The term finance can be understood in two perspectives: finance as a discipline and finance as a resource. As a resource, finance refers to the monetary means required to finance assets of an entity. As a subject of study or discipline, it describes the way individuals, corporate organizations and governments manage the money that flows through an organization. Alternatively put, finance describes how people make decisions related to collecting and allocating resources in organizations such as government agencies, banks, schools and corporations. Thus, it becomes important for every individual, non-government and government organization and business to appreciate the importance of finance in their day-to-day working.
Up until the closure of the nineteenth century, finance was a branch of economics. As a separate discipline in academics, it is still evolving. Practicing academicians and managers have been contributing in its enrichment and expansion.
Scope of Finance and Financial Management
Presently, the discipline of finance consists of the following areas in its scope:
Public Finance: Similar to business organizations, governments raise as well as spend large sums of money. However, unlike business organizations, their goals are non-profit. Dealing with governmental financial matters requires a separate and specialized field that is known as public finance.
Investment Decisions: Investment decisions include the evaluation and measurement of risk, cost of capital, as well as the estimation of the benefits expected from a project. Liquidity and capital budgeting are the two main components of investment decision. Capital budgeting involves allocating capital and committing funds in permanent assets that would yield earnings in the future. Capital budgeting is also concerned with decisions relating to replacement as well as renovation of old assets. Finance managers must maintain an appropriate balance between current and fixed assets so as to gain maximum profit and maintain the desired liquidity in a firm. Capital budgeting is quite important as it has an effect on the long term growth and success of a firm. At the same time, the decision is difficult as it involves cost estimation and has unknown and uncertain benefits.
Securities and Investment Analysis: This is an area that will interest institutional and individual investors. It mainly covers measurement of risk as well as return on investment in securities.
International Finance: The study of international finance involves economic transactions among corporations, nations and individuals that take place internationally. It pertains to the flow of money across international borders.
Financial Management: Many business firms are faced with problems while dealing with the acquisition of funds as well as the optimum methods for employing funds. Financial management thus involves studying financial problems in firms and seeks profitable business activities and low-cost funds.
Financing Decision: While investment decisions are with respect to a mix of assets, financing decisions are concerned with the financial structure or financial mix of the firm. Raising the funds involves decisions relating to the methods as well as sources of finance, time of flotation of securities, relative proportion and choice between various sources, etc. To meet investment needs, firms are required to raise funds from a variety of sources. Finance managers are required to develop the best financial mixture or the optimum capital structure for the firm so that long term market price of the shares of the company can be maximized. Proper balance between equity and debt is also required so that equity shareholders get high return with low risk.
Dividend decision: To achieve the objective of wealth maximization, a proper dividend policy needs to be developed. An aspect of dividend policy is deciding whether all the profits need to be distributed in the form of dividends or a part of the profits needs to be distributed, retaining the balance. Finance managers need to consider the investment opportunities that are available for the firm, their plans for growth and expansion, etc. Decisions need to be made relating to dividend stability.
Working Capital Decision: This relates to the investment in current liabilities as well as current assets. Current assets are inclusive of cash, inventory, receivables, short-term securities etc. They are convertible into cash in the period of a year. Current liabilities include bank overdraft, outstanding expenses, bills payable, creditors, etc.
