Group 1

Topics assigned:

 Nature, purpose, & scope of Financial Management

 The relationship of Financial Management in Accounting and Management

INTRODUCTION

Financial management is the process of planning decisions in order to maximize

wealth. Financial managers have a vital role in cash management, in acquiring funds, and
in all aspects of raising and allocating financial capital, taking into consideration the
trade-off between risk and return. Financial managers need accounting and financial data
to carry out their functions and responsibilities.

This chapter discuss the function of finance, the environment in which finance
operates, and how the financial manager fits into the corporate structure. The financial
functions of the business involve record keeping, performance evaluation, variance
analysis, budgeting and utilization of resources. The financial manager must comprehend
the goals, procedures, techniques, yardstick, and function of finance in order to perform
his or her duties; a lack of knowledge of finance not only leads to incorrect analysis and
decisions but also jeopardizes the financial manager’s future in the organization.

Adequate knowledge and understanding of finance and accounting are tools

needed for effective financial decision making. Decisions that make sense in terms of
marketing and sales must also make financial sense; the financial manager must have the
necessary background to give sound input into the decision- making process.

FINANCE

It is a body of facts, principles and theories relating to raising and using money by
individuals business and governments.

CORPORATE FORM INDIVIADUALS/GOVERNMENT

Nature of Financial Management:

Nature of financial management could be spotlighted with reference to the following

aspects of this discipline:

(i) Financial management is a specialized branch of general management, in the present-

day-times. Long back, in traditional times, the finance function was coupled, either with
production or with marketing; without being assigned a separate status.

(ii) Financial management is growing as a profession. Young educated persons, aspiring

for a career in management, undergo specialized courses in Financial Management,
offered by universities, management institutes etc.; and take up the profession of financial
management.

(iii) Despite a separate status financial management, is intermingled with other aspects of
management. To some extent, financial management is the responsibility of every
functional manager. For example, the production manager proposing the installation of a
new plant to be operated with modern technology; is also involved in a financial decision.

Likewise, the Advertising Manager thinking, in terms of launching an aggressive

advertising programme, is too, considering a financial decision; and so on for other
functional managers. This intermingling nature of financial management calls for efforts
in producing a coordinated financial system for the whole enterprise.

(iv) Financial management is multi-disciplinary in approach. It depends on other

disciplines, like Economics, Accounting etc., for a better procurement and utilisation of
finances.

For example, macro-economic guides financial management as to banking and financial

institutions, capital market, monetary and fiscal policies to enable the finance manager
decide about the best sources of finances, under the economic conditions, the economy is
passing through.

Micro-economics points out to the finance manager techniques for profit maximisation,
with the limited finances at the disposal of the enterprise. Accounting, again, provides
data to the finance manager for better and improved financial decision making in future.

(v) The finance manager is often called the Controller; and the financial management
function is given name of controllership function; in as much as the basic guideline for
the formulation and implementation of plans-throughout the enterprise-come from this
quarter.
The finance manager, very often, is a highly responsible member of the Top Management
Team. He performs a trinity of roles-that of a line officer over the Finance Department; a
functional expert commanding subordinates throughout the enterprise in matters
requiring financial discipline and a staff adviser, suggesting the best financial plans,
policies and procedures to the Top Management.

In any case, however, the scope of authority of the finance manager is defined by the Top
Management; in view of the role desired of him- depending on his financial expertise and
the system of organizational functioning.

(vi) Despite a hue and cry about decentralisation of authority; finance is a matter to be
found still centralised, even in enterprises which are so called highly decentralised. The
reason for authority being centralised, in financial matters is simple; as every Tom, Dick
and Harry manager cannot be allowed to play with finances, the way he/she likes.
Finance is both-a crucial and limited asset-of any enterprise.

(vii) Financial management is not simply a basic business function along with production
and marketing; it is more significantly, the backbone of commerce and industry. It turns
the sand of dreams into the gold of reality.

