Finance!

Finance is a term for matters regarding the management, creation, and study of money and investments...

The main functions of finance are:

1.Investment Decision

This includes decisions regarding about how funds are invested in different assets(both long terms and short term)so that they are able to earn highest possible return. Investment is the very way to expand the business.The Investment decision can be divided into two parts:

a) Long-term investment decision: It relates to investment in long-term assets like machinery etc. This is referred to as the Capital Budgeting Decision.These decisions affect the earning of the business over long run.

b) Short-term Investment Decision: It relates to investment in short-term assets like stocks, cash, debtors etc. This is referred to as the Working Capital Management.There should be adequate investment in short-term assets,as they affect the liquidity position of the business.

The major factors that may affect the investment decision are as follows-

Cash Flows of the project

The Rate of Return

Risk involved

2.Financing Decision

This includes decisions regarding the determination as to how the total funds required by the business will be obtained from various long-term sources. The financial sources includes retained earnings, equity share capital, preference share capital, debentures, long-term loans, etc.

A detailed analysis is made by the finance manager as to which is the best and cheapest source. The equity share capital is costliest and time consuming whereas the debentures comes with the burden of payment of interest.

The factors affecting financial decision are as follows-

Cost

Risk

Control in business

State of Capital Market

3.Dividend Decision

It refers to the determination of how much part of the earnings or profit should be distributed among the shareholders by the way of dividend and how much should be retained for the future needs as retained earnings.

Now some shareholders wants to have more of profit as dividend so that they can have some regular income, on the other hand, there are shareholders who wants to earn as a capital gain(Capital Gain = Selling price of Shares - Cost of acquisition of Shares).So, the financial manager has to make a balance so that both parties remain satisfied.

Factors affecting dividend decision are-

Earnings

Shareholder's preference

Growth Opportunities

Taxes

Some other functions of finance are :

1.Financial planning

2.Allocation of funds

3.Financial control

4.Liquidity decision