Introduction to Business Finance: Concept of Finance, Goal of the Firm, Finance Functions

–

 

 

Concept of Finance

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.

 

#####

Click on link for YouTube videos of Class 11:
Accounting Equation	http://tiny.cc/c89jkz
Basic Journal Entries in Nepali	http://tiny.cc/uaakkz
Basic Journal Entries	http://tiny.cc/8aakkz
Journal Entry and Ledger	http://tiny.cc/caakkz
Ledger	http://tiny.cc/haakkz
Subsidiary Book	http://tiny.cc/399jkz
Cash Book	http://tiny.cc/889jkz
Trial Balance & Adjusted Trial Balance	http://tiny.cc/c59jkz
Bank Reconciliation Statement (BRS)	http://tiny.cc/q59jkz
Depreciation	http://tiny.cc/ugakkz
Final Account: Class 11	http://tiny.cc/y89jkz
Adjustment In Final Account	http://tiny.cc/keakkz
Capital and Revenue	http://tiny.cc/peakkz
Single Entry System	http://tiny.cc/n19jkz
Non-Profit Organization (Non-Trading Concern)	http://tiny.cc/j09jkz
Government Accounting	http://tiny.cc/hcakkz
Goswara Voucher (Journal Voucher)	http://tiny.cc/hcakkz

#####

 

Business Finance

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.

 

 

Finance Function

Generally, finance function can be classified into three terms; they are:

Long-term finance

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 finance

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 finance 

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:

Investment decisions

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

 

Financing decisions

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 decisions

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 decisions

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.

 

***** #EPOnlineStudy *****

Thank you for investing your time.

Please comment on article.

You can help me by sharing this article at your social media platform.

 

Jay Google, Jay YouTube, Jay Social Media

जय गूगल, जय युट्युब, जय सोशल मिडिया