Functions of Finance

Functions of Finance is to keep the business supplied with enough funds to occupy its destinations. In other words, financial functions estimate financial information such as current value and payments.

Financial functions is one of the interesting terms in the field of finance and it is quite specialized directly connected with the top management. This term is typically used or applied to an organization or corporation’s financial strategy.


The functions of raising funds,investing them in assets, and distributing return earned from assets to shareholders are respectively discussed below :

1.Decision Functions- Decision functions are classified in 4 sections. These are mentioned here:

a) Investment decisions at present, efficient use and fixation of capital are the most important functions of finance management. This activity is also known as capital budgeting. Effectively, this function involves the decision of the firm to undertake its funds in long-term assets together with other beneficial activities.


Here are the two outlooks of investment decision:

–  Rating or evaluating of new investment in term of profitability.

Comparison of cut off rate against new investments and prevalent investments


b)
Financial decisions are another significant function of financial management. It concerns with the liabilities and stockholders’ equity side of the firm balance sheet. It is also a comprehensive financial planning and wealth management firm that helps many businesses to achieve their objectives.


c)
Dividend Decision is the way in which financial manager must decide either the firm should divide all the profits or retain them or distribute a portion and maintain the balance.

As the policy of debt,the dividend policy also should be determine in terms of its effect on the shareholders value.

Dividend policy is the set of guidelines a company uses to decides how much of its earnings it will pay out among shareholders. The optimum dividend policy is one that maximizes the market value of the firm’s shares.

Thus, the financial manager must determine the optimum dividend payout ratio if the shareholders are not indifferent to the firm’s dividend policy.


d)
Liquidity Decision is very significant to maintain a liquidity position of a firm to avoid lack of money. Corporation’s profitability, liquidity, and risk all are associated with the investment in current assets.

In order to make a balance of a trade off between profitability and liquidity, it is really important to invest sufficient funds in current assets, a proper calculation must be done that current assets do not earn anything for business.

Therefore, time to time current assets should be disposed and valued when it is become non-profitable and it must be used in the time of liquidity problems and times of insolvency.

 

2.Executive Functions :

Executive functions can be divided into 8 types-

a) Planning for the ongoing actions of the firm and confirming that the firm responds to the changing financial and economic environment.

b) Financing for evaluating, securing, and long-term serving from within the firm or from financial securities.

c) Investing in long-term assets through the capital budgeting system.

d) Capital structure and alternative sources of funds determine the required portion of return to the firm through attention.

e) Dividend cash policy distributes profits to the firm’s stockholders.

f) Current assets secure, manage, and invest as cash,accounts receivable, and inventory.

g) Short-term financing attains funds from creditors or financial markets.

h) Assessing growth of viability via merging and ensuring the economic vitality of the firm.

 


Contributor: Anika Tasnim

From Mawlana Bhashani Science & Technology University