The Importance of Finance
Finance is an essential part of any business or organization, as it provides a means of acquisition, production, and development. Finance is needed to obtain raw materials, tools, and machinery, and to establish, operate, and regulate the flow of money within an organization. Hence, organizations must plan and control their financial resources to maximize profitability. Aside from being a necessary part of any organization, finance can also be defined as an academic discipline. It explains the planning, raising, and use of resources, as well as how these resources are managed.
Another vital part of finance is the allocation of income. This involves decisions on whether to pay dividends to shareholders, plough back profits, or establish reserves. These decisions are based on the company’s earnings, trends in the market, and requirements for replacement. Finance managers also need to understand the proper proportion of equity and debt to achieve the proper balance between risk and return. It is also crucial to understand the role of credit-worthiness, as excess cash costs money.
Although finance has a modern history, it has been a part of the economy for thousands of years. In the early stages of currency exchange, businessmen mainly focused on production and sales, whereas in the later stages, their attention turned to investing their funds in profitable opportunities. In the traditional phase of finance, the main function of the financial manager was to procure funds, and the scope of the role was much narrow. But today, this role has been redefined.
While short-term finance is used to supplement cash flow for working capital, long-term finance is used to invest in fixed assets. Long-term finance requires funds over five years, while short-term finance is raised for one year to five. Short-term finance is used for replacing some fixed assets. In between, short-term finance is used for investments that need to be made for the short-term. When a company is looking for the best possible way to raise funds, it must make the right decision.
The scale of finance required by a business depends on the nature and size of the business. Whether it is a small business or a large enterprise, finance is critical to its success. A business cannot exist without it. From the beginning stages of operation to growth and expansion, finance is vital. But it is not only the ability to raise funds to run the business, but also the way in which those funds are managed. And it is vital to have the right kind of finance available to grow.
In addition to facilitating growth and expansion programmes, the finance function also provides an opportunity for the finance manager to predict industry trends and launch new ventures. It also allows the finance manager to determine the value of intangible assets. As a result, the finance manager can manage a variety of options, such as reducing costs or expanding market reach. The importance of financial planning cannot be understated. If a business has inadequate funding, it will face a number of difficulties.