Financial management is essential for any business organization. It means that all the revenues and the expenditures of the organization are taken care of. Financial management is also an area of managing the future investments of the business organization. In order to plan for financial management, there are basically three approaches that are used by business organizations. In the report, three approaches to financial management have been discussed in detail. These approaches are the Traditional view of financial management, Modern view of the financial management and Liquidity and profitability approach. These approaches are considered one by one in the following sections (Dobbins, 1993).
Approach 1- Traditional View
According to this approach, the financial management is concerned with financing, acquisition and the management of the assets of the business organization for maximizing the financial health of the organization and its owner. According to this approach, it is the responsibility of the financial manager to get the funds required by the company and invest the same into some profitable ventures that are able to generate higher returns to the organization and can be helpful for maximizing the profitability of the organization. According to this approach, the success or the failure of the financial management is connected with the quality of the financial decisions taken up by the financial manager of the organization. Under this approach, the main focus of the financial manager is to optimally utilize the resources of the organization and get the desired result within a stipulated time frame. Under this approach, the main aim of the financial manager is procuring the funding from financial resources such as debenture, equity, preference shares, long term loans, etc. Then the financial manager mobilizes these funds into some profitable ventures so that the organization can meet its objectives of maximizing the wealth of the organization.
Approach 2- Modern View
In the era of liberalization and modernization, the financial sector has shown a tremendous change which is focusing on promoting the efficient, competitive and the diversified financial system. The financial reforms in the organization are also managed in the informational technology which causes to increase the competition, takeovers, mergers, quality improvement, cost management and other financial disciples. According to the modern approach, financial managers are required to determine and undertake the following activities in an effective manner-
- Total funds that are needed by the company
- The required assets that need to be acquired
- The modern patterns of the financing the assets of the company.
According to this approach, in the modern business of the organization, the financial managers are required to undertake the following decisions-
- Investment decisions- In the case of investment decisions, the finance manager determine the resources in the organization that are scare and determine the decisions in the organization. The financial manager decides the required investment in the fixed assets which needs supporting investments in the working capital in the form of the receivables, cash, inventory. According to this approach, the investment that helps to achieve internal growth of the organization is termed as an internal investment, and the various acquisition of the firms represents as the external investment of the organization. The financial manager takes investment decisions that involve, buying or lease decisions, selection of the capital investment proposals, assets replacement decisions, allocating of the fund and the rationing, restricting, mergers, reorganization and acquisition decisions etc.
- Finance decisions- In the case of finance decisions, the financial manger decides the sources of finance that is debt equity mix. It means determining the financial pattern of the short or medium term of the fund requirement, raising of the funds through issue of the debentures, preference shares, equity and the bonds etc.
- Dividend decisions- In the case of the dividend decisions, the financial manager decides the quantum of the profits be distributed to the owners and payments to be made. It has two types of decisions that are the amount to be paid as a dividend on share prices and the amount to be kept for retained earnings to maximize the wealth of shareholders.
Approach 3- Liquidity and Profitability
Liquidity implies the ability of the business organization to meet its financial obligations that are expected as well as unexpected in order to expand the assets, minimize the liabilities of the organization.
To maintain a balance between the liquidity and profitability of the business organization is also an essential task for the financial manager of the organization. There lies an inverse relationship between the two terms, but the financial manager has to integrate these two functions in order to achieve maximum benefit for the business organization (Financial Management, 2019).
So, by analyzing the above report, it can be concluded that there are mainly three types of approaches to financial management and planning for financial management which can be used by the managers. The three approaches are- Traditional view of financial management, Modern view of the financial management and Liquidity and profitability approach.
Financial Management (2019). Investment Decisions in Financial Management. [online] Learn Accounting: Notes, Procedures, Problems and Solutions. Available at: http://www.accountingnotes.net/financial-management/investment-decisions-in-financial-management/6438 [Accessed 14 Feb. 2019].
Dobbins, R. (1993). An Introduction to Financial Management. Management Decision, 31(2).