Scope of Finance Management

Scope of financial management, elements of financial management

                      Finance is the lifeblood of any business. If any business has a scarcity of finance, it will suffer from too much disturbance in business activities. Finance department manages the activities related to finance such as an acquisition of finance, how will be invested, how cost be minimized etc. 

The basic duty of financial management is to acquire money from various sources according to the need of the company. The financial department also needs to determine the benefited source of acquisition. The source of finance which gives the company maximum benefit is the suitable source of acquisition.

It is not necessary for a company to only issue equity shares or preference shares. The company may issue both according to its requirement. When a company has surplus balance in hand, financial department invests in the sources, which give the company maximum benefit.

            Some of the major scopes of Finance Management are as follows: 

  • Investment Decision:

                      Investment decision includes evaluation of risk involved in investment decision and evaluation of benefit involved in the investment decision. The risk in investment is calculated and by comparing with risk, expected benefit from the decision need to calculate. 

After measuring the risk, and benefit from investment, finance department also need to consider the cost involved in the investment. If the company cannot afford the cost of investment, measuring risk and return is of no use.

Investment decision by company classified in three categories according to time period:

1. Short-term Investment,
2. Medium-term Investment, &
3. Long-term Investment

  • Working Capital Decision:

                 The working capital decision is one of the crucial decision in finance management. Working capital means the capital which is used to fulfill the day-to-day expenses of the company. Working Capital decision is also known as short-term financing.

If the company suffers from the scarce working capital, it will be difficult for the company to manage various short-term expenses. And, if the company has surplus working capital in hand, the surplus money will not make any money if it will be idle.

The company must carry working capital according to the short-term requirements. For example, Salary to employees, Electricity expenses, Raw Materials etc.

  • Dividend Decision:

                        Dividend decision is that decision which has no rule book. Whether a company should invest retain its profit or provide a dividend to the shareholders. Dividend decision is in the hands of the company.

The company may retain its profit without distributing it to the company's shareholders or company may distribute the profit to the shareholders in the form of dividend or company may distribute the dividend to the shareholders partially and retain remaining profit to explore investment opportunities in future.

If the company distributes profit to the shareholders in the form of the dividend, the company will face a scarcity of funds and organizational activities may not work smoothly. If the company retains its profit without distributing it to the shareholders, shareholders would not like to re-invest in the stocks of that company because the company has not given any dividend.

So, to achieve wealth maximization objective, the company must develop appropriate dividend policy and implement it. Finance manager also needs to take a decision regarding forms of the dividend. E.g.: Cash Dividend, Stock Dividend etc.

  • Financing Decision:

                                  Financing decision includes decisions regarding how to acquire finance from various sources. The company has various options for the acquisition of funds. The Sources of Finance could be internal or external. 

A company may issue shares like Equity share and Preference share. Both the shares have its own benefits depends upon various factors of the company. The company may issue both equity shares and preference shares. Here is the list of sources of finance:

  1.  Ownership Capital
  2. The issue of Shares (Equity & Preference)
  3. Issue of Bonds
  4. Bank Loan
  5. Friends & Relatives
  6. Financial Institutions

                       Finance management is one of the important key functional areas in Management. In simple terms, finance management means management or investment of available funds in such a manner that it high return with less risk.

Suggested Books for Financial Management:

1.  Financial Institutions Management: A Risk Management Approach

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Scope of Finance Management Scope of Finance Management Reviewed by Bhavik Chhuchha on September 26, 2018 Rating: 5


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