Financial Management is that managerial activity which is concerned with planning and controlling of the firm’s financial resources. Finance has become an integral part of our daily life as no body can plan a day without charting out a financial budget. The subject of financial management is of immense interest to both academicians and practicing managers.
Scope of Finance: How does a financial activity arise? Firms create manufacturing capacities for production of goods; some provide services to customers. They sell their goods and services to earn profit. They raise funds to acquire manufacturing and other facilities. Thus, the three most important activities of business firm are:
A firm secures whatever capital it needs and employs it (finance activity) in activities which generate returns on invested capital ( production and marketing activities).
The functions of raising funds, investing them in assets and distributing returns earned from assets to shareholders are respectively known as financing, investment and dividend decision. While performing these functions, a firm attempts to balance cash inflows and outflows. This is caked liquidity decision, ad we may add it to the list of important decisions or functions. Finance functions or decisions include:
• Investment or Long-term asset-mix decision
• Financing or capital-mix decision
• Dividend or profit allocation decision
• Liquidity or short-term asset-mix decision
Finance functions call for skilful planning, control and execution of a firm’s activities.