Basic Business Finance Management Approach

Business finance management deals with that part of business which controls and manages the acquisition and conservation of funds for business activities necessary to attain the business objectives. Financial management would ascertain the speed and scope of business growth in short, mid and long term. It would therefore also determine financial goals of the business and what should compose the assets of the firm. The financial mix is also determined by the business finance management. The team also determines how to fix, control and manage the financial activities of the business. There are different approaches to attain this. These are discussed below:

Traditional Approach

This approach was popular during the early stages of business. This approach was limiting and it limited the scope of financial management to accessing and managing funds for business activities. It included activities like arranging funds from financial institutions or through instruments like bonds, shares etc.and managing the legal and accounting aspects of the firm with respect to its corporate relationships. Even though limiting, the success or failure of a firm often depended on the financial decisions taken. The discerning and efficient management of funds is crucial to attaining the business objectives. One of the most important objectives is to increase the wealth for the shareholders. Also, in this approach, the responsibility of the team includes maintaining liquidity or profitability or both for the firm. 

Modern Approach

As per the modern approach, the scope of financial management broadens to become a part of the entire management process as a whole. This approach provides the conceptual and analytical framework  to help aid the financial management and decision-making process. This approach has become common due to the globalization and liberalization of economies. With the use of information technology several financial reforms have been created.  The major decisions made as per this approach are:

• The Investment Decision: These decisions pertain to the allocation of resources for different projects. Projects may include purchase of movable or immovable assets, equipment, machinery as well as acquisition of or merger with another company. The investment must be made only when the ROI is expected to be greater than the hurdle rate.

• The Financing Decision: These decisions ensure that the mix of debt and equity which is used for financing a decision, enhances the value of the asset or purchase.The mix must be such that it minimizes the hurdle rate and allows the organization to make more investment decisions as well as enhance the value of the investments already made.

• The Dividend Policy Decision: These relate to the amount of profits that must be distributed among the owners or shareholders of a company as well as the frequency with which these profits are distributed. There are two ways in which the dividend decisions effect:

The amount of money that is paid and the impact it has on the share price.

 
The amount of money that is held back in order to make future investments as well as other internal investments such that the value of the firm increases. 

Liquidity & Profitability

The financial manager must balance the liquidity and profitability of a firm. This is one of the most frequent dilemmas faced by a finance manager. Liquidity is the amount of cash available which can help the firm to take care of its short term requirements. Whereas profitability requires the finance manager to allocate resources in a way that enhances returns. Offline or online finance courses cover these topics in far more detail and students aspiring to be financial managers must go through such a course.