Introduction of Finance
The term Finance originates from the Latin word “Finis”, meaning end or limit.
- In a micro sense, finance refers to the collection or supply of money.
- In a macro sense, it involves the planning, collection, utilization, and preservation of money within an organization.
According to L. J. Gitman, “Finance can be defined as the art and science of managing money. It is concerned with the processes, institutions, markets, and instruments involved in the transfer of money among and between individuals, businesses, and governments.”
In simpler terms, finance is the management of the flow of money within an organization whether it is a corporation, school, bank, or government agency. It encompasses the allocation and management of funds, involving activities such as investing, borrowing, lending, budgeting, saving, and forecasting.
In essence, finance seeks to answer a fundamental question:
How should individuals or organizations allocate, manage, and utilize their money effectively to achieve financial stability, growth, and profitability?
- Financing – It consist raising, providing, managing of all the money capital or funds of any kind to be used in connection with the business.
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
Finance is defined as the provision of money at the time when it is required. Finance has become so important for the business enterprises that it has given birth to Financial Management. It is combination of two words.
- Finance – Finance is the study & discipline of money.
- Management – It is the process of coordinating people and others resources to achieve the goals.
Financial Management 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.
Definitions
- "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."
Scope/Elements of Financial Management
- Investment decisions - It includes 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.
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