Introduction to Finance

Topics: Balance sheet, Financial statements, Finance Pages: 57 (9913 words) Published: March 4, 2011




Finance is rightly been termed as “master key” providing access to all sources required for running business activity and also finance holds the key to all activity. Finance is also the study of money management.

The Sanskrit saying “Arthah sachiva” which means, “Finance reigns supreme” speaks volume for the significance needed by an organization. The path of success is greased with money.

However, it would not be proper to pass the credit of finance, it also the management of the monetary affairs of a company. Finance guides and regulates investment decisions and expenditure may be about capital expenditure programmers or capital budgeting finance squeezes the most out of every available rupee.


Ray G Jones and Dean Dudley observe that the word finance comes from Latin word ‘Finis’ in simple word finance is the economics and Accounting. Economics is proper utilization of scarce resource and accounting is keeping a record of thing.

Kenneth Midgley and Ronald Burns state “finance is the process of organizing the flow of funds so that a business firm carry out its objectives in the most efficient manner and meet its obligations as they fall due”.


The scope of finance function is as wide as the periphery of finance. It concentrates primarily on money management and different auxiliaries, which are incidental to it. For effective money management, the different resources of business enterprise must be mobilized.

The finance penetrates all the activities irrespective of weather they relate to product, pricing, expansion, and re-organization and in fact anything, which needs finance.


Finance function is the task of providing funds required by an enterprise on terms most favorable to it in the light of objectives of business.

There are three finance functions:-
Investment decision:-Investment decisions relates to the determination of total amount of assets to be held in the firm , the composition of these assets and the business risk complexions of the firm as perceived by its investors. It is the most important financial decision. Since funds involve cost and are available in a limited quantity, its proper utilization is necessary to achieve the goal of wealth maximization.

The long term investment decision is referred to as the capital budgeting and the short term investment decisions as working capital management Short term investment decisions, on the other hand, relates to the allocation of funds as among cash and equivalents, receivables and inventory.

Financing decisions:- A financial manager has to select such sources of funds ethics will make optimum capital structure. The imp thing to be decided here is the proportion of various sources in the overall capital mix of the firm. The debt equity ratio should be fixed in such a way that it helps in maximizing the profitability concern. The raising of funds through equity will bring permanent funds to the business but the shareholders will expect high rate of return.

Dividend decision:-The term dividend refers to that part of profits of the company which is distributed by it among its share holders. It is the reward for shareholders for investments made by them in the share capital of the company. The dividend decision is concerned with the quantum of profits to be disturbed among shareholders. A decision has to be taken weather all the profits to be distributed among shareholders.


In every organization, where funds are involved sound financial management is necessary. As COLLINS BROOKS has remarked “bad production management and bad sales management have stain in hundreds, but faulty financial management has slain in thousands”.

A business finance or financial management is a managerial...
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