Definition of finance
Financial management is that managerial activities which is concerned with the planning and controlling of the firms financial resources. The subject of finance is of immense interest to both academics and practicing managers, finance can be defined as the isauance of ,the distribution of , and purchase of liability an equity claims issues for the purpose of generating revenue and profit producing asset according to the economists Jones and Dudley in 1978.
Scope of finance
What is finance? What are a firms financial activities? Firms create manufacturing capacities for the production of goods and services; some firms provide services to customers. They sell their goods or services to earn profit.
They raise funds to acquire manufacturing and other facilities. Thus the three most important activities of a business firms are as follows:
1. Production
2. Marketing
3. Finance
A firm secure whatever capital it needs and employs it finance functions and activities,which generate returns on investment capital (production and marketing activities).
Functions of finance
It may be difficult to separate the finance function from production, marketing and other functions,but the functions themselves can be readily identified . The finance functions if raising funds,investing them in asset and distributing returns earned from asset to shareholders are respectively known as financial decisions, investment decisions and devidend decisions. A firm attempt to balance cash inflow and outflow while performing this finance functions. This is called liquidity decisions,and we may add it to the list of important finance decisions or functions. Thus finance functions may include the following:
1. Long term asset or investment decision.
2. Capital minor finance decisions
3. Profit allocation or devidend decisions short-term asset mix or liquidity decisions
Investment finance functions;
This involve the identification of viable project therefore it deals with the appraisal of projects using various technology to determine those that are viable. The two important aspect of investment decision of finance functions are as flows;
1. The evaluation of the prospective profitability of new investment opportunities.
2. The measurements of a cut off rate against that the prospective return of new investment opportunities could be compared.
Financing functions decisions;
This functions involves the identification of the main source of finance that would be use to finance the business projects. Considering that it is usually given to;
1. The cost associated with each of the source of finance there fore the cost of capital
2. The characteristics of each sources.
3. The level of risk if the project under consideration
4. The perttern of cash flow from the business project
5. The availability of each sources
6. The taxation
7. The amount involved for the project befibethe final settlement is made.
In prcaticao terms ,a firm will consider many other factors that are controlling flexibility, loans, The legal aspect deciding it's finance and capital structure.
Devidend finance function decisions;
There attention is focused in the compensation required by the providers of finance, therefore this is determine by the appropriate amount to be given as payments if devidend and the profit that will in turn be ploughed back for the expansion of the business firm. Thus, this finance function decision being the third major financial decisions, considers the following aspect;
1. Optimum dividend policy
2. Dividend payout ratio.
The managers in financial sections of a business firm should conseqeuntial the question of stability of dividend, bunus shares and cash dividend in practical terms.
Liquidity finance function decision;
Investment in current assets affects the business firms profitability and liquidity. The current asset management that effects a business firm liquidity is yet another importance finance function. Current asset against the risk of illiquidity.
The financial functions and roles of managers
The question here is who is a manager ? What is the role and functions of a manager?. A financial manager is an individual who is saddle with the responsibility, in a significant way, to carry out the finance functions of a business firm. It should be noted that , in a modern day enterprises, the financial manager takes and uccupy a very key position in any business firm. He or she is one of the important members of the management board , and the role day to day , is becoming more persuasive, intensive and significant in solving the complex finance function mansmanage problems and challenge.
Now the managers finance function is not confined to that to that of a scorekeeper maintaining records , preparing reports and raising finance when it is needed.
The finance manager is now responsible for shaping the fortunes of the eterprise, and involves in the most vital decisions if the allocation of finance for capital project.
The finance function and role of a manager, he or she will need to have a broader and effective outlook of financial event ,and must ensure that finance of the business Enterprise are utilize in the most effective and efficient manner . The finance manager must realize that his or her actions have a great impact and consequenses for the business firm because they manager can influence the size , profitability, growth ,risk and survival of the business firm , and as an impact, which can affect the overall finance functions of the business firm. The financial manager, therefore, must have a clear knowledge and understanding and an efficient graps of the nature and scope of the finance functions.
For more information on the functions and roles of a manager visit;
Finance function classification;
Finance functions can be classified under three section which is ;
- Short term finance
- medium term finance
- Long term finance
Short term finance function:
This finance classification deals with investment that is within a period of a year and the aspected return on investment is determined before the coming year ahead all plans are done and concluded within that specific year of investment. Funds and finance can be aquire from banks , overdraft, advances from your customer and also commercial paper.
Medium term finance function;
This finance classification deals with investment by business firm within one to three years the budget of the firm on investment is at this period any increase in years will be tag as a long term finance functions. Finance and capital can be source from the commercial banks in form of loans and akso financial institutions.
Long term finance function;
This type of finance function deals with investment by business firms from three years and above investment bare done with the speculative motive that the future will be profitable. The sources of funds for this finance function is usually owners capital , long term loan from financial institutions,share capital, and also depenture s and partnerships in investment.
Read more; IMPORTANCE OF FINANCE PLANNING
Finance function involves
- To make sure that there is enoghe funds and capital at a more reasonable and effective cost
- To make sure that their is an effective and efficient utilization of funds and capital for the purpose of profit maximisation
4. To make sure funds and capital are not idle but put to use through investment to increase revenue and profit.
Why business firms need finance function:
- Helps in the establishment of the starting business ideas the firm or individual has in mind
- Helps in running the business effectively and efficiently
- For expantion , diversification and the modernization of the business, therefore any business business established most evolve and grow with the current changes of the economy and it trends
- For asset purchase , therefore buying equipment needed to run the business firm this may include chairs, computers gadget a warehouse house for keeping products.
Finance function importance;
- Need identification of finance: The need to identify the business plan that the firm is planning to established
- Identification of the sources of finance; The sources of financing the business idea must be clear for effective take off of the business plan in hand
- Comparing various finance sources; The sources of finance must be look into and the most accommodating and low risk will be choosing for financing the business.
- Investment move; At this point the businesses can take off because all the required asset are in place to start the running of the business.
Functions of finance can not be over emphasis, because it is very important in any business organization or even as an independent you need finance to solve some family problems, business firms are mostly they ones who need financial assistance to grow and increase the various business venture in the economy, and nation at large.
Also finance functions can varies from company to company some may need finance to settle depts, pay employees, others nay need finance to invest in other business,buy equipment for production in the company.
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