NATURE AND SCOPE OF FINANCIAL MANAGEMENT AIMS OF FINANCIAL FUNCTIONS The primary aim of financial function is to arrange as much

funds for the business as are required from time to time. This function has the following aims: 1. ACQUIRING SUFFICIENT FUNDS: The main aim of financial is to assess the financial needs of an enterprise and then finding out suitable sources for raising them. The sources should be commensurate with the needs of the business .If funds are need for longer periods then long term sources like share capital, debentures, term loans may be explored. A concern with longer gestation period should relay more on owners funds instead of interest bearing securities because profits may not be there for some years. 2. PROPER UTILISATION OF FUNDS: Though raising of funds is important but their effective utilization is more important. The funds should be used in such a way that maximum benefit is derived from them. The returns from their should be more than their cost. it should be ensured that funds do not remain idle at any point of time . The funds committed to various operations should be effectively utilized. Those projects should be preferred which are beneficial to the business. 3. INCREASING PROFITABILITY: The planning and control of finance functions aims at increasing profitability of the concern .It is true that money generates money. To increase profitability, sufficient funds will have to be invested. Finance functions should so planned that he concern neither suffers from inadequacy of funds nor wastes more funds than required. A proper control should also be exercised that scares resources are not frittered away on uneconomical operations. The cost of acquiring funds also influences profitability of the business. If the cost of raising funds is more, then profitability will go down. Finance function also requires matching of cost and returns from funds. 4. MAXIMISING FIRMS VALUE: Finance functions also aims at maximizing the vale of the firm. It is generally said that a concerns value linked with its profitability. Even though profitability influences a firms value but it is not all. Besides profits, the type of sources used for raising funds, the condition of money market,the demand for product are some others considerations which also influences a firms value.

RELATIONSHIP OF FINANCE WITH OTHERS BUSINESS FUNCTIONS Business function means functional activities that an enterprise undertaken in achieving its desired objectives. These functions may be classified on the basis of its operational activities.

BUSINESS FUNCTIONS OF A MANUFACTURING UNDERTAKING

PURCHASE FUNCTION

PRODUCTION FUNCTION

DISTRIBUTIO N FUNCTION

ACCOUNTING FUNCTION

PERSONNEL FUNCTION

RESEARCH AND DEVELOPMEN T FUNCTION

Finance function of a business is closely related to its other functional areas. Funds will be wasted in the absence of efficient production and in the absence of proper marketing the firm will not be able to engage funds judiciously in the business. Most of the important decisions of a business enterprise are taken on the basis of availability of funds.however; finance functions in practice should not limit the general running of the business. Financial policies of a firm should be devised in such a manner so to match the requirements of other functional areas. The relationship between finance functions and other business functions of an enterprise is discussed below: 1. PURCHASE FUNCTION: materials required for production of commodities should be produced on economic terms and should be utilized in efficient manner o achieve maximum productivity .in this function the finance manager plays a key role in providing finance. In order to minimize cost and exercise maximum control, various material management techniques such as economic order quantity (EOC), determination of stock level, perpetual inventory system etc., are applied. The task of the finance manager is to arrange the availability of cash when the bill for purchase becomes due. 2. PRODUCTIVITY FUNCTIONS: production function occupies the domination positions in business activities and it is a continuous process. The production cycle depends largely on the marketing function because production is justified when they are resulted in revenues through sales. Production function involves heavy investment in fixed assets and in working capital.naturally, a tigher control by the finance manager on the investment in productive assets

becomes necessary. It must be seen that there is neither over-capitalization nor undercapitalization. Cost benefit criteria should be the prime guide in allocating funds and therefore finance and production manager should in unison. 3. DISTIBUTION FUNCTION: as goods produced are meant for sale, distribution function is an important business activity. It is more important because it provides continuous inflow of cash to meet the outflow thereof. So while choosing different distributing channels, media of advertisement and sales promotion devices, the cost benefit criterion should be the guiding factor. If cost reduction in distribution function is effected without compromising efficiency, it will lead to increased benefit to the enterprise in the form of higher profit and to the consumers in the form of lower cost. As every aspect of distributory function involves cash outflow and every distributing activity is aimed at bringing about inflow of cash, both the functions are closely inter related and hence should be carried out in close unison. 4. ACCOUNTING FUNCTION: Charles Gastenberg visualizes the influences of scientific arrangement of records, with the help of which inflow and outflow of funds can be efficiently managed and stocks and bonds can be efficiently marketed.Moreover, the efficiency of the whole organization can be greatly improved with correct recording of financial data. All the accounting tools and control devices, necessary for appraisal of finance policy can be correctly formulated if the accounting data properly recorded. For example the cost of raising funds. Expected returns on the investment of such funds, liquidity position, forecasting of sales, etc, .can be effectively carried out if the financial data are reliable.hence, the relationship between accounting and finance is intimate and the finance manager has to depend heavily on the accuracy of the accounting data.

FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING COST ACCOUNTING PROCESS AND ANALYSIS DATA RECEIVED FINANCIAL MANAGEMENT DECISION FINANCING
INVESTMENT

DIVIDEND

ACCOUNTING AND FINANCIAL MANAGEMENT RELATIONSHIP

5. PERSONNEL FUNCTION: Personnel function has assumed a prominent place in the duration of business management. No business function can be carried out efficiently unless there is a sound personnel policy backed up by efficient management of personnel. Success or failure of every business activity boils down to the efficiency of otherwise of the men entrusted with the respective functions. A sound personnel policy includes proper wage structure, incentives schemes, promotional opportunity, human resource development and other fringe benefits provided to the employees. All these matters affect finance. But the finance manager should know that organization can afford to pay only what it can bear. It means that expenditure incurred on personnel management and the expected return on such investment through labour productivity should be considered in framing a sound personnel policy. Therefore, the relation between the finance and personnel department should be intimate. 6. RESEARCH AND DEVELOPMENT: In the world of innovations and competitiveness, expenditure on research and development is a productive investment and R and D itself is an aid to survival and growth of the firm. Unless there is a constant Endeavour for improvement and sophisticated of an existing product and introduction of newer varities, the firm is bound to be gradually out marketed and out of existence. However, sometimes expenditure on R and D involves a heavier amount, disproportionate to the financial capacity of the firm. In such a case, it financially cripples the enterprise and the expenditure ultimately ends in a fiasco. On the other

hand, heavely cutting down expenditure of R and D blocks the scope of improvement and diversification of the product. So ,there must be a balance between the amount necessary for continuing R and D work and the funds available for such a purpose.Usually,this balance is struck out by joining efforts of finance manager and the person at the helm of R and D. FINANCIAL DECISIONS: Financial decision refers to decision concerning financial matter of a business firm. There are many kinds of financial management decision that the firm makes in pursuit of maximizing shareholders wealth,viz., kind of assets to be acquired ,pattern of capitalization, distribution of firms income etc.,we can classify these decision into three major groups: 1. Investment decision 2. Financing decision 3. Dividend decision 1. INVESTMENT DECISION: investment decision relates to the determination of total amount of assets to be held in the firm, the composition of these assets and the business risk complexions of the firm as perceived by its inventors. It is the most important financial decision. since funds involves cost and are available in a limited quantity, its proper utilization is very necessary to achieve the goal of wealth maximization. The investment decision can be classified under two broad groups: (1) Long term investment decision and (2) Short-term investment decision as working capital management. Capital budgeting is the process of making investment decision in capital expenditure. These are expenditures, the benefits of which are expected to be received over a long period of time exceeding one year. The finance manager has to assess the profitability of various projects before committing the funds. The investment proposals should be evaluated in terms of expected profitability, cost involved and the risks associated with the projects. the investment decision is important not only for the setting up of new units but also for the expansion of present units, replacement of permanent assets, research and development project cost, and reallocation of funds, in case investment made earlier do not fetch result as anticipated earlier. Short-term investment decision, on the other hand, relates to the allocation of funds as among cash and equivalents, receivables and inventories. Such a decision is influenced by trade off between liquidity and profitability. The reason is that, the more liquid the assets, the less it is likely

to yield and the more profitable an asset, the more illiquid it is. A sound short-term investment decision or working capital management policy is one which ensures higher profitability, proper liquidity and sound structural health of the organization. 2. FINANCING DECISION: once the firm has taken the investment decision and committed itself to new investment, it must decide the best means of financing this commitments.sijnce, firms regularly make new investments, the needs for financing and financial decisions are on going. Hence, a firm will be continuously planning for new financial needs. The financing is not only concerned with how best to finance new assets, but also concerned with the best overall mix of financing for the firm. A finance manager has to select such sources of funds which will make optimum capital structure. The important thing to be decided here is the proportion of various sources in the overall capital mix of the firm. The debt-equity ratio should be fixed in such a way that it helps in maximizing the profitability of the concern. The raising of more debts will involve fixed interest liability and dependence upon outsiders. It may help in increasing the return on equity but will also enhance the risk. The raising of funds through equity will bring permanent funds to the business but the shareholders will expect higher rates of earnings. The financial manager has to strike a balance between various sources so that the overall profitability of the concern improves. If the capital structure is able to minimize the risk and raise he profitability then the market prices of the shares will go up maximizing the wealth of shareholders. 3. DIVIDEND DECISIONS: the third major financial decision relates to the disbursement of profits back to investors who supplied capital to the firm. The term dividend refers to that part of profits of a company which is distributed it among its shareholders. It is the reward of shareholders for investment made by them in the share capital of the company. The dividend decision is concerned with the quantum of profits to be distributed among shareholders. A dec ision has to taken whether all the profits are to be distributed, to retain all the profits in business or to keep a part of profits in the business and distribute other among shareholders. The higher rate of dividend may raise the market price of shares and thus, maximisie the wealth of shareholders. The firm should also consider the question of dividend stability, stock dividend (bonus shares) and cash dividend.

