Page 12 - DMGT409Basic Financial Management

Unit 1: An Overview of Financial Management

(c) Looking after the legal and accounting relationship between a corporation and its Notes
sources of funds.
?
Did u know? The term “Corporation Finance” was used in place of the present term
“Financial Management”.
2. Modern Approach: According to the modern approach, the term fi nancial 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 the overall management.

The new approach is an analytical way of viewing the financial problems of a fi rm. The
main contents of the modern approach are as follows:
(a) What is the total volume of funds, an enterprise should commit?

(b) What specific assets should an enterprise acquire?
(c) How should the funds required, be fi nanced?

Thus, financial management, in the modern sense of the term, can be divided into four
major decisions as functions of finance. They are:

(a) The investment decision
(b) The fi nancing decision
(c) The dividend policy decision
(d) The funds requirement decision

1.4 Finance Functions

Financial Management is indeed, the key to successful business operations. Without proper
administration and effective utilization of finance, no business enterprise can utilize its potentials

for growth and expansion. Financial management is concerned with the acquisition, fi nancing
and management of assets with some overall goals in mind.

The important finance functions are as follows:
1. Investment Function: It is most important function of finance management. It begins with
a determination of the total amount of assets needed to be held by the firm. In other words,
investment decision relates to the selection of assets, that a firm will invest funds. The
required assets fall into two groups:

(a) Long-term Assets Long term assets involve huge investments and yield a return over
a period of time in future.

Example: Fixed assets like plant & machinery, land and buildings, etc.
?
Did u know? Investment in long-term assets is popularly known as “capital budgeting”.

(b) Short-term Assets: Short term assets are those assets that can be converted into cash
within a financial year without diminution in value.

Example: Current assets like raw materials, working in process, finished goods, debtors,
cash, etc.

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