Finance Function

Nikunj PatelAssistant Professor

Institute of Management,

Nirma University,

Ahmedabad

Career Opportunities in Finance

• Financial Analyst – prepares and analyze firm’s financial plans and

budgets; other duties include financial forecasting, financial ratio

analysis.

• Capital budgeting analyst/manager – evaluation/recommendation of

proposed asset investments, implementation of approved projects.

• Project finance manager –arranges financing for approved asset

investments; coordinates with investment bankers and legal counsel.

• Cash manager - maintain and control firm’s daily cash balances;

manages cash collection, short-term investment/borrowing,

disbursement activities and banking relationships.

• Credit analyst/manager – administers firm’s credit policy by

analysing/managing the evaluation of credit applications, extending

credit, monitoring/collecting A/R’s.

What Is Finance?

Finance is the study of how and under what

terms savings (money) are allocated between

lenders and borrowers.

Finance is distinct from economics in that it

addresses not only how resources are

allocated but also under what terms and

through what channels

Financial contracts or securities occur whenever

funds are transferred from issuer to buyer.

CONCEPT OF FINANCIAL MANAGEMENT

• Financial management deals with the study of procuring

funds and its effective and judicious utilisation, in terms of

the overall objectives of the firm, and expectations of the

providers of funds.

• The purpose is to achieve maximisation of share value to

the owners i.e. equity shareholders.

• “Financial Management is concerned with the efficient use

of an important economic resource, namely, Capital Funds”

—Solomon

• “Financial Management deals with procurement of funds

and their effective utilisation in the business” —S.C.

Kuchhal

SCOPE OF FINANCIAL MANAGEMENT

Broadly, it has two approaches:

• Traditional Approach-Procurement of Funds

• Modern Approach-Effective Utilisation of Funds

Traditional financial management:

(i) Estimation of requirements of finance,

(ii) Arrangement of funds from financial

institutions,

(iii) Arrangement of funds through financial

instruments such as shares, debentures, bonds

and loans, and

(iv) Looking after the accounting and legal

work connected with the raising of funds.

Limitations

• No Involvement in Application

of Funds

• No Involvement in day to day

Management

• Not Associated in Decision-

Making Allocation of Funds

SCOPE OF FINANCIAL MANAGEMENT

Broadly, it has two approaches:

• Traditional Approach-Procurement of Funds

• Modern Approach-Effective Utilisation of Funds

Modern financial management:

The emphasis of Financial

Management has been shifted from

raising of funds to the effective and

judicious utilisation of funds. The

modern approach is analytical way of

looking into the financial problems of

the firm.

AIMS OF FINANCE FUNCTION

• Acquiring Sufficient and

Suitable Funds

• Proper Utilisation of

Funds

• Increasing Profitability

• Maximising Firm’s Value

FUNCTIONS OF FINANCE

• Understanding the universe and importance of finance,

finance manager is associated, in modern business, in all

activities as no activity can exist without funds

(A) Investment Decision or Long-term Asset mix decision

(B) Finance Decision or Capital mix decision

(C) Working Capital or Liquidity Decision or Short-term asset

mix decision

(D) Dividend Decision or Profit allocation decision

FUNCTIONS OF FINANCE

• Capital budgeting– What long-term investments or projects should

the business take on?

• Capital structure– How should we pay for our assets?

– Should we use debt or equity?

• Working capital management– How do we manage the day-to-day finances of

the firm?

• Dividend Decision– How much should be distributed as dividends?

DECISIONS, RETURN, RISK, AND MARKET VALUE

Capital Budgeting

Decisions

Capital Structure

Decisions

Dividend

Decisions

Working Capital

Decisions

Return

Risk

Market Value of

the Firm

Financial Manager

• Financial managers try to answer some, or all, of

these questions

• The top financial manager within a firm is usually

the Chief Financial Officer (CFO)• Treasurer – oversees cash management, credit

management, capital expenditures, and financial

planning

• Controller – oversees taxes, cost accounting, financial

accounting, and data processing

Corporate Organization Chart

Function of Financial Manager

Operations

(plant,

equipment,

projects)

Financial

ManagerFinancial

Markets

(investors)

1a.Raising

funds2.Investments

3.Cash from

operational

activities

4.Reinvesting

1b.Obligations

(stocks, debt

securities)

5.Dividends or

interest

payments

Finance function – managing the cash flow

Sole Proprietorship

• Advantages

• Easiest to start

• Least regulated

• Single owner keeps all of

the profits

• Disadvantages

• Limited to life of owner

• Equity capital limited to

owner’s personal wealth

• Unlimited liability

Business owned by one person

Partnership

• Advantages

• Two or more owners

• More capital available

• Relatively easy to start

• Disadvantages

• Unlimited liability

• Partnership dissolves

when one partner dies or

wishes to sell

• Difficult to transfer

ownership

Business owned by two or more persons

Company

• Advantages

• Limited liability

• Unlimited life

• Separation of ownership

and management

• Transfer of ownership is

easy

• Easier to raise capital

• Disadvantages

• Separation of ownership and

management (agency

problem)

• Double taxation (income

taxed at the corporate rate

and then dividends taxed at

personal rate, while

dividends paid are not tax

deductible)

A legal “person” distinct from owners