Evolution of Finance

Financial management emerged as a distinct field of study around 20th century. Its evolution is divided into three broad phases:

Traditional phase – This phase started from 1920 and lasted till 1940. During this phase focus was mainly on below aspects:

  • Arranging, formation, issuance of funds
  • Business expansion, merger, reorganization, and liquidation during the life cycle of the firm
  • The instruments of financing, the institutions and procedures used in capital markets, and the legal aspects of financial events

Transitional phase – This phase started from early 1940 and lasted till early 1950. During this phase focus was mainly on below aspects:

  • Nature of financial management was similar to same as Traditional phase
  • But more emphasis was put on financial problems faced by managers in day to day operations hence leading to increased focus on working capital management

Modern phase – This phase started in middle of 1950 and has witnessed an accelerated pace of development with the infusion of ideas from economic theories and applications of quantitative methods of analysis. During this phase focus was mainly on below aspects:

  • The scope of financial management got broadened
  • A well-managed Finance department came into existence
  • Role of Financial manager got defined , which include acquisition of funds required in the business at the least possible cost ,investing the funds obtained in an optimum manner so as to maximize returns and  taking decisions relating to distribution of profits i.e. deciding the dividend policy and retention of profits

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