Functions of Finance
Generally, finance functions are carried on to achieve the goals of the firm. The Finance Function is a part of financial management. Finance functions are mainly viewed from two approaches; ‘raising of funds’ and ‘raising and allocation of funds’. In a business, the finance function involves the acquiring and utilization of funds necessary for efficient operations. The first approach confines the finance functions to the procurement of funds only and ignores the use of funds. It was the major finance function at the early stage of the development of finance.
The second approach is comprehensive and universally accepted. Nowadays, we follow the second approach. Alternatively, finance functions may be viewed on the basis of the level of managerial attention required to get them performed. Finance is the lifeblood of a business without it things wouldn’t run smoothly. It is the source to run any organization, it provides the money, it acquires the money. On this basis, finance functions may be classified as managerial finance functions and routine finance functions as below.
(1) Managerial finance functions
- Investment decisions – One of the most important finance functions is to intelligently allocate capital to long term assets. This activity is also known as capital budgeting.
- Financing decisions – It is important to make wise decisions about when, where and how should a business acquire funds. Funds can be acquired through many ways and channels.
- Dividend decisions – It’s the financial manager’s responsibility to decide an optimum dividend policy which maximizes the market value of the firm. Hence an optimum dividend payout ratio is calculated.
- Working capital decisions – It is very important to maintain a liquidity position of a firm to avoid insolvency. Firm’s profitability, liquidity, and risk all are associated with the investment in current assets.
(2) Routine finance functions
- Supervision of cash receipts and disbursement
- Safeguarding of cash balances
- Custody and safeguarding of valuable documents like securities and insurance policies
- Taking care of mechanical details of financing
- Record keeping of the financial performance of the firm
- Reporting to the top management
- Supervision of fixed assets and current assets.