framework, the financial manager draws on
microeconomic theories of the operation of firms and profit maximisation. A
basic knowledge of economics is, therefore, necessary to understand both the
environment and the decision. techniques of financial management.
http://ozassignment.blogspot.in/2015/03/porters-five-forces-model.html
Excellent and nice post. It will beneficial for everyone. Thanks for sharing such a wonderful post. Avail No 1 Dissertation Help UK from certified PhD writers. It is extremely helpful for me. You can email us at info@ukdissertationhelp.co.uk or Phone Number - 020 8144 9988.
ReplyDeleteVisit here:- Dissertation Help