What is Finance, Approaches to finance function, Traditional approach, Modern approach, Limitations Of Traditional Approach, Profit maximization approach, Wealth Maximisation approach,

1. Introduction to
Financial Management

2. What is Finance ?
 Finance means money
 Finance describes the management, creation and study of
money, banking, credit, investment, assets & liabilities
that make up the financial systems
 As per traditional approach it means procurement of funds
 As per modern approach it means procurement & efficient
utilization of funds

3. Approaches to finance function
Traditional
approach
Modern
approach

4. Traditional Approach
 Financial management was considered as corporation
finance
 According to this approach ,the scope of finance is
restricted to “ procurement of funds by corporates to
meet their financial needs
 Also states the legal & accounting relationship between
business and sources of finance

5. Limitations Of Traditional Approach
 The approach is confined to ‘procurement of funds’ only
 Ignores efficient utilization of funds
 It fails to consider an important aspect i.e. allocation of
funds
 It fails to consider the problems involved in working
capital management
 It neglected the issues relating to allocation and
management of funds and failed to make financial
decisions

6. Modern approach
 The modern approach is an analytical way of looking into
financial problems of the firm
 According to this approach, the finance covers both
acquisition of funds as well as allocation of funds to
various uses
 It’s also concerned with the efficient utilization of funds

7. Main Components
 Financial planning
 Determination of cost of capital
 Capital budgeting
 Working capital management
 Management of income

8. Profit maximization approach
 A firm should undertake all those activities which add to
the profit and eliminate all other which reduce its profit.
 It is generally short term.
 Acts as motivator which helps the business organisation in
becoming more efficient.
 Return on capital employed is considered the best
measurement of profit.
 It makes allocation of resources to profitable and desired
areas.

9. Criticism of profit maximization
approach
 Ambiguity
 Ignores time value of money
 Risk factor in income receivable in future.

10. Wealth Maximisation approach
 It is also known as value maximization approach
 The finance manager must take decisions which increase
net present value of the firm.
 Increase in NPV = increase in value of the firm.
 Increase in value of the firm= increase in market price of
equity shares.

11. Functions of Financial Management
 Financial planning
 Financial Decision
 Investing Decision
 Dividend Decision
 Liquidity Decision

12. Financial Institution
 They are the intermediaries who facilitate smooth
functioning of the financial system by making investors
and borrowers Meet
 They mobilize savings of the surplus units and allocate
them in productive activities promising a better Rate of
Return
 Financial Institutions are also termed as Financial
Intermediaries

13. Type of Financial Institutions
 Organized sector
1. Commercial banks
2. Co-operative banks
3. Foreign banks
 Unorganized sector
1. Indigenous bankers
2. Money lenders

14. Role of Financial Institutions
 Provide funds
 Infrastructure facilities
 Promotional activities
 Development of Backward areas
 Employment Generation

15. Thank
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