Finance is said to be the life blood of an organisation. The most common way to explain finance is money.
A Family needs money to meet its needs Like Food, Clothing, Education, Rent, Convenyance etc. Govt needs money to pay salaries of staff and carry out development work etc. Expenses and Taxes Hospitals, Schools, Religious bodies etc.I need money to carry their activities. Therefore, Individuals need money to satisfy their needs and organisations need it to attain objectives.
Finance may be defined as that administrative area or set of administrative functions in an organisation which relate with the arrangement of cash and credit so that the organisation may have the means of carrying out its objectives as satisfactory as possible.
Finance represents long term and short term money requirements of an individual or an organisation. It is a science of money that by its principles and methods explains how to acquire, Administer and control finance.
Functions of Finance
Financial planing: Financial means estimating money requirement of an enterprise. It include makings a realistic estimate of funds required to meet long term and short term needs. Estimating long term requirements includes decision to invest in fixed capital of business. Short term requirements include estimating working capital requirements. Therefore, financial planning is forecasting requirements of finance for fixed and working capital.
Fiancial Decision: After determining financial requirements, sources of raising finance are to be identified. Identification of source to raise required finance is called financing decision or capital structure decision. There are two sources of arranging finance, viz., external and internal sources.
Issue of shares, debentures, bonds and borrowing from bank, financial institution , public deposits are external sources of finance. ploughing back the profits like retained profits or reverse to meet financial requirements is the internal source of finance. To what extent an organization uses external or internal source(s) or finance depends upon factors like cost of raising funds, committed cost, i.e., interest, availability and capital structure, etc.
Investment Decision: After asscertaining financial requirements and deciding sources to arrange it, financial manager has to decide to its allocation. Allocation of available funds mean deciding how much to invest in fixed assests like building, plant and machinery, equipments etc and how much to invest in current assets like stock, raw materials, tools, stores, debtors, etc. Decision to invest in fixed assets is called capital budgeting. Decision to invest in current assets is called working capital management.
Dividend Decision: It is a return or money invested in shares of a company. Dividend in distributed to preference and rquity shareholders. Dividend decision involves two decision First, how much of profit is to be retained in business to meet its requirement. Second , how much profits in to be distributed to shareholders to meet their expectations of fair return on their investment.
A Family needs money to meet its needs Like Food, Clothing, Education, Rent, Convenyance etc. Govt needs money to pay salaries of staff and carry out development work etc. Expenses and Taxes Hospitals, Schools, Religious bodies etc.I need money to carry their activities. Therefore, Individuals need money to satisfy their needs and organisations need it to attain objectives.