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Scope of Financial Management

Scope of Financial Management

Facebook Buys WhatsApp: Boneheaded or Brilliant?

This was the title of a  Forbes Article when Mark Zuckerberg acquired Whatsapp for $19 billion dollars, the price that may exceed the GNP of some of those countries.

Mark is said to be an unconventional thinker and the WhatsApp acquisition shows Facebook’s determination to follow the road not yet paved. It is a bold move, yet filled with risks along the way.

This is one of the finest examples of the big investment decisions of recent times and the right course of action,  if you measure the number of potential users of the mobile messaging service rather than the cost of acquiring each user and the potential for selling ads to each user today.

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Financial management is one of the important aspects of overall management, which is directly asscoiated with various functional departments like personnel, marketing and production.

Financial management embraces wide area with multidimensional approaches. The following are the important scope of financial management.

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

  • Risk Evaluation
  • Measurement of cost of capital and
  • Estimation of expected benefits from a project.

Capital budgeting and liquidity are the other two major components of investment decision. Capital budgeting takes care of the distribution of capital and commitment of funds in permanent assets to harvest revenue in future.

Capital budgeting is a very focal decision as it impacts the long-term success and growth of a firm. All the same it is a very tough decision because it encompasses the estimation of costs and benefits which are uncertain and unknown.

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2. Financing Decision:

Financing decision is related to financing mix or financial structure of the firm. The raising of funds requires decisions regarding

  • 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.

Long Term Sources of Finance:

  1. Share Capital or Equity Shares
  2. Preference Capital or Preference Shares
  3. Retained Earnings or Internal Accruals
  4. Debenture / Bonds
  5. Term Loans from Financial Institutes, Government, and Commercial Banks
  6. Venture Funding
  7. Asset Securitization
  8. International Financing by way of Euro Issue, Foreign Currency Loans, ADR, GDR etc. 
scope of financial management

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Medium Term Sources of Finance:

  • Preference Capital or Preference Shares
  • Debenture / Bonds
  • Medium Term Loans from
  • Financial Institutes
  • Government, and
  • Commercial Banks
  • Lease Finance
  • Hire Purchase Finance



  • Trade Credit
  • Short Term Loans like Working Capital Loans from Commercial Banks
  • Fixed Deposits for a period of 1 year or less
  • Advances received from customers
  • Creditors
  • Payables
  • Factoring Services
  • Bill Discounting etc.


3. Dividend Decision:

In order to accomplish the goal of wealth maximization, a proper dividend policy must be established. One feature of dividend policy is to decide whether to distribute all the profits in the form of dividends or to plough back the profit into business.

While deciding the optimum dividend payout ratio (proportion of net profits to be paid out to shareholders), the finance manager should consider the following:

  • Investment opportunities available to the firm
  • Plans for expansion and growth,
  • Dividend stability
  • Form of dividends, i.e., cash dividends or stock dividends, etc.


4. Working Capital Decision:

Working capital decision is related to the FINANCING 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 cash within a year. Similarly, current liabilities are those liabilities, which are likely to mature for payment within an accounting year.

A list of what might perhaps be the most important investment management decisions an investor can make:

  • Academics vs. Investment Managers
  • Funds vs. Individual Securities
  • Passively Managed Funds vs. Actively Managed Funds
  • Low Turnover vs. High Turnover
  • Low Expenses vs. High Expenses
  • Large Cap only vs. Large Cap and Small Cap
  • Growth vs. Growth and Value
  • Unhedged vs. Hedged and Unhedged
  • Invest Methodically vs. Invest When You Feel Like it

Related Posts:

  1. Is Wealth Maximization an Appropriate Goal

  2. Startup Costs

  3. An Introduction to Financial Accounting