Finance
Finance is the life blood of business because in the modern money-oriented economy finance is one of the basic foundations of all kinds of economic activities. It is rightly said that to running business you need money in other words business needs money to make more money. Without adequate finance, no business can service and without efficient finance management, no business can prosper and grow. Finance is required for establishing developing and operating the business efficiently. The success of business depends upon supply of finance and its efficient management.
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| Finance and Financial Management – Scope, Functions, and Objectives Explained |
In simple terminology finance is a word we hear every day on the news, in offices, and even in casual conversations but what does it actually mean?
Finance is all about managing money It covers how money is:
- How much earned?
- How much spent?
- How much saved?
- How munch invested?
- How much money is protected?
In short, finance is the art and science of making smart decisions about money.
Why is Finance Important?
- It helps you make informed decisions, such as whether to buy an asset now or wait for a better opportunity.
- It prepares you for emergencies by encouraging regular saving habits.
- It helps grow your wealth by promoting investment rather than just saving.
- It reduces stress, as financial stability brings peace of mind.
Definition of Finance
- It can be defined as the management of flow of money through an organization, whether it will be a corporation, school, bank or government agency.
- Finance also is referred as the provision of money at the time when it is needed. Finance function is the procurement of funds and their effective utilization in business concerns.
Basic Principles of Finance
- Time Value of Money: Money today is worth more than the same amount in the future because it has the potential to earn returns.
- Risk and Return: Higher potential returns are usually associated with higher levels of risk.
- Diversification: Don’t put all your eggs in one basket spread your investments to reduce and manage risk.
- Cash Flow Management: Always ensure that your inflows (income) exceed your outflows (expenses).
Type of Finance
- Direct finance - Direct finance is a method of financing where borrowers borrow funds directly from the financial market without using a third-party service, such as a financial intermediary.
- Indirect finance - Indirect finance is where borrowers borrow funds from the financial market through indirect means, such as through a financial intermediary.
- Public finance - Collection of taxes from those who benefit from the provision of public goods by the government, and the use of those tax funds toward production and distribution of the public goods.
- Private finance - Private Finance is a method of providing funds for major capital investments where private firms are contracted to complete and manage the projects. These contracts are typically given to construction firms and last a long time, sometimes up to 30 years.
- Corporation finance – The division of a company that is concerned with the financial operation of the company.
In most businesses, corporate finance focuses on raising money for various projects or ventures. For investment banks and similar corporations, corporate finance focuses on the analysis of corporate acquisitions and other decisions.
Financial Management
Financial Management refers to the entire range of managerial efforts devoted to managing an organization’s finances including both the mobilization (acquisition or raising of funds) and the deployment (allocation and utilization) of those funds within the enterprise.
Financial Management also means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.
Financial Management consists of two words: Financial + Management.
- Finance means money or funds.
- Management means handling or controlling.
- Financial Management means managing money efficiently in a business.
- It includes raising funds and using them properly.
- The goal is to ensure profit, growth, and financial stability.
Definitions of Financial Management
- "Financial management is concerned with raising financial resources and their effective utilization towards achieving the organizational goals."
- "Financial management is the process of putting the available funds to the best advantage from the long-term point of view of business objectives."
The Finance Manager must ensure that funds are raised in a way that maintains a proper balance between risk, cost, and control. They should also see that the funds are used efficiently for the optimum benefit of the organization.
Scope or Elements of Financial Management
- Investment decisions: It include investment in fixed assets (called as capital budgeting). Investment in current assets are also a part of investment decisions called as working capital decisions.
- Financial decisions: They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby.
- Dividend decision: The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two:
- Dividend for shareholders - Dividend and the rate of it has to be decided.
- Retained profits - Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.
Objectives of Financial Management
The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be-
- To ensure regular and adequate supply of funds to the concern.
- To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders?
- To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.
- To ensure safety on investment, i.e., funds should be invested in safe ventures so that adequate rate of return can be achieved.
- To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.
Functions of Financial Management
- Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise.
- Determination of capital composition: Once the estimation has been made, the capital structure has to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.
- Choice of sources of funds: For additional funds to be procured, a company has many choices like-
- Issue of shares and debentures
- Loans to be taken from banks and financial institutions
- Public deposits to be drawn like in form of bonds.
- Choice of factor will depend on relative merits and demerits of each source and period of financing.
- Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible.
- Disposal of surplus: The net profits decisions have to be made by the finance manager. This can be done in two ways:
- Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.
- Retained profits - The volume has to be decided which will depend upon expansion, innovational, diversification plans of the company.
- Management of cash: Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintenance of enough stock, purchase of raw materials, etc.
- Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.
Conclusions
Understanding the meaning, scope, functions, and objectives of finance and financial management is crucial for any business. Effective financial management not only drives profitability but also fosters growth and ensures stability. By mastering these concepts, businesses can make informed decisions that lead to sustainable success. Embrace the power of finance to unlock your organization's full potential.
FAQ's
What is Financing?
It consists raising, providing, managing of all the money capital or funds of any kind to be used in connection with the business.
What is the main objective of financial management?
The main objective is to maximize the wealth of shareholders by efficiently using financial resources.
What are the three main decisions in financial management?
Investment decisions, financing decisions, and dividend decisions.
Why is financial management important?
Because it helps in effective fund utilization, reduces financial risks, and ensures business stability and growth.
What is the scope of financial management?
It covers all financial aspects—planning, organizing, controlling, and monitoring the inflow and outflow of funds.
Who is responsible for financial management in a company?
The Finance Manager or Chief Financial Officer (CFO) is primarily responsible for managing financial activities.
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