Scope of finance management

Financial management is the process of planning decisions in order to maximize the owners wealth. The Financial managers have a major role in cash management, in the acquisition of funds, and in all aspects of raising and allocating financial capital, taking into account the trade-off between risk and return.

SCOPE OF FINANCIAL MANAGEMENT

1. Estimating the Financial requirements:

On the basis of their Forecast of the volume of business operation of the company, the finance executives have to estimate the amount of fixed capital and working capital required in a given period of time, say one year, two years, 3years, four years and so on. 

Besides estimating the amount of capital, the finance executives also have to Forecast the time when additional funds from outside sources and approximately at what rate they will be committed to operations.

2. Determining the structure of capitalisation

After the estimating the requirements of capital the finance executives have to decide about the composition of capital. They have to determine the relative proportions of owner's risk capital and borrowed capital and short term and long term debt equity ratio. 

These decisions have to be taken in the light of cost of raising finance from different sources, period for which funds are needed and several other factors.

3. Choice of sources of finance: 

The Management can raise finance from various sources like shareholders, debenture holders, banks and other financial institutions, public deposits etc.. Finance executives has to evaluate each source or method of finance and choose the best source keeping in view a combination of factors.

For instance, public deposits through carry higher rates of interests than on debentures, do not require any security of the assets of the company. A company may choose this source if it does not wish to create a charge over its assets. Similarly, if a company does not want to dilute ownership, it will borrow money.

4. Investment decisions: 

The funds raised from different sources are to be intelligently invested in various assets so as to optimise the return on investment. The utilisation of long term funds needs a proper assessment of different alternatives through capital budgeting and opportunity cost analysis. 

A part of the long-term forms has to be used in working capital of the company. While making investment decisions, management should be guided by three important principles that is safety, liquidity and profitability.

5. Management of earnings:

The finance executive has to decide about the allocation of earnings among several competing needs. A certain amount of total earnings may be kept as a reserve voluntarily or as a requirement by law; earnings may be distributed among the ordinary and preference shareholders; yet another portion may be ploughed back or reinvested. The finance executive must consider being merits and demerits of alternative schemes of utilising the funds generated from the company's own earnings.

6. Management of cash flows:

Cash is needed to pay off creditors, for purchase of materials, paid labour and to meet everyday expenses. There should not be shortage of cash at any time as it will damage credit worthiness of the company. They should not be excess cash then required because money has time value. In order to know the need of cash during different periods, the management need to prepare a cash flow statement in advance.