The scope of finance function is very wide. While accounting is concerned with the routine type of work, finance function is concerned with financial planning, policy formulation and control.
Scope of Finance Function
The scope of finance function is
very wide. While accounting is concerned with the routine type of work, finance
function is concerned with financial planning, policy formulation and control.
Earnest W. Walker and William are of the opinion that the financial function
has always been important in business management. The financial organiastion
depends upon the nature of the organization – whether it is a proprietary
organsation, a partnership firm or corporate body. The significance of the
finance function depends on the nature and size of a business firm. The role of
various finance officers must be clearly defined to avoid conflicts and the
overlapping of responsibilities. The operational functions of finance include:
Financial planning
Deciding the capital structure
Selection of source of finance
Selection of pattern of investment
Financial Planning
The first task of a financial
manager is to estimate short-term and long-term financial requirements of his
business. For this purpose, he will prepare a financial plan for present as
well as for future. The estimation of fund is essential to purchase fixed
assets as well as for the rotation of working capital. The estimations should
be based on sound financial principles so that neither there are
inadequate nor excess funds with the concern. The inadequacy of funds will
adversely affect the day-to-day operations of the concern whereas excess funds
may tempt a management to indulge in extravagant spending or speculative
activities.
Deciding Capital Structure
The Capital structure refers to
the kind and proportion of different securities for raising funds. After
deciding about the quantum of funds required it should be decided which type of
securities should be raised. It may be wise to finance fixed assets through
long-term debts. Even if gestation period is longer, then share capital may be
most suitable. Long-term funds should be raised. It may be wise to finance
fixed assets through long-term debts. Even here if gestation period is longer,
then share capital may be most suitable. Long-term funds should be employed to
finance working capital also, if not wholly then partially. Entirely depending
upon overdrafts and cash creditors for meeting working capital needs may not be
suitable. A decision about various sources for funds should be linked to the
cost of raising funds. If cost of raising funds is very high then such sources
may not be useful for long.
Selection of Source of Finance
After preparing a capital
structure, an appropriate source of finance is selected. Various sources, from
which finance may be raised, include share capital, debentures, financial
institutions, commercial banks, public deposits, etc. If finances are needed
for short periods then banks, public deposits and financial institutions may be
appropriate; on the other hand, if long-term finances are required then share
capital and debentures may be useful. If the concern does not want to tie down
assets as securities then public deposits may be a suitable source. If
management does not want to dilute ownership then debentures should be issued
in preference to share.
Selection of Pattern of Investment
When funds have been procured
then a decision about investment pattern is to be taken. The selection of an
investment pattern is related to the use of funds. A decision will have to be
taken as to which assets are to be purchased? The funds will have to be spent
first on fixed assets and then an appropriate portion will be retained for
Working Capital. The decision-making techniques such as Capital Budgeting,
Opportunity Cost Analysis, etc. may be applied in making
decisions about capital expenditures. While spending on various assets, the
principles of safety, profitability and liquidity should not he ignored. A
balance should be struck even in these principles.
Tags : Financial Management - Finance – An Introduction
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