DEFINITION AND FUNCTIONS OF FINANCE

Every business enterprise faces the problems of acquisitions of funds to carry out its operations. Hence, a business enterprise has to determine the optimum methods of employing the funds it has obtained. Financing is the function in a business responsible for acquiring funds for the firm, managing funds within the firm and planning for the expenditure of funds on various assets. Such activities include preparing budget, cash flow analysis and planning for expenditure of funds on various items such as those relating to plants, equipment, machinery etc.

Although businesses generally have most of their funds tied up in the investment of plants and inventories, continuous flow of such funds is needed in and out of the business. This flow of funds represents the blood stream of the business. Therefore, keeping close watch on the financing function is very important. In this unit, therefore, the various definitions of finance would be considered, objectives of financial management and the need for financial planning are also considered.

 OBJECTIVES
At the end of this unit, you should be able to:

• define finance 
•  explain the functions of finance in business 
• explain the objectives of financial management 
• explain the need for financial planning. 

Defintion of Finance

The term “finance” has been defined as “the science of money”. It studies the principles and the methods of obtaining control of money from those who have saved it, and of administering it by those into whose control it passes.” Other definitions as given by different authors include the following:

• S. C. Kuchhal, defines finance as, “administrative era or set of Comment [ ESTHER1]: Y administrative functions in an organisation, which relates to the ear? arrangement of cash and credit so that the organisation may have the means of carrying out its objectives as satisfactorily as possible.” 
• Howard & Upton, look at finance as, “business finance includes Comment [ ESTHER2]: Y those business activities, which are concerned with the ear of publication? acquisition of and conservation of capital funds in meeting the financial needs and overall objectives of business enterprise.” 
• While Wheeler, defines finances as, “financial resources drive Comment [ ESTHER3]: Yother resources in its train, for without finance other resources ear? cannot be achieved. Finance is therefore, the basic resources used for creation of and maintenance of other resources. 

SELF-ASSESSMENT EXERCISE 1

• Mention and discuss three definitions of finance. 

Functions of Finance in Business

Financial management is the managerial capability concerned with the planning and controlling of the firm’s financial resources. 

There are two kinds of finance functions: managerial and incidental or routine functions.

Managerial Finance Function

This requires planning, controlling, and execution abilities. The three important managerial finances functions are; investment decision (asset mix), financing decision (capital mix), and dividend decision (profit allocation) decision. (Pandey, 1984; Archer & Dambrosio, 1976; Graham & Mcglorick 1984).

Incidental or Routine Finance Function

For effective execution of managerial finance functions, the incidental or routine functions must be performed. These include; supervision of cash receipts, payments and the safeguarding of cash balance; custody and safeguarding of securities; insurance policies and other valuable papers; taking care of the mechanical details of new outside financing, record keeping and reporting.

The financial manager is mainly involved in the managerial finance functions, while the people of the lower levels (Tijani-Alewa, 2004) carry out the routine finance functions.

SELF-ASSESSMENT EXERCISE 2

• Mention and discuss the two kinds of finance functions.