3_Scope, Evolution, Interface, Environment of Corp Fin

7/29/2019 3_Scope, Evolution, Interface, Environment of Corp Fin

1/17

SCOPE OF FM

EVOLUTION OF FM

INTERFACE WITH OTHER FUNCTIONAL AREAS

ENVIRONMENT OF CORPORATE FINANCE

MBA 205

Dr A.N. Garg


2/17

SCOPE OF FM

As already discussed the scope of financial management hasincreased manifold i.e. from simply raising of funds toinvestment decisions, financing decisions and dividend

decisions.

The scope of financial management may broadly be classifiedinto five As viz.

1)Anticipation of the financial needs of the organization;

2)Acquisition of the necessary capital and determining thesources of finance;

3)Allocation of funds which with the deployment of total fundsbetween the different components of fixed and current

assets;

MBA 205


3/17

Scope of FM

4) Appropriation which basically considers the division of total

earnings between the dividend distribution and retention of

profits in the business and

5) Assessment which deals with the control over financialactivities.

MBA 205


4/17

Financial management emerged as adistinct field of study at the turn of 20th

century. Its evolution can be divided

into three broad phases (though the

demarcating lines between these

phases are somewhat arbitrary)__the

traditional phase, the transitional

phase, and the modern phase.

MBA 205


5/17

EVOLUTION OF FM

The traditional phase lasted for about four decades. Following were itsimportant features:

1) The focus of financial management was mainly on certain episodicevents like formation, issuance of capital, major expansion, merger,reorganization and liquidation in the lifecycle of the firm.

2) The approach was mainly descriptive and institutional.

3) The approach placed great emphasis on long term problems.

4) The outsiders like investment bankers, lenders and other outsideinterest point of view was dominant.

5) Financial management was not considered to be a managerialfunction.

A typical work of the traditional phase is The Financial Policy OfCorporations by Arthur S Dewing.

MBA 205


6/17

EVOLUTION OF FM

The Transitional Phase began around the early1940s and continued through the early 1950s. Thoughthe nature of financial management during wassimilar to that of the traditional phase, greater wasplaced on the day-to-day problems faced by financial

managers in the areas of funds analysis, planning andcontrol. The focus shifted to Working CapitalManagement.

A representative work of this phase is Essays OnBusiness Finance by Wilford J. Eitman et al.

MBA 205


7/17

EVOLUTION OF FM

The Modern Phase began in mid 1950s and has witnessed anaccelerated pace of development with the infusion of ideasfrom economic theory and application of quantitative methods

of analysis. The distinctive features of the modern phase are:

1)The central concern of financial management is consideredto be a rational matching of funds to their uses so as tomaximize the wealth of the shareholders.

2)The approach of financial management has become moreanalytical.

3)It covers security markets and studies security analysis andportfolio management.

MBA 205


8/17

EVOLUTION OF FM

4) It covers fund management of government, profitable andnon-profitable social oriented institutions like educationalinstitutions, hospitals clubs and NGOs.

5) It provides coverage to international fund flow management,foreign exchange and risk management.

6) Finance has assumed the position of a managerial function andis no longer an outsider looking approach. It deals with threedecision-making areas called investment decisions, financingdecisions and dividend decisions.

7) Modern financial management covers various tools and

techniques of evaluation, important being, funds flow analysis,cash flow analysis, capital budgeting, cost of capital, leverages,working capital management, eva, mva and capm etc.

MBA 205


9/17

Interface of FM with other

Functional Areas Marketing-Finance Interface: There are many decisions,

which the Marketing Manager takes which have asignificant impact on the profitability impact on theprofitability of the firm. For example, he should have aclear understanding of the impact the credit extended tothe customers is going to have on the profits of the

company. Otherwise in his eagerness to meet the salestargets he is liable to extend liberal terms of credit, whichis likely to put the profit plans out of gear. Similarly, heshould weigh the benefits of keeping a large inventoryof finished goods in anticipation of sales against the costsof maintaining that inventory. Other key decisions of the

Marketing Manager, which have financial implications are: Pricing, Product promotion and advertisement, Choice of

product mix, Distribution policy etc.

MBA 205


10/17

INTERFACE Production-Finance Interface: As we all know in any

manufacturing firm, the Production Manager controls a majorpart of the investment in the form of equipment, materials andmen. He should so organize his department that the equipmentsunder his control are used most productively, the inventory ofwork-in- process or unfinished goods and stores and spares isoptimized and the idle time and work stoppages are minimized.

