Chapter – 1
INTRODUCTION TO FINANCIAL MANAGEMENT
MEANING AND DEFINITION OF FINANCIAL MANAGEMENT
According to the Encyclopedia of Social Sciences, Corporate finance deals with the financial problems of corporate enterprises. Problems include financial aspects of the promotion of new enterprises and their administration during early development, the accounting problems connected with the distinction between capital and income, the administrative questions created by growth and expansion and finally the financial adjustments required for the bolstering upon rehabilitation of a corporation which has come into financial difficulties. Management of all these is financial management. Financial management mainly involves rising of funds and their effective utilization with the objective of maximizing shareholders’ wealth.
According to Joseph and Massie, “financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations”.
According to Van Horne and Wachowicz, “Financial Management is concerned with the acquisition, financing and management of assets with some overall goal in mind.”
Financial manager has to forecast expected events in business and note their financial implications. First, anticipating financial needs means estimation of funds required for investment in fixed and current assets or long-term and short-term assets. Second acquiring financial resources–once the required amount of capital is anticipated the next task is acquiring financial resources i.e., where and how to obtain the funds to finance the anticipated financial needs and last allocating funds in business – means allocation of available funds among best plans of assets, which are able to maximize shareholders’ wealth. Thus the decisions of financial management can be divided into three viz., investment, financing and dividend decision.
EVOLUTION OF FINANCIAL MANAGEMENT
Financial management has emerged as a distinct field of study only in the early part of this century as a result of consolidation movement and formation of large enterprises. Its evolution may be divided into three phases (some what arbitrary) – viz., 1) The Traditional phase
2) The Transitional phase and
3) Modern phase
1.The Traditional Phase: This phase has lasted for about four decades. Its finest expression was shown in the scholarly work of Arthur S. Dewing, in his book tilted the Financial Policy of Corporation in 1920s.”(3) In this phase the focus of financial management was on four selected aspects. i) It treats the entire subject of finance from the outsider’s point of view (investment banks, lenders, other) rather than the financial decision maker in the firm. ii) It place much importance on corporation finance and too little on the financing problems of non-corporate enterprises. iii) The sequence of treatment was on certain episodic events like formation, issuance of capital, major expansion, merger, reorganization and liquidation during the life cycle of an enterprise. iv) It placed heavy emphasis on long-term financing, institutions, instruments, procedures used in capital markets and legal aspects of financial events. That is it lacks emphasis on the problems of working capital management. It was criticized throughout the period of its dominance, but the criticism is based on matters of treatment and emphasis. Traditional phase was only outsiders looking approach, over emphasis on episodic events and lack of importance to day-to-day problems. 2. The Transition phase: It has begun around the early 1940’s and continued through the early 1950’s. The nature of financial management in this phase is almost similar to that of earlier phase but more emphasis is given to the day-to-day (working capital) problems faced by the finance managers. Capital budgeting techniques...
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