This document discusses business finance, including the meaning, scope, traditional and modern approaches to financial management. It covers the major financial decisions around investment, financing, and dividends. Key aspects of financial management are discussed such as capital budgeting, working capital management, and capital structure. The objectives, importance and types of both fixed and working capital are also summarized. Finally, the document outlines various instruments that can be used to raise funds for business such as shares, retained profits, debentures, institutional finance, public deposits and bank finance.
4. Scope
The approach to the scope and functions
of financial management is divided for the
purpose of exposition into two broad
categories:
Traditional approach.
Modern approach.
5. Traditional Approach
The traditional approach, which was
popular in the early stage, limited the role
of financial management to raising and
administering of funds needed by the
corporate enterprises to meet their financial
needs.
6. Main limitations of Traditional
Approach
Ignored routine problems.
Ignored finance manager’s viewpoint.
Ignored non-corporate enterprise.
No Emphasis on allocation of funds.
7. Modern Approach
According to modern approach the term
financial management provides a
conceptual and analytical framework for
financial decision-making.
8. Major decisions
The financial management can be further
classified into three major decisions:
The financing decision.
The investment decision.
The dividend decision.
10. Investment Decisions
These decisions relate to how the firm’s
funds are invested in different assets so
that they are able to earn the highest
possible return for their investors.
11. Factors Affecting
Cash flows of the project.
The rate of return.
The investment criteria involved
12. Financing Decisions
This is about the quantum of finance to be
raised from various long-term sources.
The main sources of funds are
shareholders funds and borrowed funds.
14. Dividend Decision
Dividend is that portion of profits, which is
distributed to shareholders.
The decision made here is how much of
the profit is to be distributed to the
shareholders and how much of it should
be retained to meet the investment
requirements.
18. Importance
It tries to forecast what will happen in
future under different business situations.
It helps in avoiding business shocks and
uncertainties.
It helps in co-ordinating various business
functions.
19. Fixed capital
Fixed capital refers to investment in long-
term assets.
It affects the growth, profitability and risk
of the business in the long run.
20. Importance
Long-term growth and efficiency.
Large amount of funds involved.
Risk involved.
Irreversible decisions.
21. Factors affecting
Nature of business.
Scale of operations.
Choice of technique.
Technology upgradation
22. Working capital
Working capital are the investments which
facilitate smooth day-to-day operations
of a business.
Working capital is usually more liquid, but
contribute less to the profits than fixed
assets
23. Factors Affecting
Nature of business.
Scale of operations.
Business cycle.
Operating efficiency.
24. Types of business finance
Finance used in business is of following
kinds:
long-term finance.
Medium-term finance.
Short-term finance
25. Instruments of finance
A business form can raise funds from two
main sources:
owned funds.
Borrowed funds.
27. Types of shares
There are two types of shares.
Equity shares.
Preference shares
28. Retained profits
Retained profits refer to the profits which
have not been distributed as
dividends, but have been For use in
business.
Retained profits are also known as
reserves or surplus
29. Debentures
A debenture is a document or certificate
issued by a company under its seal as an
acknowledgement of its debt
30. Institutional Finance
Loan or equity capital provided by
a financial institution, instead of by one or
more individual.
32. Bank Finance
Find finance refers to the Finance
reached from commercial banks.
Commercial banks are an important
source of short-term and medium-term
finance pro-business
Editor's Notes
Arrangement of funds from financial institutionsArrangement of funds through financial instruments like share, bonds etc/.Looking after the legal and accounting relationship between a corporation and its sources of funds.
It has been criticised for its overconcentration on the most infrequent episodic events, like liquidations and mergers and ignorance of routine problems.The above approach took into account only the viewpoint of suppliers of funds, that is outsiders, bankers, investors, etc. And not the Finance manager's viewpoint.It focused attention only on the financial problems of corporate enterprises.It laid over emphasis on the problems of long-term financing and ignore the problems relating to financing short-term or working capital.