FUNCTIONAL AREAS OF FINANCIAL MANAGEMANT Financial management, at present, is not confined to raising and allocating the funds. The study of financial institutions like stock exchange, capital market etc., is also emphasized because they influence underwriting of securities and cooperate promotion. Company finance was considered to be the major domain of financial management. The scope of this subject has widened to cover capital structure, divided policies, profit planning and control, depreciation policies, etc., the techniques of financial analysis like financial statements analysis, funds statements, ratio analysis etc., are also helpful in analyzing financial strength of the enterprise. Some of the functional areas covered in financial management are discussed as such 1. DETERMINIG FINANCIAL NEEDS: A finance manager is supposed to meet financial needs of the enterprise. For this purpose, he should determine financial needs of the concern. Funds are needed to meet promotional expenses, fixed and working capital needs. The requirement of fixed assets is related to the type of industry. A manufacturing concern will require more investment in fixed assets than a trading concern. The working capital needs depend upon the scale of operations larger the scale of operations, the higher will be the needs for working capital. A wrong assessment of financial needs may jeoparidise the survival of a concern. 2. SELECTING THE SOURCES OF FUNDS: A number of sources may be available for raising funds. A concern may resort to issues of share capital and debentures. Financial institutions may be requested to provide long-term funds. The working capital needs may be meet by getting cash credit or overdraft facilities from commercial banks. A finance manager has to be very careful and cautions in approaching different sources, the term and conditions of banks may not be favorable to the concern. A small concern may find difficulties in raising funds for want of adequate securities or due to its reputation. The selection of a suitable source of funds will influence the profitability of the concern. This selection should be made with great caution. 3. FINANCIAL ANALYSIS AND INTERPRETATION: The analysis and interpretation of financial statements is as important task of a finance manager. He is expected to know about the profitability, liquididty position, short-term and long-term financial position of the concern. For this purpose, a number of ratios have to be calculated. The interpretation of various ratios

is also essential to reach certain conclusions. Financial analysis and interpretation has become an important area of financial management. 4. COST-VOLUME-PROFIT ANALYSIS: Cost-volume-profit analysis is an important tool of profit planning. It answers questions like, what is the behavior of cost and volume. At what point of production a firm will be able to recover its costs? How much a firm should produce to earn a desired profit? To understand cost-volume profit relationship, one should know the behavior of costs. The costs may be subdivided as: fixed costs, variable costs and semi-variable costs. Fixed costs remain constant irrespective of changes in production. An increase or decrease in volume of production will not influence fixed costs. Variable costs, on the other hand, vary in direct proportion to change in production. Semi-variable costs remain constants for a period and then become variable for a short period. These costs change with the change in output but not in the same proportion. The first concern of finance manager will be to recover all costs. He will aspire to achieve break-even point at the earliest. It is a point of no-profit no loss. Any production beyond break-even point will bring profits to the concern. The volume of sales, to earn a desired profit, can also be ascertained. The analysis is very helpful in deciding the volume of output or sales. The knowledge of cost-volume profit analysis is essential for taking important decisions but production and profits. FUNCTIONAL AREAS OF FINANCIAL MANAGEMENT Determining Financial Needs Selecting the sources of funds Financial analysis and interpretation Cost-volume-profit analysis Capital budgeting Working capital management Profit planning and control Dividend policy

1. 2. 3. 4. 5. 6. 7. 8.

