Determine the Limitations of the traditional approach
Limitations of the traditional approach were not entirely based on treatment or emphasis of different aspects. In other words it's weaknesses were more fundamental. Conceptual and analytical shortcoming of this approach arose from the fact that it confined financial management to issues involved in procurement of external funds, it didn't consider the important dimension of allocation of capital. Conceptual framework of the traditional treatment ignored what Solomon aptly defines as the central issues of financial management. These issues are reflected in following fundamental questions which a finance manager must address. Should an enterprise commit capital funds to certain purposes do the expected returns meet financial standards of performance? How must these standards be set and what is the cost of capital funds to enterprise? How does the cost vary with mixture of financing methods used? In the absence of coverage of these crucial aspects, traditional approach implied a very narrow scope for financial management. Modern approach provides a solution to these shortcomings.