Introduction to Financial Management

Introduction to Financial Management

Brief History of Financial Management

Since financial management separated from economics at the beginning of this century and became a separate discipline in its own right, it is subject to many rapid developments. When financial management began as an independent science, it was limited to topics related to financial instruments and institutions, and the procedural aspects of the capital market. As for the developments that occurred on this subject, later on, most of them were in response to the developments and changes dictated by the conditions that industrial and commercial institutions were going through.

At the beginning of the twentieth century, which was marked by the emergence of giant oil companies and huge auto companies as a result of the merger of two or more companies, the financial management focused on issues related to the merger, and on the general organizational matters of these institutions, in addition to the capital issuances (shares and bonds) needed to finance these operations. When modern technology developed in the early 1920’s, and institutions wanted to obtain it, an urgent need emerged to provide financing for such investments.

The huge investments were one of the reasons that led the financial management to play a new role, which is summarized in arranging the necessary funding for this from external sources in the first place, at a time when the financial markets were characterized by primitiveness, and the process of convincing the public to use its savings in order to contribute to financing the industry was an issue in It is very difficult due to the insufficient accounting information available, and the lack of confidence in the accuracy of what is available from it.

Financial management begining characteristics

As it appears in this historical narrative, it can be said that this period in the history of financial management was characterized by a focus on external sources of finance and on legal aspects that guarantee their rights to investors and paid little attention to internal financial management.

At the beginning of the thirties, a period that was characterized by the great depression that prevailed in America and led to the bankruptcy of many institutions, the financial management focused its attention on issues related to defending existence such as interest in liquidity to avoid bankruptcy, as well as issues of reorganization and interest in the appropriate capital structure of the institution, and the laws regulating financial markets. In general, this period was dominated by the principle of conservatism, and financial management remained a descriptive science focusing on legal matters with a shift in concern for survival at the expense of prevalence.

Thirties and fourties characteristics

At the end of the thirties, and as a result of the emergence of some cases of fraud and deception and the collapse of some institutions, government agencies saw the need to publish a lot of financial information about companies in order to inform the investing public of the reality of their conditions, and the publication of this information led to the emergence of a new function of financial management, which is the function of financial analysis To educate investors about appropriate investment opportunities.

During the period from 1940 to 1950, the traditional thought that developed during the twenties and thirties prevailed in financial management, a concept that focused on financial management from an external perspective, i.e., the perspective of lenders and shareholders without concern for the decision-making process within the institution. Far away from the descriptive issues that accompanied financial management since its inception and began to focus on quantitative issues such as financial analysis and planning for the use of financial resources, in addition to that, increased interest in managing liquidity and cash flows.

Fifties and sixties characteristics

As for the fifties, it witnessed an acceleration in the pattern of development of financial management. During this period, the left side of the budget began to receive some attention, and assets also began to receive better attention, and quantitative methods were developed to manage merchandise, cash, accounts receivable, and fixed assets. The attention of financial management has also shifted from the external perspective to the internal one, and it has been concluded that financial decisions have a vital impact on the existence and feasibility of the institution.

As for the sixties and seventies, they witnessed a great interest in studying the cost of capital and the best mix of the capital structure. In the seventies, interest also began to include the element of inflation in the process of financial analysis. During the eighties and the beginning of the nineties, the rapid technological developments in the field of computer uses led to an increase in the capabilities of applied financial management in the use of traditional financial analysis tools easily and easily, as it became possible to conduct financial studies and analyzes, no matter how complex, with minimal effort and time and with extreme accuracy. This is on the one hand, and on the other hand, this period witnessed a focus on pricing issues for various investment tools, both traditional and new.

Conclusion

In short, it can be said that financial management has evolved from a descriptive study to a practical study subject to precise analytical standards, and from a field that was interested in searching for sources of funding only to a field concerned with asset management and directing the available financial resources to areas of better use, and from a field concerned with the external analysis of the institution to a field Focuses on the decision-making process within the organization.

