Each one of you must be having your own idea about the word ‘Finance’. The various view points about Finance can be listed as below:
- Finance is concerned with flow of cash. The emphasis is on the liquidity aspect. All the policy decisions, objectives and activities / transactions are ultimately expressed in financial terms – present or future.
- Finance means acquiring / arranging funds for payment of bills
- Finance is concerned with procurement of funds and their wise or effective use or application
Finance Function
The finance functions can be grouped as below:
Recurring Finance Functions
These are the finance functions which are carried out in the regular conduct of the business.
Planning for funds
- Deciding in advance the quantum of fund requirements and its duration, to achieve the primary objective of the organization
- Deciding the working capital reserve
- Forms in which the total required funds are to be raised gets reflected in capital structure
Raising of Funds
- Issue of securities using stock brokers, if desired and underwriters, if required.
- Preparation of project plan & negotiating with financial institutions, for borrowing money
Allocation / Application of Funds
- Considering competing uses, immediate requirements, profit prospects and overall management plans
- Capital expenditure in fixed assets, only to meet the current as well as the increased demand for the company’s product.
- Efficient administration of financial aspects of cash, receivables and inventories.
- Control of funds, comparing the actual with the plan / estimates and actions for deviations
Allocation of Income
- To retain the income for financing expansion or to distribute to the owners as return on capital in the form of dividends
- The portion of earnings to be distributed as dividend considering the share price to be maintained, financial position of the company, cash requirements, shareholders preferences etc.
Non-recurring Finance Functions
These are the finance functions which are to be performed very rarely i.e. while floating the organization, during liquidity crisis or at the time of merger or reorganization of the organization etc.
Preparation of financial plan at the time of promotion of the enterprise, financial adjustment in times of illiquidity crisis, valuation of the enterprise at the time of merger or reorganization of the enterprise and similar other activities are of episodic character. Successful handling of such problems requires financial skills and understanding of principles and techniques of finance peculiar to non-recurring situations.