Financial management is broadly concerned with the acquisition and use of funds by a business firm. Its scope may be defined in terms of the following questions :
How large should the firm be and how fast should it grow ?
What should be the composition of the firm’s assets ?
What should be the mix of the firm’s financing ?
How should the firm analyse, plan, and control its financial affairs ?
EVOLUTION OF FINANCIAL MANAGEMENT
Financial management emerged as a distinct field of study at the turn of this century. Its evolution may be divided into three broad phases (though the demarcating lines between these phases are somewhat arbitrary) : the traditional phase, the transitional phase, and the modern phase
The traditional phase lasted for about four decades. The following were its important features :
The focus of financial management was mainly on certain episodic events like formation, issuance of capital, major expansion, merger, reorganization, and liquidation in the life cycle of the firm.
The approach was mainly descriptive and institutional. The instruments of financing, the institutions and procedures used in capital markets, and the legal aspects of financial events formed the core of financial management.
The outsider’s point of view was dominant. Financial management was viewed mainly from the point of the investment bankers, lenders, and other outside interests.
A typical work of the traditional phase is The Financial Policy of Corporations1 by Arthur S. Dewing. This book discusses at length the types of securities, procedures used in issuing these securities, bankruptcy, reorganisations, mergers, consolidations, and combinations. The treatment of these topics is essentially descriptive, institutional, and legalistic.
The transitional phase being around the early forties and continued through the early fifties. Though the nature of financial management during this phase was similar to that of the traditional phase, greater emphasis was placed on the day-to-day problems faced by finance managers in the areas of funds analysis, planning, and control. These problems, however, were discussed within limited analytical frameworks. A representative work of this phase is Essays on Business Finance by Wilford J. Eiteman et al.
The modern phase began in the mid-fifties and has witnessed an accelerated pace of development with the infusion of ideas from economic theory and application of quantitative methods of analysis. The distinctive features of the modern phase are :
The scope of financial management has broadened. The central concern of financial management is considered to be a rational matching of funds to their uses in the light of appropriate decision criteria.
The approach of financial management has become more analytical and quantitative.
The point of view of the managerial decision maker has become dominant.
Since the being of the modern phase many significant and seminal developments have occurred in the fields of capital budgeting, capital structure theory, efficient market theory, option pricing theory, arbitrage pricing theory, valuation models, dividend policy, working capital management, financial modeling, and behavioural finance. Many more exciting developments are in the offing making finance a fascinating and challenging field.
What odes financial management involve ?
The critical activity of the financial management process is that of financial decision-making, specifically decisions aimed at creating maximum value for the owners of the business. Decisions about spending, investing, or borrowing money, for example, are important financial decisions with which most of us are...
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