Importance of Finance: Objectives of Finance, Relationship of Finance and Scope of Finance
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Finance
Finance is the discipline (branch of study) or subject which help us to know how the money is generated and can be invested (managed) by an individual, by an organization, by government.
In other words, finance is the business activities which are concern with acquisition and conservation of capital funds in meeting the financial needs and overall objectives of business enterprises.
Importance of Finance
Finance is the science of money. As human being needs blood to survive similarly an organization needs money to perform different activates. It includes financial institutions (bank, finance company), industries, retail firms, production, education institutions, hospitals, individuals etc. The main importance of finance is given below:
To make capital decision
Every company needs capital for business establishment. For limited company, there are main three sources for capital decision. These are long-term loan for the company. They are:
Common stock (equity shares or ordinary shares)
Preference stock (preference shares)
Debentures or corporate bonds.
To make working capital decision
Every organization needs day-to-day expenses for operating activities. Such as purchase of raw materials, wages, salary, rent, office expenses, selling and distribution expenses etc. These expenses may be daily, weekly, monthly or yearly. These are short-term based.
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Working capital = Current assets – Current liabilities |
To make investment decision
Every organization needs long-term assets or fixed assets to run-on business smoothly. Fixed assets are income-generating sources for an organization. It is also known capital budgeting decision. Main fixed assets are plant, machinery, land, building, furniture, fixture, vehicles etc.
To make dividend decision
Every organization should distribute dividend to its shareholders. When an organization earns profit, it transfers some profit to reserves or fund. Remaining portion of profit is distributed as dividend to shareholders.
To increase profit
Success or failure of business is depended on profit. Therefore, profit is necessary for every organization. Finance manager must use available funds to increase profit. For this, cost of fund should be low and return on investment must be high.
To develop career
Every organization big or small, private or government must utilize resources efficiently. To do so they require capable and skillful manpower. The study of finance prepares you to take challenging job in private as well as government organization.
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Click on link for YouTube videos of Class 11: |
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Accounting Equation |
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Basic Journal Entries in Nepali |
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Basic Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cash Book |
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Trial Balance & Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Final Account: Class 11 |
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Adjustment In Final Account |
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Capital and Revenue |
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Single Entry System |
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Non-Profit Organization (Non-Trading Concern) |
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Government Accounting |
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Goswara Voucher (Journal Voucher) |
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Objectives of Finance
The main objectives of a business are survival and growth.
To survive in the business, the business must earn sufficient profits.
For optimum financial decisions, the financial manager must be cleared about its objectives.
He should target towards the achievement of overall business objectives.
Objectives provide a standard framework, which helps to take decisions correctly.
Financing is the functional area of the business.
It should also maintain proper relations with shareholders, customers, suppliers and other stakeholders.
The financial management of an organisation must seek to achieve the following objectives:
(a) To ensure adequate and regular supply of funds.
(b) To provide a fair rate of return to the suppliers of capital viz shareholders.
(c) To ensure effective utilization of funds by maintaining proper balance between profitability, liquidity and safety.
(d) To generate and build up sufficient surplus for expansion and growth through profits.
(e) To minimize cost of capital by developing a better mix of securities issued by the company.
(f) To co-ordinate the activities of the finance department with the activities of other departments in the organisation.
Relationship of Finance
Finance was the part of economics in ancient time.
But nowadays, it is separate subject.
Although it is separate subject yet there is close relation with the following subjects:
(A) FINANCE AND ECONOMICS
Finance was the part of economics till beginning of 19th century.
At the beginning of 19th century, finance came out as separate subject or field.
Therefore, economics is the father of finance. Under economics, we study theoretical knowledge.
But we study theoretical as well as practical knowledge in finance.
Economics focuses on maximum utilization of resources for human needs.
Finance focuses maximum utilization of capital for investors.
The factors of macro-economic such as monetary policy, fiscal policy, income level, inflation, deflation etc are also studied in finance.
The factors of micro economics such as demand and supply, profit maximization, utility, marginal analysis, pricing etc also studied in finance.
Thus, the financial manager should make the balance between the elements of micro and macroeconomics so that to make good financial decision.
It indicates the finance is closely with economics.
(B) FINANCE AND ACCOUNTANCY
The Venetian monk Luca Pacioli wrote the first published accounting work in 1494 AD.
It had given the knowledge of double-entry system of bookkeeping.
Finance was the part of economics till beginning of 19th century.
At the beginning of 19th century, finance came out as separate subject or field.
In this way, accountancy is older than finance for study.
We study theoretical as well as practical knowledge in both accountancy and finance.
The main work of accountancy is to record monetary transactions.
These transactions are recorded in financial statements like journal entries, ledger, trial balance, income statement and balance sheet etc.
Finance examines and analyses these financial statements to take rational financial decisions.
Thus, finance and accountancy are interrelated.
(C) FINANCE AND OTHER SUBJECTS
Nowadays, finance is separate area of knowledge.
It is able to make decision for financial institutions and business firms.
But it is depended on other subjects like statistics, mathematics, marketing, human recourse management etc.
It cannot derive its theories without these subjects.
Financial manger should have the knowledge of above mentioned subjects for decision making.
Therefore, indirectly these subjects effect the decision of financial manager.
It means, he/she should take care about such subjects.
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Click on link for YouTube videos |
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Share (Accounting for Share) |
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Share in Nepali |
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Debentures |
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Final Account: Class 12 |
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Final Account in Nepali |
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Work Sheet |
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Ratio Analysis (Accounting Ratio) |
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Fund Flow Statement |
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Cash Flow Statement |
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Theory Accounting Xii |
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Theory: Cost Accounting |
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Cost Accounting |
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LIFO−FIFO |
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Cost Sheet, Unit Costing |
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Cost Reconciliation Statement |
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Scope of Finance
Corporate finance
Corporate finance is the area of finance.
It deals with the sources of funding and the capital structure of corporation.
The manager takes action to increase the value of the firm.
Corporate finance is the study of sources of finance and how to use the money raised so as to add maximum value to the shareholders’ wealth.
Corporate finance managers are the most common users of financial accounting information.
They need to coordinate with other functions of the business such as production, marketing, administration etc.
Investments
Investment mainly focuses on the study of different securities, analysing the risk of security and return on securities.
It helps to minimize the risk and to maximize the return on investment.
These securities are shares, bonds, treasury bills etc.
It helps to choose right investment from wide market at right time.
Financial institutions and markets
Financial institutions help in transferring the funds from lenders to borrowers (saving surplus units to saving deficit units).
Financial markets refer to the place or mechanism where financial securities are bought and sold.
It helps in raising the capital, trading of securities, determining price and interest rate of the securities.
Public finance
Public finance is related with the management of funds by the government.
It is related to acquisition of fund for meeting the requirement of government expenditures.
The government collects the money from different sources like taxes, grants, loan etc.
These collected funds are spent on economic and social projects for the development of the nation.
Multinational finance
The study of flows of funds between individual and organization across national boundaries is multinational finance.
It helps to handle the multinational fund more effectively. Nowadays business are growing globally.
They need to invest in foreign currency.
Therefore, they need the knowledge of currency exchange rate.
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