The Finance Function

Introduction:

The managerial process which is concerned with the planning and control of organizations
financial resources is said to be financial management. Till 1890s, matters related with finance
were a part of Economics and has been recognized as a different discipline very recently. Even
now, it relies on Economics for its theoretical ideas to a great extent and has no distinct structure
of its own.

To both, active managers and academicians it is a subject matter of great importance. For
academicians, it is still in the process of development and its certain areas are controversial
without solutions that are not acceptable to all. It is a topic of immense interest to the working
managers for the most vital decisions concerning a business are related to finance, and, an insight
into the theory of finance equips them with the important concepts and analytical tools.

Scope

Creating capacity for producing goods and/or providing services to their customers, and to earn
profit is the goal of a business organization. In the process they raise capital to start
manufacturing and other facilities. The most important parts of a business organization are
production, marketing, and finance. A firm organizes the capital it requires and uses it in
processes that yield profits on investment. Real assets are necessary to carry-out its activities.

Physical assets that include office, building, furniture, factory, plant, and machinery are tangible
real assets. Copyrights, patents, technical knowledge, and technological collaboration come
under intangible real assets. Securities, financial instruments and papers, such as debentures or
bonds and shares are financial assets. Securities are issued by the organizations to investors in
the primary capital markets to raise funds, called equity funds, which are bought and sold in the
secondary market (stock exchange). Creditors are also an important source of acquiring capital
on the rate of interest.

Finance function: The separation of the functions of finance from production, marketing, and
others may be difficult, but they can be readily identified. Financing, investment, and dividend
decisions are the functions of drawing funds, investing them in assets and distributing returns
earned on assets to shareholders, respectively. Apart from these functions, inflow and out flow of
cash balances is tuned by the business firm which is called liquidity decision. Therefore, finance
functions include short-term asset-mix or liquidity decision, long-term asset-mix or investment
decision, capital-mix or financing decision, and profit allocation or dividend decision.
Finance functions are simultaneously and continuously performed by firms in the ordinary
course of the business, but a sequence is not a must. Finance function requires expertise in
planning, control, and execution of the activities of a business. Financial decisions that increase
the value of shares make the shareholders better-off and the whole finance function centers
around that objective.