Finance
The scope of financing is very wide. Finance plays an important role in all spheres of personal life, family, society, and government. Just as the economic activities of life cannot be imagined without money, every business or non-business organization cannot run without money. Money is said to be the lifeblood of business. Generally, money means only cash or bank deposits. But in business terms, money does not mean only cash; it includes checks, shares, bonds or debentures, bills receivable, prize bonds, etc., along with many other things. Collection, use, savings, and related overall activities of money are called finance.
Finance mainly deals with the collection and management of funds. Financing is the planning and implementation of how much capital is needed to run a business, from which sources to raise that capital, and how to invest it to maximize business profits. In the case of a manufacturing firm, income comes from the sale of products. This production requires machines, raw materials, workers, etc. Capital is required for the purchase of machinery, raw materials, and payment of labor wages, etc. Proper management of these requires proper use of money or capital. So finance refers to the process of collecting, investing, and controlling money.
The concept of finance and its application are essential everywhere, including business and non-business organizations, and government institutions.
As much as financing is important for small enterprises, it is undoubtedly more essential for large enterprises. Building and running a large organization requires huge amounts of money. Land, buildings, machinery, etc., first require a large amount of fixed costs or capital. For such capital raising, sources such as the sale of company shares and debentures, and the collection of long-term loans, etc., are used. Such loans can be collected from various specialized banks, commercial banks, leasing companies, etc. After setting up, it requires a lot of working capital for various needs, including raw materials, procurement of various materials, wages of workers, and payment of salaries and allowances to employees, and fuel costs. These are met from various sources of short-term financing. Once the production starts, the proceeds from the sale need to be used properly. So, for setting up and running an industrial unit, proper planning and its proper implementation and effective control of the flow of money are necessary. Otherwise, the organization will never reach its desired goals.
Function of Finance
There was a time in the past when only collection of funds was considered as function of finance. After evolution of time, currently the functions of finance are includes collection of money, investment of fund, proper money management, risk management, profit distribution, i.e. the overall functions related to finance. Below are the details:
1. Financial Planning:
Financial planning is important in determining the amount of money, time, proper expenditure of funds required to carry out a task and the judgment and scope of activities involved. It is considered first in all public and private sectors.
2. Identify the Source of Fund
After adopting the financial plan it is considered from which source the money will be raised. The main considerations in selecting the source are the nature of the fund’s source, adequacy, tenure and cost of raising money from the source. In the case of a business organization, the sources of money collection can be divided into two categories:
a) Internal Sources: Own capital.
b) External Sources: Bank Loans, Creditors, Share Debentures.
3. Procurement of fund
The third task of financing is to collect funds by signing an agreement specifying the amount of loan funds, interest rate, payment method, duration, reserve system etc. through mutual discussion between the lender and the recipient from the selected source. In this case, security is also arranged if required.
4. Fund Utilization
Investing funds in the most profitable sectors according to financial planning is one of the most important task of financial functions. In this case, the investment decision is taken by considering the possible risks, profit, duration, cost etc. of the project.
5. Risk-Return Trade Off
There is a proverb in English “no risk, no gain” that means profit is impossible without risk. It must be remembered that, risk must be taken to earn profit, but such risk cannot be taken that destroys the total investment. Therefore, balancing risk with potential returns is one of the key functions of financing.
6. Cost Control
The objective of financing is to keep the costs associated with a task within a certain limit, That is to say, producing products or services which is cost-effective and utility-oriented.
7. Protection of Fund
Keeping in mind the possible risks and uncertainties of the investment project, making necessary arrangements to preserve the invested funds, through regular audit, supervision and control.
8. Cash Flow Projection
There is constant outflow and inflow of cash as a result of business transactions. Cash is an important tool for running a business. So cash inflows need to match cash outflows.
9. Asset Management
Proper utilization of financial management is achieved through efficient management and utilization of assets. Raise long-term funds for fixed assets and short-term funds for current assets, and it is also important to properly allocate the assets to the project and make maximum use of them.
If you invest more money, a liquidity deficit may occur. Similarly, investing less money can reduce profits. Therefore, investment should be balanced between dividend power and liquidity.
10. Distribution of Profit
Determining what percentage of the profits earned by investing in selected projects will be distributed among the share-holders, who will get how much of the profits, how the undistributed profits will be reinvested—is another function of financing.
More Resources
Thank you for reading our resources on the Introduction to Finance. Enhancing your knowledge more and progressing in your career, you may find the following guides helpful: