When an organization manages the inflow and outflow of the cash, it is called finance.
Finance is the science of money.
As human being need blood to alive so as business organization needs money to operate.
Money is required to the organization in each and every step like starting business, expanding business, modernizing business, surviving in the adverse situation as well as to gain growth in business.
In simple words, the sum of money required to run a business is called finance.
Finance is the activity which is related to acquisition of assets and capital fund.
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The raising and managing of funds by business organizations is business finance.
The financial manager is responsible for planning, analysis and control operations.
Generally, financial manager is the top of the organizational structure of a firm.
In very large firms, finance committee takes financial decisions.
In small firms, the owner or manager takes financial decisions.
Lower-level staff conducts day-to-day work of business finance.
Their work includes handling cash receipts and disbursements.
It also includes borrowing from commercial banks on a regular and continuing basis and formulating cash budgets.
Financial decisions affect both the profitability; it also affects the risk of a firm’s operations.
Increase in cash holdings, it reduces risk of the firm but cash holding reduces the firm’s profitability.
Similarly, the use of additional debt can raise the cash of a firm but more debt means more risk.
Make a balance between risk and profitability is the task of finance.
Generally, finance function can be classified into three terms; they are:
Long-term means more than 3 years; it may be upto 30 years.
Long-term finance sources are owner’s capital (share capital), long-term loans, debentures, internal funds etc.
Firm uses long-term finance for the purchase of fixed assets like land and building, plant and machinery, vehicle etc.
Medium term means 1 to 3 years.
Medium term financial sources are loan from financial institutions.
Firm uses medium term finance for buying new fixed assets, expanse of the business etc.
This finance is also used for import the inventory (merchandise).
Short-term means upto one year.
Short-term financial sources are bank overdrafts, commercial paper, advances from customers, trade credit etc.
Firm uses short-term finance for the purchase of inventory (raw materials, goods and merchandise), payment of bills, payment day to day operating expenses.
Goal or Objectives of the Firm
The main goal or objectives of the firm related to finance function are explained below:
In Investment decision, the finance manager decides where to put or invest the company funds.
It is related to the management of working capital, capital budgeting decisions, management of mergers, buying or leasing of assets.
Investment decisions should create revenue on investment, profits and cost saving
Finance decision means from where to raise the funds.
There are two main sources to raise funds; they are equity and borrowing.
From these two decisions, mix of short and long-term financing should be made.
While choosing the short-term and long-term funds, time period, interest, dividend etc should be agreed upon.
Dividend is the return on common stock and preferred stock (equity shares and preference shares).
These are decisions as to how much, how frequent and in what form to return cash to shareholders.
A balance between profits retained and dividend paid should be decided here.
Liquidity means a firm has enough money to pay its bills when they are due.
Firm must have sufficient cash reserves to meet unforeseen emergencies.
This decision involves the management of the current assets.
Liquidity decision saves become insolvent or fail to make payments.
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