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    Evolution of Financial Management

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    Ashis karmakar
    Financial management has evolved over three phases - traditional, transitional, and modern. The traditional phase focused on descriptive accounts of capital-raising events. The transitional phase emphasized day-to-day problems but within limited frameworks. The modern phase since the 1950s uses economic theory and quantitative analysis, views decisions from the manager's perspective, and has developed many new areas like capital budgeting and valuation models.

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    Evolution of Financial Management

    Uploaded by

    Ashis karmakar
    13K views4 pages
    Financial management has evolved over three phases - traditional, transitional, and modern. The traditional phase focused on descriptive accounts of capital-raising events. The transitional phase emphasized day-to-day problems but within limited frameworks. The modern phase since the 1950s uses economic theory and quantitative analysis, views decisions from the manager's perspective, and has developed many new areas like capital budgeting and valuation models.

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    EVOLUTION OF FINANCIAL MANAGEMENT

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    EVOLUTION OF FINANCIAL MANAGEMENT

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    Financial management has evolved over three phases - traditional, transitional, and modern. The traditional phase focused on descriptive accounts of capital-raising events. The transitional phase emphasized day-to-day problems but within limited frameworks. The modern phase since the 1950s uses economic theory and quantitative analysis, views decisions from the manager's perspective, and has developed many new areas like capital budgeting and valuation models.

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    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    13K views4 pages

    Evolution of Financial Management

    Uploaded by

    Ashis karmakar
    Financial management has evolved over three phases - traditional, transitional, and modern. The traditional phase focused on descriptive accounts of capital-raising events. The transitional phase emphasized day-to-day problems but within limited frameworks. The modern phase since the 1950s uses economic theory and quantitative analysis, views decisions from the manager's perspective, and has developed many new areas like capital budgeting and valuation models.

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    The key takeaways are that financial management involves making investment and financing decisions to maximize the value of a business for its owners. It aims to rationally match funds to their uses. Financial management has evolved from a traditional descriptive approach to a more analytical quantitative approach focused on managerial decision making.

    Financial management involves making financial decisions aimed at creating maximum value for owners. This includes evaluating decisions about spending, investing, or borrowing money. The financial manager is primarily concerned with investment decisions and financing decisions.

    Financial managers are primarily concerned with two main types of interrelated decisions - investment decisions about which assets or projects funds should be invested in, and financing decisions about the most cost effective method of financing the chosen investments, such as through debt, equity, or a mix.

    Financial management is broadly concerned with the acquisition and use of funds by a business firm.

    Its scope may be defined in terms of the following questions : How large should the firm be and how fast should it grow ? What should be the composition of the firms assets ? What should be the mix of the firms financing ? How should the firm analyse, plan, and control its financial affairs ?

    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 : 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. 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. The outsiders point of view was dominant. Financial management was viewed mainly from the point of the investment bankers, lenders, and other outside interests.

    A typical work of the traditional phase is The Financial Policy of Corporations1 by Arthur S. Dewing. This book discusses at length the types of securities, procedures used in issuing these securities, bankruptcy, reorganisations, mergers, consolidations, and combinations. The treatment of these topics is essentially descriptive, institutional, and legalistic. The transitional phase being around the early forties and continued through the early fifties. Though the nature of financial management during this phase was similar to that of the traditional phase, greater emphasis was placed on the day-to-day problems faced by finance managers in the areas of funds analysis, planning, and control. These problems, however, were discussed within limited analytical frameworks. A representative work of this phase is Essays on Business Finance by Wilford J. Eiteman et al. The modern phase began in the mid-fifties and has witnessed an accelerated pace of development with the infusion of ideas from economic theory and application of quantitative methods of analysis. The distinctive features of the 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 being of the modern phase many significant and seminal developments have occurred in the fields of capital budgeting, capital structure theory, efficient market theory, option pricing theory, arbitrage pricing theory, valuation models, dividend policy, working capital management, financial modeling, and behavioural finance. Many more exciting developments are in the offing making finance a fascinating and challenging field.

    Chief Finance Officer

    Treasurer

    Controller

    Cash Manager

    Credit Manager

    Financial Accounting Manager

    Cost Accounting Manager

    Capital Budgeting Manager Portfolio Manager

    Fund Raising Manager

    Tax Manager

    Data Processing Manager Internal Auditor

    What odes financial management involve ?