The role of the financial management in the institution is an ever-evolving role, and it is thus compatible with the new ideas and modern methods in the areas of their use. The role of financial management is different nowadays from its role years ago. There is no doubt that its future role will be different from what it is now, so it has become imperative that the financial management and those studying it keep pace with these changes in a serious and vigorous manner.

Private and public financial management

Financial management is divided into two main fields, the field of public financial management and the field of private financial management. It is appropriate to point out that these two fields are not completely separate from one another, but that there is a reciprocal effect between them. on projects, services and infrastructure. In addition, they both deal with one group of financial institutions, and operate in the same single financial market.

Public Finance

Public Finance is the activity concerned with the process of obtaining funds for the state to run public utilities and to ensure that these funds are used efficiently and effectively in accordance with what has been approved for it by law.

The scope of public finance within this concept includes the following:

  1. How the state obtains the funds needed for it and the areas of its expenditure and distribution.
  2. Exercising control over resources and expenditures
  3. The effect of fiscal policies on consumption, spending and national income.

Private Finance

Private Finance, or private financial management, is concerned with decisions related to the acquisition of assets and activities that the institution will practice, as well as managing cash and providing the necessary financing to enable the institution to carry out its activities.

Comparison between public finance and private finance

Public finance differs from private finance in terms of goals and objectives. Public finances first seek to achieve social goals that bring benefit and good to the entire society.

On the other hand, private finance seeks to achieve the personal interests of the owners of the project by achieving profits for them, and such pursuit of private interest leads indirectly to achieving the goals of society, represented in increasing employment and increasing the gross national product, which is what public finance seeks.

The most important areas of difference between public and private finance are:

Comparison in the field of finance

The state obtains its financial needs through direct and indirect taxes, and from non-tax revenues such as fees and licenses, state property revenues, state profits and its participation in projects, and borrowing. As for the private sector, it obtains its financing needs through the contribution of the owners of the project, and through borrowing and undistributed profits.

Comparison in investing (or spending)

When the public sector makes its decision to spend or invest, it is concerned with social welfare first and profit second. As for the private sector, it makes its decision in the light of its expectation of obtaining an adequate return for the invested capital, with less concern for social goals.

The evolution of the role of financial management in a commercial enterprise

Historically, three stages can be distinguished related to the content of the financial function in a commercial enterprise, which are as follows:

The first stage

This stage was in the early beginnings of financial management, when the scope of this function was limited to the most frequent business in the life of the financial manager, such as bookkeeping, receiving and paying money, and maintaining it. It did not approach the level of participation in decision-making directly or indirectly.

The second stage (or traditional entrance)

This is the stage during which the field of the financial function expanded, as its role became not limited to routine work, but rather included the process of obtaining the necessary funds for the institution and taking over the negotiating, legal and accounting marks with funding sources.

Despite the expansion of the financial management function at this stage, its role did not rise to the level of decision-making responsibility, but rather remained an advisory role limited to issues related to obtaining funds to finance spending decisions taken elsewhere within the organization.

During this period, the concept of financial management was subjected to several criticisms, including:

  • The focus of financial management on the external perspective of the financial function (ie, attention to the viewpoint of investors and lenders) rather than focusing on making decisions within the institution.
  • Focusing on the issues of financing large companies and neglecting the issues of small projects.
  • Focusing on non-recurring activities in the life of the project, such as issues of accession and merger, rather than focusing on the ordinary problems of the institution, such as liquidity management, the distribution of resources to different types of assets, the appropriateness of liabilities, and their distribution among various sources.
  • And Focusing on long-term financing issues and neglecting working capital financing issues.

Phase Three (New Entrance)

This stage was called the stage of the new entrance to financial management, and it was characterized by the expansion of the financial function and its transition from the advisory role to the role of the participant in making decisions within the institution. And the cost of money, meaning that the new role includes attention to the following:

  1. The quality and quantity of assets in the enterprise and how they are distributed among the various items
  2. The total investment in the project
  3. Appropriate financing sources or structure of liabilities form

References

  • Financial Management Encyclopedia, MDRS Center, 2022.