The Modern Approach of Finance

The Modern Approach of Finance

The traditional approach, with its emphasis on the episodic financing and lack of sounds theoretical underpinnings, out lived its utility in the changed business situation since the mid-1950s. The development of a strong corporate sector, technological improvements, widened marketing operations, persistent inflation, increased national concern with environment, a keen and healthy business completion, energy and social issues, government regulations on companies, and growing importance of international relations made it imperative for the management of the firm to optimize the use of its resources for its continued survival. The development of an efficient information system, planning and control tools, performance evaluation techniques and the growth of the special managerial skills paved way to formalize a system of using and allocating the scarce resources most effectively and efficiently. As a result, the approach to and scope of financial management changed. The emphasis shifted from episodic financial to the managerial financial problem. The new financial to the managerial financial problem. The new approach is embedded with sound conceptual and analytical theories.

The new or modern approach is an analytical way of looking into the financial problems of the firm. Financial management is considered a vital and an integral part of overall management. The financial policy is the wise use of funds, and the central process involved is a rational matching of advantages of potential uses against the cost of alternative potential sources so as to achieve the broad financial goals which an enterprise sets for itself.¹³ Thus, in a modern enterprise, the basic financial, function is to decide about the expenditure decisions and to determine the demand for capital for these expenditures. In other words, the modern financial manager is concerned with the efficient allocation of funds. However, the allocation of funds is not a new problem. It did exist in the past, but was not considered important in achieving the firm’s long run objectives.

The aforementioned factors have required considerable flexibility in order to cope with changing situations. The “Old ways of doing things”. simply is not good enough in a world in which old ways become absolutely quickly. We conveniently discuss the main developments in the recent period as under. ¹⁴.

• What steps can be taken to increase the value of the firm ?
• Which new proposals for employing capital should be accepted by the firm ?
• How much working capital will be needed to support the company operations ?
• Where should the firm go to raise long term funds and how much will it cost ?
• Should the firm declare dividends of share capital. If yes, then how much dividend should be declared and is what form ?

In fact, these questions relate to three broad decision areas of financial management, viz., the investment decision (including capital budgeting and working capital management). the financing decisions and the divided decision. These financial decisions directly concern firm’s decision to acquire or dispose assets, and requires the commitment or recommitment of funds. Firm’s investment, financing the dividend decisions influence on production, marketing and other functions and affect the size, growth, risk and profitability of the firm.” The function of financial management is to review and control decisions to commit or recommit funds to new or an going uses. Thus, in addition to raising funds financial management is directly concerned with production, marketing and other functions within an enterprise whenever decisions are made about the acquisition of destruction of assets.”¹⁵ Thus, although, the financial manager has to perform his traditional function of raising funds but this greater concern will be determining the size the technology, in setting the pace and direction of growth, in setting the pace and direction of growth, in shaping the profitability and risk complexion of the firm by selecting the best asset mix, and obtaining the optimum financing mix. The mew approach to financial management, which stresses the acquisition and wise use of funds, should be broadened to include profit planning functions also. 16 The terms profit planning refers to the operating decisions make by the executive in the areas of pricing, volume of output, and the firm’s selection of product lines, profit planning is, therefore, a prequiste for optimizing investment and financing decisions.¹⁷