Financial and Strategic Management

Is Financial Management a science or an art?

Financial Management is a subject within the compass of social science as it deals with people. Its nature is nearer to applied sciences as it envisages the use of classified and tested knowledge as help in practical affairs and solving business.

Theory of financial management is based on certain systematic principles, some of which can be tested in mathematical equations like the law of physics and chemistry. Financial management contains a much larger body of rules or tendencies that hold true in general and on the average. The use of computers, operations research, statistical techniques and econometric models find wide application in financial management as tools for solving corporate financial problems like budgeting, choice of investments, acquisition or mergers etc. This takes the financial management nearer to treatment as a subject of science. Nevertheless, there remains a wide scope for the application of value judgement in financial decision making. Most practical problems of finance have no hard and fast answers that can be worked out mathematically or programmed on a computer. They must be solved by value judgement, intuition and the “feel” of experience. Thus, despite its frequent acceptance as applied science, finance remains largely an art. Because, according to George A. Christy and Peyton Foster Roden (Finance: Environment and Decisions) knowledge of facts, principles and concepts is necessary for making decisions but personal involvement of the manager through his intuitive capacities and power of judgement becomes essential. This makes financial management and managing a company’s finance both an art and a science. It requires a feel for the situation and analytical skills along with a thorough knowledge of the techniques and tools of financial analysis and the know-how to apply them and interpret the results.

A very interesting presentation has been made by Weston in his book “Methodology in Finance”. The finance functions are mainly three viz., planning, organisation and financial control. In each of these finance functions, elements of science and art can be observed. Wherever methodology is to be applied in decision making in all these areas, the subject matter becomes a science confronted with the framework of techniques and tools. On the other hand, when the question of choice to make a selection out of the alternative results arises the subject matter becomes an art requiring human skills for value judgement. For example, in the planning function, there are certain goals, which may be short-term goals or long-term goals. Each falls within the area of art. Another parameter of planning is estimating funds, which may again be short-term or long-term involving techniques and skills. When involvement to techniques is there the subject matter remains science and when the skills are required to be interpreted, the subject matter becomes an art. It so happens in all aspects of planning, organisation and control.

Thus, in the entire study of financial management whether it is related to investment decision, financing decisions i.e. deciding about the sources of financing, or dividend decision, there is a mixture of science as well as art. When techniques for analytical purposes are used it is science and when the choice in appreciation of the results is made it is an art. Thus, people will like to call financial management as science as well as art. But it is better if we say that the discipline of financial management has both the aspects of science as well as art; where there is the theory of systematic knowledge it is science and where there is the application it is art.

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Shreya Kushwaha

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