5. CAPITAL BUDGETING: Capital budgeting is the process of making investment decision in capital expenditures. It is an expenditure the benefits of which are expected to be received over a period of time exceeding one year. It is an expenditure incurred for acquiring or

improving the fixed assets, the benefits of which are expected to be received over a number of years in future. Capital budgeting decisions are vital to any organization. An unsound investment decision may prove to be fatal for the very existence of the concern. The crux of capital budgeting is the allocation of available resources to various proposals. The crucial factor which influences the capital budgeting decisions is the profitability of the prospective investment. For making correct capital budgeting decisions, the knowledge of its technique is essential. a number of methods like pay back period method, rate of returns method, net present value method, internal rate of return method and profitability index method may be used for making capital budgeting decisions. 6. WORKING CAPITAL MANAGEMENT: Working capital is the life blood nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is essential to maintain the smooth running of business. No business can run successfully without an adequate amount of working capital. Working capital refers to that part of the firms capital which is required for financing short-term or current assets such as cash, receivables and inventories. It is essential to maintain a proper level of these assets. Finance manager is required to determine the quantum of such assets. Cash is required to meet day-today needs and purchase inventories etc., the scarcity of cash may adversely affect the reputation of a concern. The receivables management is related to the volume of production and scales. For increasing sales, there may be a need to give more credit facilities. Though sales may go up but the risk of bad debts and cost involved in it may have to be weighted against the benefits. Inventory control is also important factor in working capital management. The inadequacy of inventory may cause delay or stoppages of work. Excess inventory, on the other hand, may result in blocking of money in stocks, more costs in stock maintaining etc., proper management of working capital is an important area of financial management. 7. PROFIT PLANNING AND CONTROL: profit planning and control is an important responsibility of the financial manager. Profit maximization is generally, considered to be an important objective of a business. Profit is also used as a tool for evaluating the performance of management. Profit is determined by the volume of revenue and expenditure. Revenue may accrue from sales, investment in outside securities or income from other sources. The expenditure may include manufacturing costs, trading expenses, office and administrative

expenses, selling and distribution expenses and financial costs. The excess of revenue over expenditure determines the amount of profit. Profit planning and control directly influence the declaration of dividend, creation of surpleses; taxation etc., break-even analysis and costvolume-profit relationship are some of the tools used in profit planning and control. 8. Dividend policy: dividend is the reward of the shareholders for investments made by them in the share of the company. The investors are interested in earning the maximum return on their investments whereas management wants to retain profits for future financing. These contradictory aims will have to be reconciled in the interest of shareholders and the company. The company should distribute a reasonable amount as dividends to its members and retain the rest for its growth and survival. A dividend policy is influenced by a number of factors such as magnitude and trend of earnings, desire and type of shareholders, further requirements of the company, governments economic policy, taxation policy, etc., dividend policy is an important area of financial management because the interests of the shareholders and the needs of the company are directly related to it. FUNCTIONS OF A FINANCE MANAGER The changed business environment in the recent past has widened the role of a financial manager. The increasing pace of industrialization, rise of larger-scale units, innovations of information processing techniques, intense competition etc., have increased the need for financial planning and control. The size and extent of technique of control. In the present business context, a financial manager is expected to perform the following functions. 1. FINANCIAL FORECASTING AND PLANNING: a financial manager has to estimate the financial needs of a business. How much money will be required for acquiring various assets? The amount will be needed for purchasing fixed assets and meeting working capital needs. He has to plan the funds needed in the future. How these funds will be acquired and applied is an important function of a finance manager. 2. ACQUIRING OF FUNDS: after making financial planning, the next step will be acquiring funds. There are a number of sources available for supplying funds. These sources may be shares, debentures, financial institutions, commercial banks, etc. the selection of an appropriate source is a delicate task. The choice of a wrong source for funds may create difficulties at later stage.the pros and cons of various sources should be analysed before making a final decision.

3. INVESTMENT OF FUNDS: The funds should be used in the best possible way. The cost of acquiring them and the returns should be compared. The channels which generate higher returns should be preferred. The technique of capital budgeting may be helpful in selecting a project. The objective of maximizing profits will be achieved only when funds are efficiently used and they do not remain idle at any time. A financial manager has to keep in mind the principles of safety, liquidity and soundness while investing funds. 4. HELPING IN VALUATION DECISION: a number of merges and consolidations take place in the present competitive industrial world. a finance manager is supported to assist management in making valuationetc.,for this purpose, he should understand various methods of valuing shares and other assets so that correct values are arrived at. 5. MAINTAIN PROPER LIQUIDITY: every concern is required to maintain some liquidity for meeting day-to-day. Cash is the best source for maintaining liquidity. it is required to purchase raw materials, pay workers, meet other expenses,etc., a finance manager is required to determine the need for liquid assets and then arrange liquid assets in such a way that there is no scarcity of funds.