Financial Management means the efficient and effective management of money (funds) in such a manner as to accomplish the objectives of the organization. It is the specialized functions directly associated with the top management. The significance of this function is not only seen in the 'Line' but also in the capacity of 'Staff' in overall administration of a company. It has been defined differently by different experts in the field.
It includes how to raise the capital, how to allocate it i.e. capital budgeting. Not only about long term budgeting but also how to allocate the short term resources like current assets. It also deals with the dividend policies of the share holders.
That is, it lacks emphasis on the problems of working capital management.
It was criticized throughout the period of its dominance, but the criticism is based on matters of treatment and emphasis. Traditional phase was only outsiders looking approach, over emphasis on episodic events and lack of importance to day-to-day problems.
The Transition Phase: It began in the early 1940's and continued through the early 1950's. The nature of financial management in this phase is almost similar to that of the earlier phase, but more emphasis is given to the day-to-day (working capital) problems faced by the finance managers.
EVOLUTION OF FINANCIAL MANAGEMENT
Financial management emerged as a distinct field of study at the turn of this century. Its evolution may 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.
The traditional phase lasted for about four decades. The following were its important features:
1. The focus of financial management was mainly on certain episodic events like formation, issuance of capital, major expansion, merger, reorganization, and liquidation in the life cycle of the firm.
2. The approach was mainly descriptive and institutional. The instruments of financing, the institutions and procedures used in capital markets, and the legal aspects of financial events formed the core of financial management.
3. The outsiders point of view was dominant. Financial management was viewed mainly from the point of the investment bankers, lenders, and other outside interests.
The transitional phase begins around the early forties and continues through the early fifties. Though the nature pf financial mgmt during this phase was similar to that of the traditional phase, greater emphasis was placed on the day to day problem faced by the finance managers in the area of funds analysis, planning, and control. These problems however were discussed within limited analytical framework.
The modern phase begin in mid 50s and has witnessed an accelerated pace of development with the infusion of ideas from economic theories and applications of quantitative methods of analysis. The distinctive features of modern phase are:
* The scope of financial management has broadened. The central concern of financial management is considered to be a rational matching of funds to their uses in the light of appropriate decision criteria
* The approach of financial management has become more analytical and quantitative
* The point of view of the managerial decision maker has become dominant
Since the beginning of the modern phase many significant and seminal developments have occurred in the fields of capital budgeting, capital structure theory, efficient market theory, optional pricing theory, agency theory, arbitrage pricing theory, valuation models, dividend policy, working capital management, financial modeling, and...