Finance is the art and science of managing money. The discipline of finance is concerned with the procurement, allocation, application and disbursement of money by a business entity in order to maximize its return on invested capital. It includes financial services and financial instruments.
The subject of finance is divided into two broad categories:
While public finance deals with the procurement, allocation and disbursement of funds in the public sector institutions (Central, State and Local government institutions), Private Finance is concerned with the procurement, allocation and disbursement of funds in the private sector firms (Individual firms, profit making businesses and non-profit organizations. Private Finance can be further divided into Personal Finance, Business Finance and Finance of Non-profit organizations.
Concept of Finance:
As every business needs finance to carry on its operations and to achieve its objectives Finance may also be simply defined as provision of money at the time of need.
However there are three main approaches to finance:
The first approach views finance as an activity of providing funds to a business entity at the time of need and on favourable terms keeping in mind the firm`s objectives.
The second approach relates finance to cash. It views finance as broad-based function and relates it to all activities taking place in a business
According to the third approach Finance is concerned with raising of funds and their effective utilization in a business.
Finance Function: Every firm secures the capital it needs and employs it in activities which generate return on invested capital. Finance Function refers to the procurement of funds and their effective utilization in the business concern.
Nature of Finance Function:
It is an integral and central function to all business organizations
It plays a significant role in long-term growth and survival of a business
It helps in managerial decision making through analysis and interpretation of financial data
It is interrelated to other primary business functions like marketing, human resource planning, production planning etc.
It helps in valuation of a business
Scope of Finance Function:
Its scope lies in the following activities-
Estimating Financial Requirements of a business
Selecting a source of Finance
Making good investment decisions
Determining the Capital structure of a firm
Management of Cash Flows
Implementing Financial Control
Meaning of Financial Management:
Financial management is that managerial activity which is concerned with the planning and controlling of a firm’s financial resources. It is a permanent and continuous process for every business concern.
According to Solomon: “Financial Management is concerned with the efficient use of an important economic resource, namely, Capital Funds”
According to Howard and Upton: “Financial Management is an application of general managerial principles is to the area of financial decision making”
Financial Management Process:
Factors influencing Financial Management decisions-
State of Economy
Structure of Capital and Money markets
Requirements of Investors
Lending policy of financial institutions
Nature and Size of business
Expected Return, Cost and Risk Involved
Composition of Assets
Structure of Ownership
Trend of Earnings
Age of the Firm
Working capital requirements
Conditions of debt agreements
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