Finance is the word used to describe the money resources available to individuals, business firms, governments, and the management of these money resources. Virtually all individuals and organizations earn or raise money and spend or invest money.
Meaning of Finance
Finance is the process of raising funds or capital for any expenditure. Finance can be defined as the art and science of managing money. Finance is related to all individuals and organizations earning or raising money and spending or investing money.
Finance involves the process, institutions, markets, and instruments in transferring money among individuals, businesses, and governments.
Finance is the activity of the planning, acquisition, management, and controlling of the firm’s financial resources.
Finance is the process of providing funds for economic activities. Finance consists of providing and utilizing the money, capital rights, credit, and funds employed in a firm’s operation.
Definition of Finance
- Finance is the art and science of managing money and affects the lives of every person and every organization. – L. J. Gitman
- Finance can be defined as the management of the flow of money through an organization, whether it be a corporation, school, bank, or government agency. – Hampton
- Finance is the money resources available to governments, firms, or individuals and the management of these monies. – George E. Pinches
- Finance includes the subareas of financial management, investments, and money and capital markets. – C. P. Jones
- Finance is the study of markets and instruments that deal with cash flows over time. – Ross, Westerfield & Jaffe
- Finance is a body of facts, principles, and theories dealing with the raising and using of money by individuals, businesses, and the government. – Schall & Hally
Meaning of Finance Management
Financial management is the managerial process of planning, collecting, investing, managing, protecting, and controlling financial resources for business firms. It is concerned with acquiring, financing, and managing assets with some overall goal.
Financial management is the acquisition, management, and financing of the firm’s financial resources due to regard for values in external economic markets.
Definition of Finance Management
Let us look at this definition part by part.
- Financial management is a managerial activity concerned with planning and controlling the firm’s financial resources. M. Pandey
- Financial management is the acquisition, management, and financing of resources for firms by means of money. – G. E. Princes
- We define financial management as the process of optimal use of financial and real or physical resources to increase the firm’s value. – Benton E.G.
- Financial management is concerned with raising, allocating, and controlling the firm’s funds. – Berton A. Kolb
- Financial management consists of all those activities that are concerned with obtaining money and using it effectively & efficiently. – Hughes & Kapoor
- Financial management is the acquisition, management, and financing of resources for firms by means of money. – George E. Princes
- The financial management process involves all the firm’s activities that link its financial decisions with the firm’s goal, the maximization of stockholder wealth. – C. P.Jones
Financial management is concerned with the duties of the finance manager in a business firm. He performs a variety of tasks as budgeting, financial forecasting, cash management, credit administration, investment analysis, and fund procurement.
Financial management is also called Managerial Finance, Corporate Finance, Business Financial Management, and Business Finance.
Economics is the study of how scarce resources should be allocated among competing uses, and financial management is, in effect, applied economics because it is concerned with the allocation of a firm’s scarce financial resources among competing choices.
Financial management has evolved over time since its emergence as a separate field of study in the early part of the 20th century. The recent trend toward globalization of business activity has created new demands and opportunities in finance.
Definition of Financial Manager
Financial activity is usually associated with a top officer of the firm, such as the vice president, chief financial officer, and treasurer. Reporting to the chief financial officer is the treasurer and controller.
The treasurer is responsible for handling financial functions, including cash flows, managing capital expenditures, and making financial plans. The controller handles the accounting function, which includes taxes, cost and financial accounting, and information systems.
- Financial manager actively manages the financial affairs of any business, whether financial or nonfinancial, private or public, large or small, profit-seeking or non-profit. – L. J. Gitman
- Financial manager refers to anyone who is responsible for a significant investment or financial decision. – Brealy & Myers
- A financial manager is a person who has the responsibility to allocate funds to current and fixed assets to obtain the best mix of financing alternatives and to develop an appropriate dividend policy within the context of the firm’s objectives. – Block & Hirt
- Financial managers actively manage the financial affairs of any type of business. – Khan &Jain
A financial manager is a person responsible in a significant way for carrying out the finance functions. The most important function of a financial manager is to create value from the firm’s capital budgeting, investment, financing, and working capital activities.
Finance in the Organizational Structure of the Firm
The exact nature of the organization for financial management will differ from firm to firm. It will depend on factors such as the firm’s size, the nature of the business, financing operations, the capabilities of financial managers, and, most importantly, the financial philosophy of the firm.
In some cases, the financial manager may be known as the vice president of finance, the director of finance, or the financial controller.
Two officer treasurer and the controller may be appointed under the direct supervision of the chief financial officer to assist him. The simple organization chart is stated here:
- Capital Budgeting
- Cash Management
- Banking and Investment
- Credit Management
- Dividend Disbursement
- Financial Analysis and Plan
- Investor Relations
- Pension Fund Management
- Insurance and Risk Management
- Taxation and Auditing
It may state that the controller’s functions are related to the primary and internal works of the firms and concentrate on the asset side of the balance sheet.
At the same time, the treasurer’s functions are secondary and external works and relate to the liability side of the balance sheet.
The controller is the manager (accounts), and the treasurer is the financial manager. Their activities are typically within the control of the vice president (Finance).
Risk In Financial Management
Risk is the uncertainty of an investment’s actual return in the future. Risk is a concept that relates to human expectations. It denotes a potential negative impact on an asset or some characteristic of value that may arise from some present process or from some future event.
Different Sources of Risk In Financial Management
As we know that risk is related to human expectations and has been defined by different scholars from different viewpoints. The potential sources of risk can be pointed out under the following heads.
FIRM-SPECIFIC RISKS
Business risk
The chance that the firm will be unable to cover its operating costs. The level of business risk is driven by the firm’s revenue stability and the structure of its operating costs (fixed vs. variable).
Financial risk
The chance that the firm will be unable to cover its financial obligations. The level of financial risk is driven by the predictability of the firm’s operating cash flows and its fixed-cost financial obligations.
SHAREHOLDER SPECIFIC RISKS
Interest rate risk
The chance that changes in interest rates will adversely affect the value of an investment. Most investments lose value when the interest rate rises and an increase in value when it falls.
Liquidity risk
The chance that an investment cannot be easily liquidated at a reasonable price. Liquidity is significantly affected by the size and depth of the market in which an investment is customarily traded.
Market risk
The chance that the value of an investment will decline because of market factors that are independent of the investment (such as economic, political, and social events). In general, the more a given investment’s value responds to the market, the greater its risk, and the less it responds, the smaller its risk.
FIRM & STOCKHOLDER RISKS
Event risk
The chance that a totally unexpected event will have a significant effect on the value of the firm or a specific investment. These infrequent events, such as the government-mandated withdrawal of a popular prescription drug, typically affect only a small group of firms or investments.
Exchange rate risk
The exposure of future expected cash flows to fluctuations in the currency exchange rate. The greater the chance of undesirable exchange rate fluctuations, the greater the risk of the cash flows and therefore the lower the value of the firm or investment.
Purchasing power risk
The chance that changing price levels caused by inflation or deflation in the economy will adversely affect the firm’s or investment’s cash flows and value.
Typically, firms or investments with cash flows that move with general price levels have a low purchasing power risk, and those with cash flows that do not move with general price levels have a high purchasing power risk.
Tax risk
The chance that unfavorable changes in tax laws will occur. Firms and investments with values that are sensitive to tax law changes are riskier.
