Some of the major scope of financial management are as follows: 1. Investment Decision 2. Financing Decision 3. Dividend Decision 4. Working Capital Decision.
1. Investment Decision:
The investment decision involves the evaluation of risk, measurement of cost of capital and estimation of expected benefits from a project. Capital budgeting and liquidity are the two major components of investment decision. Capital budgeting is concerned with the allocation of capital and commitment of funds in permanent assets which would yield earnings in future.
Capital budgeting also involves decisions with respect to replacement and renovation of old assets. The finance manager must maintain an appropriate balance between fixed and current assets in order to maximise profitability and to maintain desired liquidity in the firm.
Capital budgeting is a very important decision as it affects the long-term success and growth of a firm. At the same time it is a very difficult decision because it involves the estimation of costs and benefits which are uncertain and unknown.
2. Financing Decision:
While the investment decision involves decision with respect to composition or mix of assets, financing decision is concerned with the financing mix or financial structure of the firm. The raising of funds requires decisions regarding the methods and sources of finance, relative proportion and choice between alternative sources, time of floatation of securities, etc. In order to meet its investment needs, a firm can raise funds from various sources.
The finance manager must develop the best finance mix or optimum capital structure for the enterprise so as to maximise the long- term market price of the company’s shares. A proper balance between debt and equity is required so that the return to equity shareholders is high and their risk is low.
Use of debt or financial leverage effects both the return and risk to the equity shareholders. The market value per share is maximised when risk and return are properly matched. The finance department has also to decide the appropriate time to raise the funds and the method of issuing securities.
3. Dividend Decision:
In order to achieve the wealth maximisation objective, an appropriate dividend policy must be developed. One aspect of dividend policy is to decide whether to distribute all the profits in the form of dividends or to distribute a part of the profits and retain the balance. While deciding the optimum dividend payout ratio (proportion of net profits to be paid out to shareholders).
The finance manager should consider the investment opportunities available to the firm, plans for expansion and growth, etc. Decisions must also be made with respect to dividend stability, form of dividends, i.e., cash dividends or stock dividends, etc.
4. Working Capital Decision:
Working capital decision is related to the investment in current assets and current liabilities. Current assets include cash, receivables, inventory, short-term securities, etc. Current liabilities consist of creditors, bills payable, outstanding expenses, bank overdraft, etc. Current assets are those assets which are convertible into a cash within a year. Similarly, current liabilities are those liabilities, which are likely to mature for payment within an accounting year.
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FAQs
In terms of scope, financial management encompasses a wide variety of activities that include forecasting cash flow needs, budgeting, obtaining appropriate capital structure, making investment decisions, managing working capital effectively, and analyzing potential acquisitions or mergers.
What are the 4 types of financial management explain? ›
Most financial management plans will break them down into four elements commonly recognised in financial management. These four elements are planning, controlling, organising & directing, and decision making.
What are the four 4 process of financial management? ›
The Four elements of Financial Management
- Planning. Identify the steps that align with the association or individual objectives. ...
- Controlling. Ensure each aspect of the association follows the established plan. ...
- Organizing and directing. ...
- Decision making.
Scope of Financial Management
The financial manager projects how much money the company will need in order to maintain positive cash flow, allocate funds to grow or add new products or services and cope with unexpected events, and shares that information with business colleagues.
What are the 4 steps of financial management? ›
Use this step-by-step financial planning guide to become more engaged with your finances now and into the future.
- Assess your financial situation and typical expenses. ...
- Set your financial goals. ...
- Create a plan that reflects the present and future. ...
- Fund your goals through saving and investing.
Character, capital, capacity, and collateral – purpose isn't tied entirely to any one of the four Cs of credit worthiness. If your business is lacking in one of the Cs, it doesn't mean it has a weak purpose, and vice versa. Instead, the four categories come together to constitute purpose.
What are the four 4 major financial statements briefly describe each? ›
They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders' equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time.
What are the 4 routine functions in financial management? ›
- Estimating Capital Expenses. While estimating the capital expense, a company must keep the following points in mind: ...
- Determining Capital Structure. One of the functions of financial manager is determining the capital structure. ...
- Choosing Sources of Funds. ...
- Procurement of Funds. ...
- Investment of Funds. ...
- Surplus Disposal.
The main financial system components include financial institutions, financial services, financial markets, and financial instruments.
What are the 4 phases of financial planning? ›
Financial Planning for Individuals & Families
For individuals and families, we focus on asset/liability matching, tax-efficiency, and cost-effective planning throughout the four key phases of financial management: accumulation, distribution, preservation, and legacy. Plan to budget, determine investments, set goals.
The scope of management is defined by the breadth of responsibilities and functions that managers undertake to realize an organization's goals. This scope is influenced by various factors, including the organization's size, industry, structure, and leadership style.
What is the financial scope? ›
DEFINING THE FINANCIAL SCOPE aims to estimate the financial volume and potential funding sources of your plan and its projects. Before a Funding Coordination Officer/Team can start the search for funding, they need to have a good understanding of the overall plan and its projects.
What is the scope of financial management projects? ›
Project financial management encompasses several key processes: budget planning and allocation, which involves estimating costs and setting a budget; financial tracking and risk management, which entails monitoring expenses against the budget and accounting for internal or external changes; and financial reporting, for ...
What are the 4 phases of the financial management process? ›
The Financial Management Cycle includes four phases that are essential for the overall evaluation of the financial management of any firm. The four phases are Planning, Budgeting, Managing Operations, and Annual Reporting.
What are the four 4 functions of the financial system? ›
The financial system serves four main functions: providing a payment system, matching borrowers and lenders, enabling individuals to manage their finances across lifetimes and generations, and sharing and managing risk.
What are the first 4 steps to financial success? ›
4 Steps to Financial Success
- Step 1: Know Your Numbers. Comparing your income to monthly payments will help you budget for savings. ...
- Step 2: Protect What's Yours. Insurance is the best defense against the unexpected. ...
- Step 3: Fund Your Future. How do you see your retirement? ...
- Step 4: Build Your Wealth.
The most common types of financial institutions include banks, credit unions, insurance companies, and investment companies. These entities offer various products and services for individual and commercial clients, such as deposits, loans, investments, and currency exchange.
What are the 4 areas of finance? ›
Finance is the management of money which includes investing, borrowing, lending, budgeting, saving and forecasting. There are four main areas of finance: banks, institutions, public accounting and corporate.
What are the 4 finance functions? ›
Finance functions cover Investment (allocating funds to assets for growth), Dividend (deciding on profit distribution to shareholders), Financing (raising capital through equity or debt), and Liquidity (ensuring sufficient cash flow for operations).