If the production manager can achieve this, he would be holdingthe cost of the output under control and thereby help inmaximizing profits. He has to appreciate the fact that whereasthe price at which the output can be sold is largely determinedby factors external to the firm like competition, governmentregulations, etc. the cost of production is more amenable to hiscontrol. Similarly, he would have to make decisions regardingmake or buy, buy or lease etc. for which he has to evaluate thefinancial implications before arriving at a decision.

MBA 205


11/17

INTERFACE Top Management-Finance Interface: The top management,

which is interested in ensuring that the firm's long-term goalsare met, finds it convenient to use the financial statements as ameans for keeping itself informed of the overall effectiveness ofthe organization. We have so far briefly reviewed the interface offinance with the non-finance functional disciplines likeproduction, marketing etc. Besides these, the finance function

also has a strong linkage with the functions of the topmanagement. Strategic planning and management control aretwo important functions of the top management. Financefunction provides the basic inputs needed for undertaking theseactivities. Economics - FinanceInterface: The field of finance is closely related to economics.Financial managers must understand the economic frameworkand be alert to the consequences of varying levels of economicactivity and changes in economic policy.

MBA 205


12/17

INTERFACE They must also be able to use economic theories as guidelines

for efficient business operation. The primary economic principleused in managerial finance is marginal analysis, the principlethat financial decisions should be made and actions taken onlywhen the added benefits exceed the added costs. Nearly all-financial decisions ultimately come down to an assessment oftheir marginal benefits and marginal costs.

Accounting - Finance Interface: The firm's finance (treasurer)and accounting (controller) activities are typically within thecontrol of the financial vice president (CFO). These functions areclosely related and generally overlap; indeed, managerial financeand accounting are often not easily distinguishable. In smallfirms the controller often carries out the finance function, and inlarge firms many accountants are closely involved in various

finance activities. However, there are two basic differencesbetween finance

MBA 205


13/17

INTERFACE and accounting; one relates to the emphasis on cash flows and the

other to decision making complex and diverse responsibilities. Financial Management and Human Resource Management

The HR policies have a direct bearing on the finances of a companyand hence, there is a direct relationship between the two. Rightfrom recruitment, the HR people have to be in constant touch withthe finance people. Finances are required for selection, training,development, promotion and incentives etc. When we say that awell contended work force is the biggest asset of an organization, itsimply shows the relationship between the two.

In the globalized competitive scenario business firms are moving toleaner and flat organizations. Investments in human resourcedevelopment are also bound to increase. Restructuring ofremuneration structure, voluntary retirement schemes, sweat

equity etc., have become major financial decisions in the areas ofhuman resource management.

MBA 205


14/17

Environment of Corporate Finance Corporate finance merely refers to the process of acquiring

assets, managing them well and obtaining the best returnfrom them during their lifetime. It could also extend toother peripheral functions such as getting rid of unwantedassets in a legal and viable manner. Ultimately corporatefinance seeks to ensure that the organization has enough

resources to fund its own business plans. Withoutcorporate finance the organization may come to astandstill.

The global environment may not just be understood interms of multinational companies. It is much more

because governments and international bodies have aninfluence and are affected by the processes that happen inwhat we call the global business environment.

MBA 205

MBA 205


15/17

Environment of Corporate Finance If one wants to understand the inter connectivity of

all these issues, one only needs to look at the

devastating effect that the global economic downturn

has had on all businesses in general and financial

institutions in particular.

In the past most business operated within their local

communities. Technological advancements have

made this kind of operation archaic. Really effective

business can no longer be local. It has to be multi-

regional and multinational. By their work in corporatefinance, business professionals oversee and manage

these large scale capital movements. Outsourcing is

now the

MBA 205

MBA 205


16/17

Environment of Corporate Finance immediate exemplification of globalization that

affects ordinary people.

The fact that globalization has all but banished local

markets into oblivion has meant increased

competition. This has affected the role of corporate

finance so that it now focuses on internationalizingbusiness activity.

MBA 205

MBA 205


17/17

Environment of Corporate Finance The financial environment is a vibrant part of the

economy. Imagine what would happen if companies

and individuals couldn't access funds for operating

purposes or lifestyle goals? Or what the economy

would look like if banks and insurance companies

didn't provide deposit services and risk coverage toclients? This scenario certainly could stifle economic

growth and crimp consumer spending. Corporate

finance provides economic players the tools necessary

to thrive and expand.

MBA 205

3_Scope, Evolution, Interface, Environment of Corp Fin

Documents

Transcript of 3_Scope, Evolution, Interface, Environment of Corp Fin