Question 1 OR (a)

Changing scope of the finance function; role of the finance manager

6 marks

Time to write: About 12 minutes
Topic: Nature, scope and objectives of financial management

Question

Question 1 OR (a) · 6 marks

Explain how the scope of the finance function has changed over time. In a modern firm, what role does the finance manager play?

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

12 minfor 6 marks

Read from the question

Explain…What…?Two asks in one question: answer both.

Write it in this order

Read; underline the asks; jot your points 1 min
1 Traditional (procurement-only) scope and its weaknesses 2 marks 3 min
2 Modern scope: investment, financing and dividend decisions 2 marks 3 min
3 Role of the finance manager in a modern firm, tied to wealth maximisation 2 marks 3 min
Check: every ask answered, key terms underlined 2 min

123

Short on time? Trim steps 1–3 evenly rather than skip one: each is capped at its own marks.

Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

1. The traditional scope (to the early 1950s). Finance was treated as the procurement of funds: the finance manager was given an amount to raise and his job ended once the funds were raised. The subject covered the institutions of the capital market, the instruments through which funds are raised, and the legal and accounting relationship between a firm and its sources of funds. This view has been discarded because of three weaknesses:

Outsider-looking-in. It was written from the viewpoint of the suppliers of funds (investors, investment bankers), and ignored the internal decisions of those who use the funds.
Corporate only. It dealt with the financing problems of corporate enterprises and left out non-corporate ones.
Episodic. It was built around infrequent events (promotion, incorporation, merger, reorganisation), so the day-to-day financial problems of a firm received little attention.

2. The modern scope. Financial management now covers the whole of a firm's financial operations: procuring the funds needed, when needed, at the lowest cost; investing them in assets in the most profitable way; and distributing returns to shareholders to meet their expectations. These correspond to the three decisions of modern financial management: the investment, financing and dividend decisions. The investment decision covers both long-term assets (capital budgeting) and current assets (working capital management).

3. The role of the finance manager in a modern firm. The finance manager is no longer a mere raiser of funds but a decision-maker inside the firm:

Investment decision: selecting long-term projects (capital budgeting) and managing current assets (working capital).
Financing decision: deciding the mix of sources and raising funds at the lowest cost.
Dividend decision: deciding how much of the earnings to distribute and how much to retain.
Planning and control: these functions call for good planning, control and execution of the firm's activities.

Each decision is taken with one aim: to maximise shareholders' wealth, that is, to increase the market value of the firm's shares.

Where the 6 marks sit

#	Component	Marks
1	Traditional (procurement-only) scope and its weaknesses	2
2	Modern scope: investment, financing and dividend decisions	2
3	Role of the finance manager in a modern firm, tied to wealth maximisation	2
	Total	6

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