Chapter 1
Scope and Objectives of Financial Management
Q1. What are the stages of decision making that an entrepreneur
goes through while starting any new business/venture?
Answer:
The following are the main stages:
Stage 1: Decide which assets (premises, machinery, equipment etc) to buy.
Stage 2: Determining what is total investment (since assets cost money)
required for buying assets.
Stage 3: It is important to determine how much cash he would need to run
the daily operations (payment for raw material, salaries, wages etc.), that is,
Working Capital requirement.
Stage 4: The next stage is to decide what all sources, does the entrepreneur
need to tap to finance the total investment (assets and working capital). The
sources could be Share Capital (Including Entrepreneur’s own funds) or
borrowing from Banks or Investment from Financial Institutions etc.
Q2. What is the main focus of financial management?
Answer:
The entire focus of financial management is to address three major financial
decision areas namely:
1. Where to get the money from? (Financing Decision
2. Where to invest the money? (Investment Decision)
3. How much to distribute amongst shareholders to keep them satisfied?
(Dividend Decision)
1|Page
This material is in accordance with ICAI Material
, Q3. What is the meaning of financial management?
Answer:
It can be defined as
“Financial Management comprises of forecasting, planning, organizing,
directing, coordinating and controlling of all activities relating to acquisition
and application of the financial resources of an undertaking in keeping with
its financial objective.”
Another very elaborate definition given by Phillippatus is
“Financial Management is concerned with the managerial decisions that
result in the acquisition and financing of short term and long term credits
for the firm.”
Q4. What are the different sources of fund for a business enterprise?
Answer:
(A) Equity:
The funds raised by the issue of equity shares are the best from the risk
point of view for the firm, since there is no question of repayment except
under liquidation.
From the cost point of view, however, equity capital is usually the most
expensive source of funds.
This is because the dividend expectations of shareholders are normally
higher than prevalent interest rate and since dividends are an
appropriation of profit, they are not allowed as an expense under the
Income Tax Act.
Also the issue of new shares to public may dilute the control of the existing
shareholders.
(B) Debentures:
Debentures are comparatively cheaper than shares because of their tax
advantage.
The interest the company pays on debentures is free of tax, unlike
dividend payments which is made from the taxed profits.
2|Page
This material is in accordance with ICAI Material
, However, even when times are hard, interest on debenture, loans must be
paid whereas dividends need not be.
However, debentures entail a high degree of risk since they have to be
repaid as per the terms of agreement, whether or not the company makes
profit.
(C) Funding from Banks:
Commercial Banks play an important role in funding the business
enterprises.
Apart from supporting businesses in their routine activities (deposits,
payments etc) they play an important role in meeting the long term and
short term needs of a business enterprise.
(D) International Funding:
Funding today is not limited to domestic market.
With liberalization and globalization a business enterprise has options to
raise capital from International markets also.
Foreign Direct Investment (FDI) and Foreign Institutional Investors (FII) are
two major routes for raising funds from foreign sources besides ADR’s
(American depository receipts) and GDR’s (Global depository receipts).
Obviously, the mechanism of procurement of funds has to be modified in
the light of the requirements of foreign investors.
Q5. What are the points to be kept in mind while procuring funds from variant
sources?
Answer:
In a global competitive scenario, it is not enough to depend on the
available ways of raising finance
Resource mobilization has to be undertaken through innovative ways to
meet the needs of investors.
3|Page
This material is in accordance with ICAI Material
Scope and Objectives of Financial Management
Q1. What are the stages of decision making that an entrepreneur
goes through while starting any new business/venture?
Answer:
The following are the main stages:
Stage 1: Decide which assets (premises, machinery, equipment etc) to buy.
Stage 2: Determining what is total investment (since assets cost money)
required for buying assets.
Stage 3: It is important to determine how much cash he would need to run
the daily operations (payment for raw material, salaries, wages etc.), that is,
Working Capital requirement.
Stage 4: The next stage is to decide what all sources, does the entrepreneur
need to tap to finance the total investment (assets and working capital). The
sources could be Share Capital (Including Entrepreneur’s own funds) or
borrowing from Banks or Investment from Financial Institutions etc.
Q2. What is the main focus of financial management?
Answer:
The entire focus of financial management is to address three major financial
decision areas namely:
1. Where to get the money from? (Financing Decision
2. Where to invest the money? (Investment Decision)
3. How much to distribute amongst shareholders to keep them satisfied?
(Dividend Decision)
1|Page
This material is in accordance with ICAI Material
, Q3. What is the meaning of financial management?
Answer:
It can be defined as
“Financial Management comprises of forecasting, planning, organizing,
directing, coordinating and controlling of all activities relating to acquisition
and application of the financial resources of an undertaking in keeping with
its financial objective.”
Another very elaborate definition given by Phillippatus is
“Financial Management is concerned with the managerial decisions that
result in the acquisition and financing of short term and long term credits
for the firm.”
Q4. What are the different sources of fund for a business enterprise?
Answer:
(A) Equity:
The funds raised by the issue of equity shares are the best from the risk
point of view for the firm, since there is no question of repayment except
under liquidation.
From the cost point of view, however, equity capital is usually the most
expensive source of funds.
This is because the dividend expectations of shareholders are normally
higher than prevalent interest rate and since dividends are an
appropriation of profit, they are not allowed as an expense under the
Income Tax Act.
Also the issue of new shares to public may dilute the control of the existing
shareholders.
(B) Debentures:
Debentures are comparatively cheaper than shares because of their tax
advantage.
The interest the company pays on debentures is free of tax, unlike
dividend payments which is made from the taxed profits.
2|Page
This material is in accordance with ICAI Material
, However, even when times are hard, interest on debenture, loans must be
paid whereas dividends need not be.
However, debentures entail a high degree of risk since they have to be
repaid as per the terms of agreement, whether or not the company makes
profit.
(C) Funding from Banks:
Commercial Banks play an important role in funding the business
enterprises.
Apart from supporting businesses in their routine activities (deposits,
payments etc) they play an important role in meeting the long term and
short term needs of a business enterprise.
(D) International Funding:
Funding today is not limited to domestic market.
With liberalization and globalization a business enterprise has options to
raise capital from International markets also.
Foreign Direct Investment (FDI) and Foreign Institutional Investors (FII) are
two major routes for raising funds from foreign sources besides ADR’s
(American depository receipts) and GDR’s (Global depository receipts).
Obviously, the mechanism of procurement of funds has to be modified in
the light of the requirements of foreign investors.
Q5. What are the points to be kept in mind while procuring funds from variant
sources?
Answer:
In a global competitive scenario, it is not enough to depend on the
available ways of raising finance
Resource mobilization has to be undertaken through innovative ways to
meet the needs of investors.
3|Page
This material is in accordance with ICAI Material
