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Introduction: The term nature as applied to financial management refers to its relationship with the closely- related fields of economics and accounting, its functions and scope. The objective of this chapter is to describe the evolving functions and scope of financial management.
Financing Decision:
As mentioned above ,a finance manager has to perform three important functions: I) Estimating the requirements of the funds. II) Raising the funds III) Investing the funds.
Raising of finance:
A crucial decision that is to be taken by a finance manager is regarding raising of funds. In raising of the funds, a careful consideration is to be given to the mix of owned funds and borrowed funds. The aim should be to achieve a right combination of debt and equity for enhancing the value of the firm. I) Requirements of funds during long- term and short-term. II) Deciding about optimum combination of owned funds and borrowed funds for raising the funds.
Dividend Decision.
It is one more important area which requires careful consideration regarding the dividends. How much amount of profits should be distributed amongst the shareholders and how much amount should be retained for investing in the business will have to be decided by the management. Several factors are taken into consideration before a dividend decision is to be taken.
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The following aspects need to be in depth consideration in determining the dividend policy. (a) Assessing the shareholders expectations. (b) Determination of dividend payout ratio and retention policy. (c) Projecting the requirement of the funds for expansion and diversification proposals. (d) Considering the impact of the legal constraints on dividend decision.
To conserve the funds: To conserve the funds of the orgnisation through such measures as stock or inventory control ,control of credit and debtors balances to minimises the losses that would otherwise occur.
Functions of the financial management: To plan and evaluate: To plan and evaluate is in relation to budget for future operations in short- term and long term and in the assessment of the proposed capital expenditure projects.
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As already explained above, one of the main functions of the financial management is to provide sufficient funds at a reasonable cost, to ensure their profitable use and disposal of surplus in such a manner so as to maximise the wealth of the shareholders. The nature and structure of a finance department mainly depends upon a number of factors, such as size of the orgnisation, the nature of the business, financing operations, caliber of the finance personnel etc.
Continued.. The Board of Directors decides the financial decisions . Financial policies are approved by the Board of the Directors. The operational and functional areas are left to the Chief Financial Officer who reports to the Board. The Board of Directors have the responsibility of ensuring that the overall goals and objectives are achieved and the expectations of the shareholders are fulfilled. As a general practice, especially in a large concerns, the finance functions are grouped into operational areas of finance and functional areas of the finance.
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The operational areas of the finance are entrusted to finance executives reporting to treasurer and functional areas of finance are entrusted to the another group of finance officers reporting to the controller. Both the controller and the treasurer who are responsible for the respective functions report to the Chief Finance Officer or Vice President (Finance) or Head of Finance.
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Thus, the finance functions are broadly classified into two types: a) Treasuring functions b) Control functions The treasurer is responsible for The procurement and management of funds, cash management, collection of accounts, credit administration, investment of surplus funds, Shortterm financing.
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The controller is responsible for management and control of assets, and his responsibilities include --accounting, preparation of financial reports, internal auditing, internal control systems, taxation matters, protection of assets including insurance coverage,etc.
Board of Directors
Managing Directors Finance (Director)/C.F.O./Vice-President
Treasurer Managers
Controller Managers
Investment
Credit collection
Accounting
Auditing
Credit administration
Agency problem:
A characteristic feature of the corporate enterprise is the separation between ownership and management as a corollary of which management enjoys substantial autonomy in regard to the affairs of the firm. Shareholders are the owners of the orgnisation and they have the right to change the management. The conflicting goals of the management objective of survival and maximising owners wealth can be harmonised.
Agency problem:
In order to ensure that management would take optimal decisions compatible with the shareholders interest of the value maximisation and minimises the agency problems in terms of conflict of interests two remedial measures commend themselves. i) Provision of appropriate incentives
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A) The owner can start the business with very little legal formalities. B) The owner can take the decisions connected with the business himself which results into very fast decision-making. C) The running of the firm can be very smooth as there is no possibility of differences opinion among different persons because of the single owner.
Partnership Firms A partnership firm is a business by two or more persons. The partnership comes into existence according to the provision of the Indian Partnership Act,1932. The rights, duties and obligations of the partners are also governed by the Partnership Act,1932. The main advantages of the partnership firm are as follows: a) Like the sole proprietorship, it is easy for formation and comparatively free form government regulations.
Continued The partners are coming from the various backgrounds and therefore, the benefit of their experiences is available for the firm. However there are certain limitations which are: a) Unlimited liability of the partners prevents the firm from taking the risk. b) The firm do not have any perpetual succession and, therefore ,the death, insolvency or retirement of the partner may threaten the very existence of the firm.
Limited Company:
A limited company registered under Companies Act,1956. Limited Companies has some unique features such as, a) Perceptual succession: A limited company has perpetual succession which implies that a company has a separate existence from its owners i.e. shareholders. Even though the shareholders are keep changing the existence of the firm is not threatened.
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b) Limited liability: The liability of the shareholders are limited . c) Transferability of the shares: Subject to the limitations mentioned in the Article of Association, the shares of a limited freely transferable. A limited company has divides into private and Public Company.
Private company:
A private company is that company which satisfies the following criteria. i) Minimum number of members are two and maximum numbers of the members are fifty. ii) No public invitation is allowed for the subscription of shares and debentures.
Public Company:
a) A public limited company is a form of orgnisation that has a minimum of seven members while there is no restriction on maximum number of members.
b) A public company is allowed to invite the public for subscription to its shares and debentures. c) There is no any restriction on the transfer of the shares.