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FIN 2-Finance Function, Definition, Scope

The finance function involves three main activities: 1) Drawing a financial plan and forecasting financial needs, 2) Raising necessary funds, and 3) Putting funds into proper use. It can be defined as the procurement of funds and their effective utilization in business. The scope of the finance function is wide, as it affects many aspects of a firm's operations, such as capital expenditures, financing investments, and dividend distributions. Finance functions can be classified into executive functions, requiring administration skills, and incidental functions covering routine works necessary to implement executive financial decisions.

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385 views4 pages

FIN 2-Finance Function, Definition, Scope

The finance function involves three main activities: 1) Drawing a financial plan and forecasting financial needs, 2) Raising necessary funds, and 3) Putting funds into proper use. It can be defined as the procurement of funds and their effective utilization in business. The scope of the finance function is wide, as it affects many aspects of a firm's operations, such as capital expenditures, financing investments, and dividend distributions. Finance functions can be classified into executive functions, requiring administration skills, and incidental functions covering routine works necessary to implement executive financial decisions.

Uploaded by

Jeffrey Jazz Bugash
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Finance Function: Definition,

Scope and Classification |


Financial Management
Read this article to learn about the Finance Function:- 1.
Definition of the Finance Function 2. Scope of the Finance
Function 3. Classification.
Definition of the Finance Function:
There are three ways of defining the finance function. Firstly, the
finance function can simply be taken as the task of providing funds
needed by an enterprise on favourable terms, keeping in view the
objectives of the firm.

This means that the finance function is solely concerned with the
acquisition (or procurement) of short- term and long-term funds.

However, in recent years, the coverage of the term ‘finance function’


has been widened to include the instruments, institutions and
practices through which funds are obtained. So, the finance function
covers the legal and accounting relationship between a company and
its source and uses of funds.

For example, in financial management, we discuss debt-equity ratio


(determined by the government), as also various accounting and legal
aspects of dividend policy.

No doubt, the basic function of the finance manager is one of


determining how funds can best be raised (i.e., at the minimum
possible cost). In other words, the essence of finance function is
keeping the business supplied with enough funds to fulfil its
objectives.

But such a definition is too narrow and is not of much practical use.
No doubt, the finance function is much broader than mere
procurement of short-term and long-term funds so that a firm’s
working capital and fixed capital needs can be met.

Another extreme view is that finance is concerned with cash. This


definition is much too broad and thus is not really meaningful.

The third view — based on a compromise between the two — is more


useful for practical purposes. This definition treats the finance
function as the procurement of funds and their effective utilisation in
business. The finance manager takes all decisions that relate to funds
which can be obtained as also the best way of financing an investment
such as the installation of a new machinery inside the factory-or office
building.

The cost of the machinery may be financed by making a public issue of


8% cumulative preference shares. At the same time, he has to consider
whether the additional return (cash flow) expected from the new
machinery is sufficient to cover the cost of capital in terms of interest
to be paid over a period of time.

In this case, the finance decision is based on an analysis of the


alternative sources and uses of funds. To start with the finance
manager has to draw a plan outlining the company’s need for funds.
Such financial plan is based on forecasts of financial needs of the
company. Such forecasts are based on sales forecasts.

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In the next step, the finance manager has to raise necessary funds to
meet the company’s need for fixed and working capital. Then, in the
third step, he has to put the acquired funds into effective uses.

The sequence of the three-step process is presented below:


1. Drawing a financial plan and forecasting financial needs

2. Raising necessary funds

3. Putting funds into proper use.

In a broad sense, the finance function covers the following


six major activities:
1. Financial planning;

2. Forecasting cash inflows and outflows;

3. Raising funds;

4. Allocation of funds;

5. Effective use of funds; and

6. Financial control (budgetary and non-budgetary).


The last function is very important. Through financial control the
finance manager tries to bring performance closer to the targets.

Scope of Finance Function:


No doubt, the scope of finance function is wide because this function
affects almost all the aspects of a firm’s operations. The finance
function includes judgments about whether a company should make
more investment in fixed assets or not.

It is largely concerned with the allocation of a firm’s capital


expenditure over time as also related decisions such as financing
investment and dividend distribution. Most of these decisions taken
by the finance department affect the size and timing of future cash
flow or flow of funds.

Classification of Finance Function:


Finance function can be classified into two broad categories, viz.,

(i) Executive finance function and

(ii) Incidental finance function.

While the former requires administration skill in planning and


execution, the latter largely covers works of a routine nature, which
are necessary to implement financial decisions at the executive level.

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