Financial Management - An Overview
Financial management revision article series
Financial Management - The Scope
Financial management is concerned with monitoring financial markets, approving financial investment projects in the organization, procuring the finance from the market to finance the project, and conforming to the contracts signed with the providers of finance.
Thus the important activities are
1. Monitoring financial markets to understand the desires of the providers of finance
2. Investment decisions within the company
3. Financing decisions - From whom to procure funds?
4. Dividend decisions - Conforming to the contracts.
Evolution of Corporate Finance Area or Subject
The early phase of corporate finance subject had focus on episodic events in the life cycle of a corporation. The typical and popular book of this phase is the book, The Financial Policy of Corporations by Arthur S. Dewing, Professor of Finance at Harvard University (published in 1918). The book had a descriptive and institutional material regarding formation of company, issuance of capital, major expansion, merger, reorganisation, and liquidation.
In the early 40s a transition occurred and along with the external focus related to major events, greater emphasis was placed on the day-to-day internal activities of financial management in the area of funds requirement analysis, planning, and control. A representative work of this phase is Essays on Business Finance by Wilford J . Eiteman et al. (published in 1953).
The modern phase began in mid-fifties with application of economic theory and quantitative methods of analysis. Financial decision making has become analytical and quantitative and financial decision making activity has become dominant.
Goals of Financial Management
Financial theory, rests on the premise that the objective of the firm should be to maximize the value of the firm to its equity shareholders.
This value is could be equal to the market price of shares in stock market with good liquidity. But financial managers may have to calculate the discounted value of expected future cash flows and compare with the market price. In case of discrepancies they may have to communicate to the financial markets their point of view.
Basic Considerations of Financial management: Risk and Return
In the context of evaluating an investment proposal, from the point of view of finance function, risk and return are the relevant dimensions. Higher return from a proposed project increases market value and higher risk decreases market value.
Financial Decisions in a Firm
While a formally specified person performs the financial market monitoring and procurement of finance functions, the investment decisions and performance of investments are in the hands of operating executives. Finance sense has to be there in each and every employee of an organization to make an organization financially viable and successful.
The marketing persons who do market research provide estimates of market size, revenue generation which form the basis of project proposals.
The engineers, who select location for the plant, equipment shape the investment decision of the firm by providing various alternatives.
The purchase managers actions influence the level of inventories.
The sales managers' assessments determine the receivables policy.
Department managers actually plan and control expenditures.
Thus many activities that are a part of financial function are performed by operating executives. But there are many tasks of finance function that can be done by specialist financial officers. Traditionally, the financial officers are grouped into controller's office and treasurer's office.
The treasurer's office is responsible for
Controller's office is responsible for
Management accounting and control
ReferencesPrasanna Chandra, Financial Management, 5th Ed., Tata McGraw Hill, 2001
Brealey and Myers, Corporate Finance, Fifth Edition, Prentice Hall India, 2001