Finance is the planning for funding resources and raising, controlling, and disposing of the same of a business organization with a view to attaining the ultimate goal and maintaining good relations between its resources and the claim against these resources.
Business finance in a business organization, especially in a large-scale undertaking, is to perform several important functions.
Its importance is significant because if proper planning can not be made of finance, it may spell the death knell for the business.
The financial management plans how much fund is needed to carry out the firm’s operations. If a firm is to be started new, it is to determine its cash needs.
It is also responsible for making financial planning of capital budgeting, asset expansion, and machine replacement if it becomes obsolete or physically deteriorated. The proper planning of expenditures is fundamental to any financial management.
Raising of Fund
The financial management raises the requisite funds to meet the requirements of the business operations.
If the firm is short of funds, the financial manager must make arrangements for obtaining funds according to operating requirements. Funds may be needed for an initial undertaking, seasonal change, or permanent expansion.
Investment of Fund
The collection of funds is useless if they can not be invested properly. Financial management is responsible for ensuring the maximum utilization of funds for earning a maximum return. So, the firm’s funds must be efficiently managed to achieve the goal.
Allocation of Fund
A business’s basic finance function is to decide investment decisions and determine the capital demand for these expenditures.
The financial manager is concerned with the efficient allocation of funds. The allocation of funds is considered important enough to achieve the firm’s long-run objectives.
The financial management is to control the use of funds committed to s the operation of the concern. It must control the investment by checking the actual against the plan. The investment in operating assets must be carefully supervised to maximize their efficient utilization.
So, financial control is a very important function of financial management which keeps a vigilant eye on the flow of funds.
Protection of Fund
Financial management is also supervised to protect the capital supplied by the owners and creditors.
Suppose accrued income and unwise expenses are incurred due to inadequate planning. The owner’s interest would be hampered. There are also the dangers of theft and embezzlement or misappropriation of funds.
Therefore, the financial manager should have close stewardship over the firm’s assets.
The firm’s fixed cost remains constant while profits fluctuate at a higher degree than fluctuations in sales.
Profit planning helps to anticipate the relationships between volume, costs, and profits and develop action plans to face unexpected surprises. It is, therefore, a prerequisite for optimizing investment and financing decisions.
If a firm needs funds, it may either borrow it from outside or retain a part or whole of the profits to finance the requirements if there are adequate profits.
Many firms plow back profits to businesses to avoid outside financing, which is more costly than retained earnings. A firm may plan for a surplus in years of prosperity to cover expected deficits in hard times.
Distribution of Profit
Financial management is to determine the disposition of the funds represented by the net income. It may decide to distribute profits as an aid to financing or retain profit and avoid outside financing.
The outstanding debt may be retired from the funds represented by undistributed profits or retained earnings.
Understanding Capital Market
The financial management has to deal with the capital market, where the firm’s securities are traded. The financial manager should fully understand the operations of capital markets and how securities are valued.
He or she should also know how risk is measured in capital markets and how to cope with it, as investment and financing decisions often involve considerable risk.
In addition to the above, business finance also has other importance.
In the promotion of a firm, in financial readjustments of the relations of creditors and owners, in case of liquidation of a firm, and the cases of sale or exchange in value, the problems of valuation and financing, the financial management has a great deal of impact perform.
Business finance is considered a vital and integral part of overall management.