Approaches to finance functions
- 1. Introduction to Finance Function • There are four main operational areas of every business organization viz, Production , Marketing , Finance & Human Resource out of which Finance is crucial area because all other business activities are depends upon funds . • The decisions regarding funds may make / destroy the organization.
- 2. Definition of Finance Function • According to R.C.Osborn : The Finance function is the process of acquiring and utilizing funds of a business. • According to Bonneville and Dewey : Financing consists of raising , providing , managing of all the money , capital or funds of any kind to be used in connection with the business .
- 3. Scope of Finance 1. Financing Decisions – These decisions basically deal with acquiring funds & deployment of funds 2. Investment Decisions – These decisions are related with selection of assets . Assets are classified into two types – Fixed Assets - Current Assets • The decisions regarding Fixed Assets are known as capital budgeting decisions • The decisions regarding current assets come under Working Capital Management
- 4. Scope of Finance 3 Dividend Policy Decisions – Whatever profit company earns , the owners are entitled to receive them. These decisions are related with distribution of dividends i e to decide how much profit we should distribute as dividend & how much should be retained in business
- 5. Functions of Finance Dept • Calculating fund’s requirement of organization – Means how much money we require to run the business • Finding sources of finance – It means to check from where we can raise money & out of that which source of finance is suitable for our organization • Utilization of funds – It means utilization of profits which a company earns during a financial year
- 6. Financial Management Financial management means managing the funds/ money in such a way that by investing optimum capital we can get maximum output i e profit
- 7. Scope of Financial Management • Traditional Approach • Modern Approach Traditional Approach:- -Established in 1920-30 -Known as Corporation Finance -Scope was limited -Dealing with procurement of funds by corporate enterprises.
- 8. -Consists following activities : Deciding funds requirement : Raising funds from external sources : fulfilling legal, procedural requirement for raising funds Limitations - Concentrating on procurement of funds only - Using external sources of funds - Ignored Working capital
- 9. Modern Approach This approach is more balanced , it says that financing is concerned with procurement of funds & wise application of funds .It gives equal weightage to both procurement & utilization of funds .
- 10. Objectives Of Financial Management Profit Maximization – The primary objective of any business is to earn profit so the finance dept has to manage the funds so that the company can get maximum profit. All such actions which generate profit or cut down costs should be undertaken & those that are likely to have adverse impact on profitability should be avoided. According to then financial experts , this objective is simple & has the in – built advantage of judging economic performance . It will direct the resources in those channels that promise maximum return.
- 11. Financial Management Limitations / Criticisms of this objective 1 Ambiguous concept 2 Timing of benefits (Ignores pattern of return) 3 Quality of benefits (Ignores Risk) 4 Ignores social consideration
- 12. Financial Management Objectives Of Financial Management Wealth Maximization – It means the value of any business activity should not be measured in terms of costs but in terms of benefits it produce. The word Wealth refers to Net Present Worth, which is the difference between gross present worth & the amount of capital investment required to achieve the benefits This objective is widely accepted , it considers time value of money .
- 13. BODs MD Production Personnel Mgr Finance Mgr Marketing Mgr Mgr Treasurer Controller
- 14. Financial Management Duties of treasurer Obtaining finance (short term , long term) Maintaining relations with investors , banks Credit & Collection administration Investment Mgt
- 15. Financial Management Duties of Controller Planning & control Report making (accounting ) Tax administration Internal Audit Economic appraisal