FINANCE FUNCTION
Finance is defined as the provision of money at the time when it is required.
Every enterprise, whether big, medium or small needs finance to carry on its operations and to achieve its targets.
Meaning of Finance :
- Finance may be defined as the art and science of managing money. It includes financial service and financial instruments.
- Finance function is the procurement of funds and their effective utilization in business concerns.
Types of Finance:
Finance is one of the important and integral part of business concerns, hence, it plays a
major role in every part of the business activities.
Finance can be classified into two major parts:
Private finance and public finance.
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| Types of Finance |
- Private Finance, which includes the Individual, Firms, Business or Corporate Financial activities to meet the requirements.
- Public Finance which concerns with revenue and disbursement of Government such as Central Government, State Government and Semi-Government Financial matters.
Nature of Finance function
The finance function is the process of acquiring and utilizing funds of a business. Finance functions are related to overall management of an organization. Finance function is concerned with the policy decisions such as like of business, size of firm, type of equipment used, use of debt, liquidity position.
i) In most of the organizations, financial operations are centralized.
ii) Finance functions are performed in all business firms, irrespective of their sizes / legal forms of organization.
iii) They contribute to the survival and growth of the firm.
iv) Finance function is primarily involved with the data analysis for use in decision
making.
v) Finance functions are concerned with the basic business activities of a firm, in
addition to external environmental factors which affect basic business activities, namely,
production and marketing.
vi) Finance functions comprise control functions also.
vii) The central focus of finance function is valuation of the firm.
SCOPE OF FINANCIAL MANAGEMENT:
The main objective of financial management is to arrange sufficient finance for
meeting short term and long term needs. A financial manager will have to concentrate
on the following areas of finance function.
1. Estimating financial requirements:
The first task of a financial manager is to estimate short term and long term financial
requirements of his business.
2. Deciding capital structure:
Capital structure refers to kind and proportion of different securities for raising funds.Capital structure includes share capital, debentures, financial institutions, public deposits etc.
3. Selecting a source of finance:
- Short term finance - banks, public deposits and financial institutions.
- Long term finance - share capital and debentures may be the useful.
4. Selecting a pattern of investment:
- The selection of an investment pattern is related to the use of funds.
- The funds will have to be spent first on fixed assets and then an appropriate portion will be retained for working capital and for other requirements.
5. Proper cash management:
Cash management is an important task of finance manager. He has to assess various cash needs at different times and then make arrangements for arranging cash.
6. Implementing financial controls:
An efficient system of financial management necessitates the use of various control devices. They are ROI, break even analysis, cost control, ratio analysis, cost and internal audit.
7. Proper use of surpluses:
A judicious use of surpluses is essential for expansion and diversification
plans and also in protecting the interests of share holders.
FINANCE FUNCTION – AIM
The objective of finance function is to arrange as much funds for the business as are
required from time to time. This function has the following objectives.
1. Assessing the Financial requirements.
The main objective of finance function
is to assess the financial needs of an organization and then finding out suitable
sources for raising them.
2. Proper Utilization of Funds.
The funds committed to various operations should be effectively utilised.The funds should be used in such a way that maximum benefit is derived from them.
3. Increasing Profitability.
The planning and control of finance function aims at increasing profitability of the concern.
Finance Function should be so planned that the concern neither suffers from inadequacy of funds nor wastes more funds than required.
4. Maximizing Value of Firm.
Finance function also aims at maximizing the value of the firm. It is generally said that a concern's value is linked with its
profitability.
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