TRADITIONAL CONCEPT : Success of any business depends upon profit which is directly related with financial management. Financial Management starts with acquisition, financing and management of business assets. By investing funds in best ventures a firm can maximize its wealth by obtaining higher returns. Traditional concept shows one basic function of financial management i.e. procurement of funds. Traditional concept of financial management is limited and narrow. It limits the role of finance manager to collecting funds. According to Hunt, William and Donaldson “the finance function was viewed as the task of providing the funds needed by the enterprise on the terms most favorable in the light of the objective of the business.” Following are the functions of financial management under traditional concept:
a) Making arrangements of funds keeping in mind the short term and long term requirement of the business. Appropriate financial institutions are selected which suits the capacity of the enterprise to bear the cost.
b) Making perfect combination of debt and equity as a source of internal finance. Funds are mobilized through equity shares, preference shares, debentures and bonds etc. in a perfect combination which bears less cost of capital.
Following are the grounds on which this approach has been criticized
(i) According to this concept financial management does not get involve in day to day business activities. Under this concept, funds are only generated. Proper attention is not given towards their appropriate use. Allocation of funds is not considered here.
(ii) It does not form part of integral management. Once funds are generated finance managers are called up again only when additional funds are required for promotion, expansion, merging and amalgamation etc.
(iii) It makes arrangements of funds only for long term requirement. Short term requirements are ignored. There are many day-to-day problems related with finance which are not covered under this approach.
Keeping in mind, the narrow concept of traditional approach and requirement of modern competitive situation of business new concept was developed.
MODERN CONCEPT: Style of doing business has been changed for keeping pace with the competition. Privatization and globalization made survival and growth tough. Any business can grow only if it manages its funds in the best way possible as it the life of business. Funds are needed for day-to-day requirements to expansion, promotion etc. Traditional concept can generate only funds but modern concept emphasize on its best possible use. Here, role of finance manager is not limited to mere collection of funds but it is his duty to allocate the funds in best possible way to obtain higher returns. It is the duty of finance manager to keep in mind the long term as well as short term requirements of finance in the business. This approach ensures optimum utilization of funds. According to this concept finance function is the part of integral management and forms part of top level financial planning. Functions of financial management are as follows:
• Analyzing the need of finance required by the business.
• Searching the best available alternate of finance which suits the requirement of the business.
• Obtaining funds from best alternate and allocating it towards assets in optimum way.
• To ensure that funds generated and allocated are put to effective use and reporting to top management.
Modern concept has much broader concept than traditional concept. It covers all the financial activities starting from financial planning, generating, procuring and allocating of financial resources by ensuring optimum utilization of financial resources.
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