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 firm’s assets?

• What should be the mix of the firm’s financing ?• How should the firm analyze, plan and control its

financial affairs

Financial Decisions

Investment Decision

Dividend Decision

Financing Decision

Capital Budgeting

Cost of capital

Working CapitalManagement

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 decision-making. 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 objective—maximize the market value of the firm’s shares.