Question

1) What is finance? Define business finance. 2) Explain the types of finance. 3) Discuss the objectives of financial management 4) Critically evaluate various approaches to the financial management. 

Answer 1

Ans 1. Finance is the Life Blood of Business. Finance is a broad term that describes activities associated with banking, leverage or debt, credit, capital markets, money, and investments. Basically, finance represents money management and the process of acquiring needed funds.

Ans 2. There are two types of finance :-

(a) Debt Finance - It means financing the business by borrowing money from external lenders. Eg:-Taking Loan from bank

(b) Equity Finance - It means raising funds by issuing shares of the company to public .

Ans 3.Some of the objectives of Financial Management are -

(a) to reduce the cost of

(b) To ensuring sufficient availability of funds

(c) To ensure optimum funds utilization.

Ans 4. There are two approches to Financial Management :-

(a) Traditional Approach-

In this approach, finance was required not for regular business operations but occasional events like reorganization, promotion, liquidation, expansion, etc. It was considered essential to have funds for such events and regarded as one of the crucial functions of a financial manager. Though the financial manager is not accountable for the effective utilization of funds, however, his responsibility is to get the required funds from external partners on a fair term. The traditional approach of finance management stayed until the 5th decade of the 20th century. The traditional approach only emphasized on the fund’s procurement only by corporations. Hence, this approach is regarded as narrow and defective.

(b) Modern Approach-

The modern approach had a more comprehensive analytical viewpoint with a focus on the procurement of funds and its active and optimum use. The fund arrangement is an essential feature of the entire finance function. The main elements of this approach are an evaluation of alternative utilisation of funds, capital budgeting, financial planning, ascertainment of financial standards for the business success, determination of cost of capital, working capital management, Management of income, etc. The three critical decisions taken under this approach are as follows

(i) Investment Decision

(ii) Financing Decision

(iii) Dividend Decision