Module 7

Business Function
Finance
Finance
Features
01
Benefits
02
Application
03
The finance function refers to practices and activities directed to manage business finances. The functions are
oriented toward acquiring and managing financial resources to generate profit. The financial resources and
information optimized by these functions contribute to the productivity of other business functions, planning, and
decision-making activities.

Finance is the lifeblood of any business; without proper financial resources, no business can run smoothly; the
finance processes can be related to planning, execution, control, and maintenance of financial resources.
Moreover, its scope is ever increasing; it widens as the company grows because larger companies have the
resources to support the increase in functions.

Finance

Finance is that administrative area or set of administrative functions in an organization which relate with the
arrangement of cash and credit, so that the organization may have the means to carry out its objectives as
satisfactorily as possible.
Features of Finance Function
Helps Run a Business
To remain in business you Purchase Assets
must cater to the day to
You need money to
day operating costs such
purchase assets. This
as paying salaries, buying
can be tangible assets
stationery, raw material,
like furniture, buildings or
the finance function
intangible like trademarks,
ensures you always have
patents, etc. to get this
adequate funds to cater
you need finances.
to this.

Helps Establish a To Expand, Modernize,

Business Diversify
Without money, you A business needs to grow
cannot get labor, land and otherwise it may become
so on with the finance redundant in no time.
function you can With the finance function,
determine what is you can determine and
required to start your acquire the funds
business and plan for it. required to do so.
Importance of Finance Function
Identify Need of Finance
To starts a business you need to know how much is
required to open it. So, the finance function helps 01
you know how much the initial capital is, how much
of it you have and how much you need to raise.

Identify Sources of Finance

Once you know what needs to be raised you look at
areas you can raise these funds from. You can
02 borrow or get from various shareholders.

Comparison of Various Sources of Finance

After identifying various fund sources compare the 03
cost and risk involved. Then choose the best source
of financing that suits your business needs.

Investment
04 Once the funds are raised it is time to invest them.
Investment decisions should be done in a manner
that a business gets higher returns. Cost of funds
procurement should be lower than the return on
investment, this will show a wise investment was
made.
 Objectives of Finance Function
Investment Decisions
This is where the finance
manager decides where to put
the company funds. Investment
decisions relating to the
management of working capital,
capital budgeting decisions,
management of mergers, buying
or leasing of assets. Investment
decisions should create revenue,
profits and save costs..
Financing Decisions
Here a company decides where
to raise funds from. They are two
main sources to consider mainly
equity and borrowed. From the
two a decision on the appropriate
mix of short and long-term
financing should be made. The
sources of financing best at a
given time should also be agreed
upon..
Dividend Decisions
These are decisions as to how
much, how frequent and in what
form to return cash to owners. A
balance between profits retained
and the amount paid out as
dividends should be decided here.
Liquidity Decisions
Liquidity means that a firm has
enough money to pay its bills
when they are due and have
sufficient cash reserves to meet
unforeseen emergencies. This
decision involves the
management of the current
assets so you don’t become
insolvent or fail to make
payments.
Investment decision
The investment decision function revolves around capital budgeting decisions. Capital
budgeting in an organization involves the analysis of investment opportunities, specifically
long-term projects, and associated cash flows, to determine the profit potential. They
revolve around making a sound investment that must ripe sufficient and sometimes
maximum returns for the business in the long run. Hence these decisions are challenging
and complex. Payback Period, Net Present Value (NPV) Method, Internal Rate of Return
(IRR), and Profitability Index (PI) are the popular methods to carry out capital budgeting.

Financing decision
Expertise in forming financing decisions leads to optimized capital structure, enhanced
performance, and growth. Financing functions deal with acquiring capital (like when and
how) for the various functioning of the entity, like whether to use equity capital or debt to
finance business events. The debt and equity mix of an entity are called its capital
structure. The financing decisions always focus on maintaining good capital structure
ratios.
Dividend decision
Companies share profits with their shareholders in the form of dividends. There are different types of shares,
shareholder’s dividends, and dividend policies. Furthermore, a company’s dividend policy influences the company’s
market value and stock prices. Hence dividend decision, including the division of net
income between dividends and retained earnings, is an important function.

Liquidity decision
Liquidity decision generally revolves around working capital decisions and management. Therefore, the priority is
managing current assets to follow the going concern concept. The lack of liquidity results in issues like financial
crisis and insolvencies. At the same time, a lot of liquidity can also lead to more danger. Hence, it is important to have
the right mix of current assets and current liabilities.
Vital functions of Finance
 Let’s look into a finance function scenario and the application of
Application technological evolutions like business intelligence into the
functions of an organization.

of Finance Tax deadline extensions are usually beneficial to financial

functions. They want deadline extensions due to the impact
created by finance functions following legacy systems,
heterogeneous information sources, manual-intensive tasks, etc.
Finance and accounting teams must view data as a prime factor
in improving these operations. Organizations may exploit data
efficiently. It is possible by integrating human expertise with big
data, artificial intelligence (AI), machine learning (ML), blockchain,
and cognitive computing.

Techniques like automation and artificial intelligence can reform

finance functions. Robotic process automation (RPA) contributes
to efficiencies and creates value for the organization.
Incorporating a business intelligence process to develop a digital
tax function that provides benefits like real-time reporting can
improve the output of financial functions. RPA and intelligent
workflows can optimize the tax accounting process, AI data
mining can identify potential tax fraud or errors, and a unified
view of tax data can boost the time spent on analysis and review.
 Generally, finance processes focus on cost control
Application , operating budgets, and internal auditing activities in small
organizations. But for large organizations and MNCs, the process
is complex; for example, they engage in profit repatriation

of Finance policies of their companies’ subsidiaries, and capital budgeting

decisions and valuation must reflect divisional differences and
the complications introduced by currency tax and country risks.
In addition, incentive systems need to measure and reward
managers operating in various economic and financial settings.
Finally, global exposure presents new challenges, and some
companies recruit finance professionals specifically to rotate
globally.
Business organisations finance their activities in a variety of
ways and from a range of sources. Methods include reinvesting
profits, borrowing, trade credit and issuing shares and
debentures. Sources include the banks and other financial
institutions, individual investors and governments, as well as
contributions from the organisation’s original owners. A number
of observations about the topic as it relates generally to the
business environment:

1 All organisations tend to fund their activities from both internal

(e.g. owner’s capital, reinvested profits) and external sources
(e.g. bank borrowing, sale of shares).

2 Financing may be short term, medium term or longer term,

and the methods and sources of funding chosen will reflect the
time period concerned (e.g. bank borrowing on overdraft tends
to be short term and generally needed for immediate use).
3 Funds raised from external sources inevitably involve the
organisation in certain obligations (e.g. repayment of loans with
interest, personal guarantees, paying dividends) and these will
act as a constraint on the organisation at some future date.

4 The relationship between owner’s capital and borrowed funds

– usually described as an organisation’s gearing – can influence
a firm’s activities and prospects in a variety of ways (e.g. high-
geared firms with a large element of borrowed funds will be
adversely affected if interest rates are high).

5 Generally speaking, as organisations become larger many

more external sources and methods of funding become
available and utilising these can have implications for the
structure, ownership and conduct of the organization
(Ian Wirthington and Chris Britton, The Business Environment, Pearson Education Ltd, England 2006.)
Carefully read and analyze the case studies

1. ITC Classic story

https://www.icmrindia.org/free%20resources/casestudies/The%20ITC%20Classic%20Story
1.htm

2. Grameen Bank- A Role Model in Microfinance

https://www.icmrindia.org/free%20resources/casestudies/Bangladesh%20Grameen%20Ban
k1.htm