Meaning of Business Finance

Business Finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of business enterprises.

What is Financial Management?

Financial Management is broadly concerned with the acquisition and use of funds by a business firm. Its scope may be defined in terms of the following questions. How large should the firm be and how fast should it grow? What should be the composition of the firms assets? What should be the mix of the firms financing ? How should the firm analyze, plan and control its financial affairs

Financial Decisions

Investment Decision

Financing Decision

Dividend Decision

Cost of capital Capital Budgeting Working Capital Management

Capital Structure

SCOPE AND FUNCTIONS OF FINANCIAL MANAGEMENT

Traditional Approach Modern Approach

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. It deals with the following aspects. Arrangement of funds from financial institutions Arrangement of funds through financial instruments like share, bonds etc/. Looking after the legal and accounting relationship between a corporation and its sources of funds.

Main limitations of Traditional Approach

Outsider-looking-in-approach Ignored routine problems Ignored non-corporate enterprise. Ignored working capital financing No Emphasis on allocation of funds Time value of money is not considered

Modern Approach
According to modern approach the term financial management provides a conceptual and analytical framework for financial decisionmaking. That means, the finance function covers both acquisition of funds as well as their allocation. The new approach views the term financial management in a broader sense. It is viewed as an integral part of over-all management.

Financial management, in the modern sense of the term, divided into four major decisions
The investment decision The financing decision The dividend policy decision The funds requirement decision.

OBJECTIVE OF FINANCIAL MANAGEMENT

Profit Maximization Wealth Maximization Economic Value Added Focus on stakeholders

Drawbacks of Profit maximization

Ambiguity Timing of benefits Quality of benefits

Wealth Maximization
Maximizes the net present value of a course of action to shareholders. Accounts for the timing and risk of the expected benefits. Benefits are measured in terms of cash flows. Fundamental objectivemaximize the market value of the firms shares.