Financial management, as an integral part of overall management is not totally an independent area. It draws heavily on related disciplines and fields of study such as economics, accounting, marketing, production and quantitative methods.
The scope of finance function was treated by the traditional approach in the narrow sense of procurement of funds by corporate enterprises to meet their financial needs. Thus defined, the field of study dealing with finance was treated as encompassing three inter-related aspects of raising and administering resources from outside:
- Institutional arrangement in the form of financial institutions that the funds are raised from the capital market and their procedural aspects.
- The financial instruments through which the funds re raised from the capital market and their procedural aspects.
- Legal and accounting relationship between a firm and its sources of funds.
The traditional approach to the scope of finance functions evolved during the 1920s and 1930s and dominated academic thinking during 40s and through the early 50s. But, it suffered from serious drawbacks.
Firstly, it focused on financing problems of corporate enterprises. To that extent, the scope was confined only to a segment of the industrial enterprises, as non-corporate organizations lay outside its scope.
Secondly, the traditional treatment was found to have a lacuna to the extent that the focus was on long term financing. Its natural implication was that the issues involved in working capital management were not in the purview of the finance function.
Last but not the least, the traditional treatment was outside looking in approach, that is, from the view point of suppliers of funds such as investors, investment bankers an so on. No consideration was given to the view point of those who had take internal finance decisions that is insider looking out was completely ignored. Hence the traditional approach has now been discarded.
[...] Thus, in the modern sense of the term, financial management can be broken down into three major decisions as a solution to the three major problems relating to the financial operation of a firm. They are: The investment decision The financing decision The dividend policy decision IMPORTANCE OF FINANCIAL MANAGEMENT: Financial management determines the nature and the size of the activities and the operations of the business. It arranges to meet out the financial obligations of a business as and when they arise, increase its credit worthiness, protects the business against financial crises and avoids all stress and strains on the finance of an enterprise. [...]
[...] In our country there are two major sources of term lending: Specialised Financial Institutions or Development Banks The need for establishing financial institutions was felt in many countries immediately after the Second World War in order to re-establish there were shattered economies. These specialized financial institutions are also called Development Banks because they provide not only finances but also help in promotion of new enterprises. These institutions have to play a very significant role in the industrial development of our country for the following reasons: Absence of organized capital markets Lack of entrepreneurial talent Low capital formation Shyness of capital, that is, people prefer to invest only in traditional areas and reluctant to take risk in new ventures Inadequacy of financial facilities to meet huge requirements of funds for industrial development, and Planned economic development to achieve the socio-economic objectives At present, there are four important financial institutions at the national level, i.e., Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (IRCI) now called Industrial Investment Bank of India Ltd. [...]
[...] SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI) The small industries Development Bank of India (SIDBI) was set up in 1990 under the SIDBI Act The main objective of SIDBI has been to work as a principal financial institution for the promotion, financing and development of industries in the small-scale sector. It is also expected to c00rdinate the functions of various financial institutions, such as, State Financial Corporations, State Small Industries Development Corporations Scheduled Banks and State Cooperative Banks etc. engaged in the financing, promotion and development of small-scale industries. [...]
[...] PROBLEMS OF FINANCIAL STATEMENT ANALYSIS Financial Statement Analysis can be a very useful tool for understanding a firm's performance and condition. However, there are certain problems and issues encountered in such analysis, which calls foe care, circumspection and judgment in such an exercise. Development of Benchmarks Many firms, particularly the larger ones, have operations spanning a wide range of industries. Given the diversity of their product lines, it is difficult to find suitable benchmarks foe evaluating their financial performance and condition. [...]
[...] The following concepts underline the construction of the income statement: Accounting period concept Accrual concept Realization concept Matching concept Materiality concept INCOME STATEMENT CONTENTS As there is no specified format for drawing up the income statement under the Indian Company's act, a great variety of formats is used by companies for preparing the income statement. Table below shows the Income statement format: D. FINANCIAL STATEMENTS Financial Statements contain a wealth of information, which, if properly analyzed and interpreted, can provide valuable insights into a firm's performance and position. Financial statement analysis may be done for a variety of purposes, which may range from a simple analysis of the short- term liquidity position of the firm to a comprehensive assessment of the strengths and weaknesses of the firm in various areas. [...]
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