Limitations of traditional approach to finance decisions

approaches to financial management pdf

Investment Decisions: The firm should select only those capital investment proposals whose net present value is positive and the rate of return on the projects should exceed the marginal cost of capital.

Then the emphasis shifted from episodic financing to the managerial financial problems, from raising of funds to efficient and effective use of funds. But the high proportion of gearing i.

Traditional finance function

The Finance manager of a modern business firm will generally involve in the following three types of decisions: 1 Investment decisions, 3 Dividend decisions. Investment Decisions: The firm should select only those capital investment proposals whose net present value is positive and the rate of return on the projects should exceed the marginal cost of capital. The modern or new approach provides a solution to all these aspects of financial management. However, the buy-back of shares is allowed under the provisions of the Companies Act, If, more assets of the firm are held in the form of highly liquid assets, it will reduce the profitability of the firm. The dividend payments are made only if the distributable profits are available with the company, after payment of interest charges and tax payments. Another limitation was that internal financial decision-making was completely ignored in this approach. Financing Decisions: The financing of capital investment proposals are done in two forms of finances in general i.

One of the important problems faced by Finance manager is the dilemma of liquidity vs. March finance report: started with the good news. Posted by.

Limitations of traditional approach to finance decisions

Interrelationship of Investment, Financing and Dividend Decisions: The corporate finance theory has broadly categorized the financial decisions into investment, financing and dividend decisions. Thus, this approach has failed to consider the routine managerial problems relating to finance of the firm. Liquidity and Profitability. Modern View 3. These decisions have to be made in such a way that the funds of the firm are used optimally. As a very authoritative style, managers who operate with traditional management techniques are limited in their ability to motivate employees through praise, coaching and constructive feedback, which are common to Theory Y coaching. Financial management in India has changed substantially in scope and complexity in view of recent Government policy. From the point of view of modern corporate firm, financial management is related not only to fund raising but encompasses the wider perspective of managing the finances for the company efficiently.

It is the function of a Finance manager to carefully analyze the different alternatives of investment, determination of investment levels in different assets i. References Tutor2u: Management Styles About the Author Neil Kokemuller has been an active business, finance and education writer and content media website developer since

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Financial management