Finance function

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The finance function is most important for all business enterprises. It remains a focus of all activities. It starts with the setting up of an enterprise. It involves: raising of funds, deciding the cheapest source of finance, utilisation of funds raised, making provision for refund when money is not required in the business, deciding the most profitable investment, managing the funds and paying returns to the providers of funds in proportion to the risks undertaken by them. Therefore, it aims at acquiring sufficient funds, utilising them properly, increasing the profitability of the organisation and maximising the value of the organisation and ultimately the shareholder's wealth.Financial management emerged as a distinct field of study at the turn of the 20th century. The evolution of Financial Management can be divided into three phases namely the traditional phase, the transitional phase, and the modern phase:

 

1. The Traditional Phase:

The traditional phase lasted for about four decades. buring this phase, Financial

Management was considered necessary only during occasional events such as formation, issuance of capital, major expansion takeovers, mergers, liquidation, etc. Also, when taking financial decisions in the organisation, the needs of outsiders (investment bankers, people who lend money to the business and other such people) to the business was kept in mind.

 

2. The Transitional Phase:

The transitional phase began around the early forties and continued through the early

fifties. buring this phase, the day-to-day problems that Financial Managers faced were given importance. The general problems related to funds analysis, planning and control were given more attention in this phase.

 

3. The Modern Phase:

The modern phase began in mid 50s and has witnessed an accelerated pace of development

with the infusion of ideas from economic theories and applications of quantitative methods of analysis. Modern phase is still going on. The scope of Financial Management has greatly broadened over this period. It is important to carry out financial analysis for a company. This analysis helps in decision making. During this phase, many theories have been developed regarding efficient markets, capital budgeting, valuation models and also in several other important fields in Financial Management. The point of view of the managerial decision maker has become dominant. Since the beginning of the modern phase many significant and seminal developments have occurred in the fields of capital budgeting, capital structure theory, valuation models, dividend policy, working capital management, etc.

 

4. IMPORTANCE OF FINANCIAL MANAGEMENT:

At any moment in time, a business firm can be viewed as a pool of funds. Thesefunds come from various sources i.e. equity shares, preference shares, debentures, financial institutions and past earning retained in the business. Funds raised from the sources are committed to a number of uses i.e. fixed assets used in production of goods and services, inventories used to facilitate production and sales, accounts receivable owed by customers and cash and marketable securities used for transactions and liquidity purposes. At a given moment, the pool of funds of the firm is static overtime, however, the pool changes; and these changes are known as funds flow. In an ongoing business funds flow continually throughout the enterprise. The term finance can be defined as the management of flow of funds through an organisation or procurement of funds (in flows) and their effective utilisation (outflows). It is an area looked after by the finance manager who deals with the following issues.