1.1 BACKGROUND OF THE STUDY
Financial management involves all activities of a financial manager concerned with arising of capital, planning cash and credit requirement including the effective control of financial resource.
The activities could be segregated as follows:
i. Converting forecasts into plans and budgets
ii. Planning the appropriate capital structure
iii. Raising cash from outside the business
iv. Forecasting the future availability of and requirement of cash
v. Investing surplus finds
vi. Controlling cash balances and flows in accordance with plans and
with changing circumstances.
With the emergence of finance as a separate field of study the emphases was more or less on legal matter such as mergers formation of new company’s disposal and consolidation.
With most vital problem of the firm was identification of means of raising capital for possible expansion due to increasing ware in industrialization, the mobility of funds from area of surplus to are of scarcity pose a lot of problems.
In the 1930s the stock of depression ushered in an era of conservation, and attention shifter to such topics as preservation of capital, maintenance of liquidity, reorganization of financially troubled corporations, and the bankruptcy process the federal government assumed a much larger role in regulating business.
In 1940s and early 1950s offered little new in the study or produce of corporate finance. However, in the mid- 50s a major shift in emphasis took place. Up to that time, the study of finance had been descriptive o definitional in nature.
Furthermore, the orientation had been from the viewpoint of a third partly, or outside looking in the all changed in the mid-50s as a more analytical decision oriented approach began to evolve.
The first area of study to generate the new found enthusiasm for decision related analysis was capital budgeting, in which the financial manager was presented with analytical techniques for allocating resources among the various assets of the firm the enthusiasms spread to other decision making areas of the firm such as cash and inventory management, capital structure formulation, and dividend and policy. The emphasis shifted from that of the outside looking in to that of the financial manger force to make tough day to-decision affecting the performance of firm.
Form the late 1960s through todays; financial management has focus on risk-return relationship and the maximization of return for a given level of risk.
Another area of financial research that also receiving more attention in early 1990s is AGENKY THEORY. This theory examines the relationship of the firm. In privately owned firms, management and the owners are usually the same people. Management operates the firm to satisfy its own goals, needs, financial requirements, and the like. As a company moves from private to public ownership, management now represents all the owners, this places management in the agency position of making decision in the best interest of all shareholder.
Because of the diversitied ownership interest, conflicts between managers and shareholder can arise that impact the financial decision of the firm.