    The critical activity of the financial management process is that of financial decisionmaking, specifically decisions aimed at creating maximum value for the owners of the business. Decisions about spending, investing, or borrowing money, for example, are important financial decisions with which most of us are from time to time concerned. In the operation of a business enterprise the key function of the financial manager involves evaluating these of decisions. As we have seen in the Coffee Ventures scenario, the financial manager will be primarily concerned with two main types of interrelated decisions : 1 investment decisions; and 2 financing decisions. Investment decisions identifying the assets or projects in which the firms limited financial resources should be invested. Financing decisions involve deciding on the most costeffective method of financing the chosen investments. Should debt or equity finance be used, or perhaps a mix of both ?

    The assets in which the firm invests can be real assets, such as fixed tangible assets (e.g. property and equipment), intangible assets (e.g. register patents and trademarks) and financial assets (e.g. shares and bank deposits). Most of the assets which appear on a firms balance sheet are of the tangible type building, equipment, inventories, and so on. Intangible assets on the balance sheet will include registyered patents, trademarks, and often brand names. However, many of what are considered to be investments in intangible assets cannot appear on a balance sheet. These would include expenditures in such areas as research and development, marketing and advertising staff training and development, customer service and quality. Undoubtedly investments of this nature are vital in todays competitive business environment and add considerably to the reputational capital of a firm in the financial markets, but from a purely technical accounting point of view these expenditures cannot be capitalised, that is, treated as assets in the balance sheet. Expenditures of this type are charged as expense items to the profit and loss account as they are incurred. We will now take a closer look at the respective characteristics of investment and financing decisions. Investment decisions These can be broken down into : 1 strategic investment decisions (SIDs); and 2 tactical / operational investment decisions.

    Strategic investment decision


    These are concerned with investing in the long-term, wealth-creating assets of the business, such as investments in fixed tangible assets (e.g. land and buildings) or the acquistion of other businesses. Strategic investment decisions will normally involve committing very substantial sums of money to selected investment projects for long periods into the future, usually in the face of considerable risk and uncertainty. Yet, as we shall see later, it is the strategic investment decisions which have the potential for creating real value for the business, and thus wealth for its owners. It is the quality of its strategic investment decision which are absolutely crucial to the long-term success of a business. Strategic investment decision-making is the subject of Part 4, Chapters 10 to 12. Tactical / operational investment decisions These relate to investing in medium to short-term assets such as stocks, debtors, bank, and money market deposits. These are the assets which are essential to the

    firms day-to-day operations. Short-term investment decision-making is presented in part 7, Chapters 17 to 19. Financing decisions These can similarly be analysed as : 1 strategic financing decisions; and 2 tactical / operational financing decisions.

    Strategic financing decisions


    These involve determining the most suitable long-term financing arrangements for the firm - the arrangements for financing its long-term, wealth-creating assets. The primary source of long-term financing for the firm is the capital markets, the role of which is discussed in Chapter 4. The strategic financing decision typically involves deciding what is the most appropriate mix or bend of equity and long-term debt finance in the firms capital structure sometimes called the capital structure decision. Capital structure decisions, and their links, if any, to the value of the firm, is a very controversial issue in financial management, an issue which is addressed in Chapter 13. An essential and important part of the strategic financing relates to a firms dividend policy, and is often referred to separately as the dividend decision. Dividend policy involves deciding how much of the firms earnings should be paid out to shareholders in the form of dividends in return for their investment in the firm, and how much should be retained to finance the firms future investment plans. Like capital structure, the relevant or otherwise of dividend policy in the determination of a firms vale is also a controversial topic in financial management and is explored in chapter 14. Tactical and operational financing decisions These concern how best to finance the firms investment in its medium and short-term assets respectively. For example, deciding on the most appropriate method(s) of financing the investment needed in current assets such as stocks and debentures. Short-term financial decision-making is one of the themes in Part 7. The skill and competence with which investment and financing decisions are made will distinguish the effective financial manager from the ineffective financial manager. Taken together the outcomes of theses two main types of decisions will determine the value of the firm and as we have seen, the goal of maximising the market value of the firm is the focus for corporate financial decision-making.

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