No production, purchases or marketing are possible without being duly supported by

requisite finances. Hence, Financial Management commands a higher status vis-a-vis all
other functional areas of general management.

Purpose of Financial Management

 Rise in profit – the purpose is to increase of sales volume or other activities can
be taken up. It is the general feature of any firm to increase profits buy proper
utilization of all opportunities and plans
 Reduction in cost- help operation gains more profit
 Sources of funds- it should be decided by keeping in view the value of the firm to
collect funds though issue of shares or debentures
 Reduce risk- these won’t be profit without risk but for this reason if more risk is
taken, it may become danger to the existence of the firm.
 Reading Financial Statement- These reports have the ability to give an overall
picture of the business in can absolutely uniform format .because it allowing you
to get real insight into what makes a particular business tick
  Managing cash flow- Cash flow is he lifeblood of any business , setting budget,
knowing your expenditures pattern and getting cash in from customer . Spending
and careful budgeting will help you keep more of your hard earn cash.
 Survival of the company- is an important consideration when the financial
manager makes any financial decisions. Once incorrect decision may lead
company to be bankruptcy.
 Risk Management- To ensure company do not face undue pressure from the
various financial situation.

SCOPE OF FINANCIAL MANAGEMENT

FINANCIAL MANAGEMENT- is traditionally primarily concerned with

 Acquisition
 Financing
 Management if assets

The basic responsibility of the Finance Manager is to acquire funds needed by the
firm and investing those funds in profitable ventures that will maximize the firm’s
wealth, as well as, generating returns to the business concern.

In view of modern approach, the Finance Manager is expected to analyze the business
firm and determine the following:

 The total funds requirements of the firm

 The assets or resources to be acquired
 The best pattern of financing the assets

Scope of Financial Management

 Estimating the Requirement of Funds: Businesses make forecast on funds needed

in both short run and long run, hence, they can improve the efficiency of funding.
The estimation is based on the budget e.g. sales budget, production budget.
 Determining the Capital Structure: Capital structure is how a firm finances its
overall operations and growth by using different sources of funds. Once the
 requirement of funds has estimated, the financial manager should decide the mix
of debt and equity and also types of debt.
 Investment Fund: A good investment plan can bring businesses huge returns.

The relationship of Financial Management in Accounting and Management

Accounting and finance have different focuses. The primary distinctions between
accounting and finance involve the treatment of funds and decision making. Accounting
is a necessary sub function of finance.

The control features of the finance function are referred to as management accounting.
Managerial accounting includes the preparation of reports used by management for
internal decision making , such as budgeting, costing, pricing, capital budgeting ,
performance evaluation, break even analysis, transfer pricing ( pricing of goods or
services transferred between departments), and rate of return analysis. Managerial
accounting depends heavily on historical data obtained as part of the financial accounting
function. But managerial accounting, unlike financial accounting, is future-oriented and
emphasizes making the right decisions today to ensure future performance.

Managerial accounting information is important to the financial manager. For example,

the break-even point analysis is useful in deciding whether to introduce a product line.
Managerial accounting can help identify and suggest corrective action.

Source: Fundamentals & Applications of Financial Management book by Salvador,S. et.

al

The responsibility of accounting to management is a primary one, and in fact is

considered by most accounting authorities to be paramount. Since the decisions and
actions of management are directed toward specific objectives and are conditioned by
certain views, it follows that these objectives and views must be considered in the
accounting in order that it may render maximum service. The objectives of management
are, first to conserve the capital of the enterprise and second to add to such capital by
earning income. These two objectives govern the data with which accounting deals (
Mauriello,J., Vol.26, No.2).

Members:
Doron, Roselyn T.
Basul, Ma. Sharon Ann
Dugmoc, Delight B.
Arlan, Anna Marie
Laosinguan, Lowella B.
Juanite, Aljhunde L.
Ga, Ashley Dianne
Morales, Jeana
Buo, Shiela Yvonne