What is Finance, Approaches to finance function, Traditional approach, Modern approach, Limitations Of Traditional Approach, Profit maximization approach, Wealth Maximisation approach,
2. What is Finance ?
ï” Finance means money
ï” Finance describes the management, creation and study of
money, banking, credit, investment, assets & liabilities
that make up the financial systems
ï” As per traditional approach it means procurement of funds
ï” As per modern approach it means procurement & efficient
utilization of funds
4. Traditional Approach
ï” Financial management was considered as corporation
finance
ï” According to this approach ,the scope of finance is
restricted to â procurement of funds by corporates to
meet their financial needs
ï” Also states the legal & accounting relationship between
business and sources of finance
5. Limitations Of Traditional Approach
ï” The approach is confined to âprocurement of fundsâ only
ï” Ignores efficient utilization of funds
ï” It fails to consider an important aspect i.e. allocation of
funds
ï” It fails to consider the problems involved in working
capital management
ï” It neglected the issues relating to allocation and
management of funds and failed to make financial
decisions
6. Modern approach
ï” The modern approach is an analytical way of looking into
financial problems of the firm
ï” According to this approach, the finance covers both
acquisition of funds as well as allocation of funds to
various uses
ï” Itâs also concerned with the efficient utilization of funds
7. Main Components
ï” Financial planning
ï” Determination of cost of capital
ï” Capital budgeting
ï” Working capital management
ï” Management of income
8. Profit maximization approach
ï” A firm should undertake all those activities which add to
the profit and eliminate all other which reduce its profit.
ï” It is generally short term.
ï” Acts as motivator which helps the business organisation in
becoming more efficient.
ï” Return on capital employed is considered the best
measurement of profit.
ï” It makes allocation of resources to profitable and desired
areas.
9. Criticism of profit maximization
approach
ï” Ambiguity
ï” Ignores time value of money
ï” Risk factor in income receivable in future.
10. Wealth Maximisation approach
ï” It is also known as value maximization approach
ï” The finance manager must take decisions which increase
net present value of the firm.
ï” Increase in NPV = increase in value of the firm.
ï” Increase in value of the firm= increase in market price of
equity shares.
12. Financial Institution
ï” They are the intermediaries who facilitate smooth
functioning of the financial system by making investors
and borrowers Meet
ï” They mobilize savings of the surplus units and allocate
them in productive activities promising a better Rate of
Return
ï” Financial Institutions are also termed as Financial
Intermediaries
14. Role of Financial Institutions
ï” Provide funds
ï” Infrastructure facilities
ï” Promotional activities
ï” Development of Backward areas
ï” Employment Generation