Evaluation of Financial Management:
Financial
management, as an academic discipline, has undergone significant changes over
years as regards its scope and coverage. In order to have a better exposition
to these changes, it will be appropriate to study the traditional approach and
modern approach of financial management.
Traditional Approach:
The traditional
approach , which was popular in the early part of this century, limited the
role of financial management to raising and administering of funds needed by
the corporate enterprises to meet their financial needs. It broadly covered the
following three aspects:
(i)
Arrangement of funds from the financial
institutions;
(ii)
Arrangement of funds through financial
instruments, viz. shares & debentures, bonds etc;
(iii)
Looking
after the legal and accounting relationship between a corporation and its
sources of funds.
Thus, the
traditional concept of financial management included within its scope the whole
gamut (range) of raising the funds externally. The term “Corporation Financial”
was used in place of the present term “Financial Management”.
The
traditional approach evolved (developed) during 1920 continued to dominate
academic thinking during the forties and through the early fifties.
Modern Approach:
The
traditional approach outlived its utility due to change business situation
since mid 1950’s. Technological improvements, widened marketing operations,
advent and usages of computer in financial decision making, development of
various pricing models, valuation models and investment portfolio theories
enlarged the scope of finance. Decision to arrange funds, was to be seen in
consonance with their efficient and effective use. The total approach to the
study of finance has change and termed as “Financial Management”.
Thus,
according to modern concept, financial management is concerned with acquisition
of funds as well as their allocation. The modern approach is an analytical way
of looking at the financial problems of a firm. The main contents of the new
approach are as follows:
(i)
What is the total volume of funds an enterprise
should commit?
(ii)
What specific assets should an enterprise
acquire?
(iii)
How should the funds required be finance?
The above
questions relate to four broad decision areas of financial management, viz.,
funds requirement decision, financing decision, investment decision and
dividend decision.
