The finance function refers to organising, directing, and supervising the financial function of an organisation, such as the acquisition and usage of financial resources. In other words, it is the application of general management ideas to a company’s financial resources. A financial choice is yet another key duty that a financial manager is responsible for daily.
Businesses must make informed choices about when, where, and how to raise capital. Funds may be obtained via a variety of methods and venues. It is necessary to maintain a proper equity ratio to debt in the business. A company’s capital structure refers to stock and loan capital.
The finance function is divided into three categories:
Long-Term Finance
This comprises financing for investments that will last three years or longer. Owner capital, share capital, long-term loans, debentures, internal funds, and other forms of long-term financing are examples of sources of long-term financing.
Medium-Term Finance
This is funding done for one to three years and may be obtained via bank loans and financial institutions.
Short-Term Finance
It refers to the financing required for less than one year. Examples include overdrafts from banks, commercial paper, client advances, trade credit, and other funding sources.
Finance Functions Objectives
Investment decisions
This is when the finance manager determines where the company’s cash should be invested. Investment choices linked to working capital management, capital budgeting decisions, merger management, and the acquisition or leasing of assets are all investment decisions. Investment choices should generate income, profitability, and cost savings.
Decisions on financing
This is when a corporation determines where to seek financing. Essentially, there are two primary sources to consider: stock and borrowed funds. A choice on the proper balance of short- and long-term finance should be made based on the information provided by the two. It is also necessary to agree on the finest sources of finance available at any particular moment.
Dividend choices
These are the decisions about how much, how often, and whether cash should be returned to shareholders. It is necessary to balance the number of earnings kept and the number of dividends given out.
Liquidity decisions
They are based on whether or not the company has enough money to pay its payments on time and maintain adequate cash reserves to deal with unanticipated situations. This choice concerns the management of current assets to ensure that you do not become bankrupt or that you do not fail to meet your obligations.
The Importance of Finance function
Identify the need for a Finance function
Before you can establish a company, you must first determine the amount of money necessary to get it up and running. As a result, the financial function assists you in determining the amount of initial capital required, how much of it you now have, and how much you need to obtain.
Identify Potential Sources of Finance function
Once you’ve determined how much money you’ll need to raise. You will want to think about where you can get the money. You have the option of borrowing or obtaining from numerous stockholders.
Comparison of the Finance function
After discovering various funding sources, assess the costs and risks associated with each one. Then decide on the most appropriate funding source for your company’s requirements.
Investment
After the money has been raised, it is time to put them to use. Investment choices should be made to receive greater returns on their investments. The cost of obtaining money should be less than the return on investment; if this is the case, the investment was considered prudent.
Functions of the Finance Commission
According to Article 280 of the Indian Constitution, the President of India chooses a statutory, independent, and non-political body known as the Finance Commission every five years, which the Prime Minister heads. The Finance Commission’s responsibilities include advocating tax devolution between the federal government and the states and investigating problems the President may designate.
Significance of functions of the Finance Commission
It helps sustain India’s unity by ensuring an appropriate allocation of financial resources between the Union and its various states.
It provides the states with the resources to promote human development, which results in the formation of national institutions.
The Finance Commission attempts to rectify the anomaly and imbalance in India’s federal structure.
Implementing a few Finance Commission proposals, such as grants for the Special Category Status, has allowed a few backward states to access additional funding.
Conclusion
The finance function monitors developments both within and internationally. It then assesses the impact of these changes on its bottom line. On the other hand, small firms seldom have a separate finance department. Larger organisations can afford to hire experts to keep track of their finances. The business climate might alter substantially in a short time. Recognising India’s diversity also means recognising the varied state development paths. The Finance Commission’s role includes promoting diversity and a democratic development path. When sharing resources between the federal government and the states, it is vital to adhere to the concepts of justice and fairness that have been established.
