Traditional and Modern Approach of Financial Management

Definition of Financial Management

Financial management can be definded as the collection managerial process which is concerned with the planning and control of financial resources.

According to J.L. Massie :- “Financial Management is the operational activity of a business that is responsible for obtaining and effectively utilising the funds necessary for efficient operations.”

Scope of Financial Management

The scope and functions of financial management can be classified into two categories.

- Traditional approach

- Modern approach

Traditional approach

 According to this approach, the scope of the finance function is restricted to “procurement of funds by corporate enterprise to meet their financial needs.

 The term ‘procurement’ refers to raising of funds externally as well as the inter related aspects of raising funds.

 The inter related aspects are the institutional arrangement for finance, financial instruments through which funds are raised and legal and accounting aspects between the firm and its sources of funds.

 In traditional approach the resources could be raised from the combination of the available sources.

Limitations of traditional approach

 This approach is confirmed to ‘procurement of funds’ only.

 It fails to consider an important aspects i.e. allocation of funds.

 It deals with only outside I.e. investors, investment bankers.

 The internal decision making is completely ignored in this approach.

 The traditional approach fails to consider the problems involved in working capital management.

 The traditional approach neglected the issues relating to the allocation and management of funds and failed to make financial decisions.

Modern approach

Modern approach is an analytical way of looking into financial problems of the firm. According to this approach, financial management is concerned with both acquisition of funds and their effective and optimum utilisation. This viewpoint not only considers the sporadic...