02-07-2013, 01:12 PM
AIMS AND FUNCTIONS OF FINANCE
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INTRODUCTION
Financial Management is nothing but management of the limited financial resources the organisation
has, to its utmost advantage. Resources are always limited, compared to its demands or needs.
This is the case with every type of organisation. Proprietorship or limited company, be it public or
private, profit oriented or even non-profitable organisation.
FINANCE FUNCTION– IMPORTANCE
In general, the term “Finance” is understood as provision of funds as and when needed. Finance is
the essential requirement –sine qua non– of every organisation.
Required Everywhere: All activities, be it production, marketing, human resources development,
purchases and even research and development, depend on the adequate and timely availability of
finance both for commencement and their smooth continuation to completion. Finance is regarded
as the life-blood of every business enterprise.
Efficient Utilisation More Important: Finance function is the most important function of all
business activities. The efficient management of business enterprise is closely linked with the
efficient management of its finances. The need of finance starts with the setting up of business.
Its growth and expansion require more funds. The funds have to be raised from various sources.
The sources have to be selected keeping in relation to the implications, in particular, risk attached.
Raising of money, alone, is not important. Terms and conditions while raising money are more
important. Cost of funds is an important element. Its utilisation is rather more important. If funds
are utilised properly, repayment would be possible and easier, too. Care has to be exercised to
match the inflow and outflow of funds. Needless to say, profitability of any firm is dependent on
its cost as well as its efficient utilisation.
NATURE OF FINANCIAL MANAGEMENT
Financial management refers to that part of management activity, which is concerned with the
planning and controlling of firm’s financial resources. Financial management is a part of overall
management. All business decisions involve finance. Where finance is needed, role of finance
manager is inevitable. Financial management deals with raising of funds from various sources,
dependant on availability and existing capital structure of the organisation. The sources
must be suitable and economical to the organisation. Emphasis of financial management is more on
its efficient utilisation, rather than raising of funds, alone.
The scope and complexity of financial management has been widening, with the growth of
business in different diverse directions. As business competition has been increasing, with a greater
pace, support of financial management is more needed, in a more innovative way, to make the
business grow, ahead of others.
Traditional Approach
The scope of finance function was treated, in the narrow sense of procurement or arrangement of
funds. The finance manager was treated as just provider of funds, when organisation was in need
of them. The utilisation or administering resources was considered outside the purview of
the finance function. It was felt that the finance manager had no role to play in decisionmaking
for its utilisation. Others used to take decisions regarding its application in the organisation,
without the involvement of finance personnel. Finance manager had been treated, in fact, as an
outsider with a very specific and limited function, supplier of funds, to perform when the need of
funds was felt by the organisation.
FUNCTIONS OF FINANCE
Finance function is the most important function of a business. Finance is, closely, connected with
production, marketing and other activities. In the absence of finance, all these activities come to a
halt. In fact, only with finance, a business activity can be commenced, continued and expanded.
Finance exists everywhere, be it production, marketing, human resource development or undertaking
research activity. Understanding the universality and importance of finance, finance manager
is associated, in modern business, in all activities as no activity can exist without funds.
Financial Decisions or Finance Functions are closely inter-connected. All decisions mostly
involve finance. When a decision involves finance, it is a financial decision in a business firm. In
all the following financial areas of decision-making, the role of finance manager is vital.
Finance Decision
Once investment decision is made, the next step is how to raise finance for the concerned
investment. Finance decision is concerned with the mix or composition of the sources of
raising the funds required by the firm. In other words, it is related to the pattern of
financing. In finance decision, the finance manager is required to determine the proportion of
equity and debt, which is known as capital structure. There are two main sources of funds,
shareholders’ funds (variable in the form of dividend) and borrowed funds (fixed interestbearing).
These sources have their own peculiar characteristics. The key distinction lies in the
fixed commitment. Borrowed funds are to be paid interest, irrespective of the profitability of the
firm. Interest has to be paid, even if the firm incurs loss and this permanent obligation is not
there with the funds raised from the shareholders. The borrowed funds are relatively cheaper
compared to shareholders’ funds, however they carry risk. This risk is known as financial
risk i.e. Risk of insolvency due to non-payment of interest or non-repayment of borrowed
capital.