OVERVIEW OF

FINANCE
What is Finance?
 Finance is defined by Webster’s Dictionary as “the
system that includes the circulation of money,
granting of credit, the making of investments, and the
provision of banking facilities.”
 It may be defined as the science of managing and
creating money, administration and operations of
institutions like banks, investment companies,
cooperatives, lending groups that facilitate credits and
a unit or department that directs the organizations’
assets, liabilities, and equities.
 At large, finance boils down to “funds and resources.”
 In simple terms, finance is concerned with decisions
about money, or more appropriately, cash flows.
Finance decisions deal with how money is raised and
used by businesses, governments, and individuals.
What is Finance?

 To make sound financial decisions you must

understand three general, yet reasonable,
concepts: Everything else being equal:
1.More value is preferred to less
2.The sooner cash is received, the more
valuable it is
3.Less risky assets are more valuable than
(preferred to) riskier assets.
General Areas of Finance
1.Financial Markets and Institutions
 Financial institutions, which include banks, insurance
companies, savings and loans, and credit unions, are
an integral part of the general financial services
marketplace. The success of these organizations
requires an understanding of factors that cause
interest rates and other returns in the financial
markets to rise and fall, regulations that affect such
institutions, and various types of financial
instruments, and various types of financial
instruments, such as mortgages, automobile loans,
and certificates of deposit, that financial institutions
offer.
General Areas of Finance

2.Investments
 This area of finance focuses on the decisions made by
businesses and individuals as they choose securities
for their investment portfolios. The major functions in
the investments area are (a) determining the value,
risks, and returns associated with such financial
assets as stocks and bonds and (b) determining the
optimal mix of securities that should be held in a
portfolio of investments, such as a retirement fund.
General Areas of Finance

3.Financial Services
 Financial services refer to functions provided by
organizations that deal with the management of
money. Persons who work in these organizations,
which include banks, insurance companies, brokerage
firms, and similar companies, provide services that
help individuals and companies determine how to
invest money to achieve such goals as home
purchase, retirement, financial stability and
sustainability, budgeting, and so forth.
General Areas of Finance
 Managerial (business) finance
 Managerial finance deals with decisions that all firms make
concerning their cash flows, including both inflows and outflows.
As a consequence, managerial finance is important in all types of
businesses, whether they are public or private, and whether they
deal with financial services or the manufacture of products. The
duties encountered in managerial finance range from making
decisions about plant expansions to choosing what types of
securities should be issued to finance such expansions.
 Financial managers also have the responsibility for deciding the
credit terms under which customers can buy, how much
inventory the firm should carry, how much cash to keep on hand,
whether to acquire other firms (merger analysis), and how much
of each year’s earnings should be paid out as dividends versus
how much should be reinvested in the firm.
Roles of Financial Managers
 Allocation or Utilization of Funds
 The financial manager decides as to where to get financial resources like
cash, inventories, equipment, and other assets needed by the firm in its
operation. If cash is acquired, the financial manager decides where to use
the cash – finance a new project, pay outstanding obligations, pay
operating expenses, or buy equipment needed by the firm.
 Management of Funds
 The person in charge of the finance function is called the director of finance, VP –
Finance, or finance manager. He is responsible for the allocation of the financial
resources of a company, the acquisition of additional funds needed, and the
utilization of these financial resources to attain organizational objectives.
 The finance manager or comptroller supervises the chief accountant, the
purchasing manager, the investment manager, the budget and planning
manager, the treasury department, and the risk management and insurance
department.
Goals of the Financial Manager

1. Acquisition of funds with the least cost from the right sources at the
right time;
2. Effective cash management;
3. Effective working capital management;
4. Effective inventory management;
5. Effective investment decisions;
6. Proper asset selection; and
7. Proper risk management.
Goals of the Financial Manager

 Acquiring funds form the right sources at the right time

with the least cost provides an advantage toward goal attainment.
Establishing the right connection or networking is important in this
respect. Sources of funds include banks, financial institutions and
financial intermediaries, insurance companies, mortgage and loan
associations, and individual and corporate investors.
 Effective cash management needs a detailed cash flow budget
so that the sources and uses of funds can be carefully planned.
Taking advantage of cash discounts in paying trade payables,
prioritizing the use of cash, and other similar strategies help in
managing cash.
Goals of the Financial Manager

 Similarly, inventories need to be managed effectively. Overstocking is

undesirable; it ties up capital. Understocking, likewise, is undesirable because
the firm misses sales opportunities that could have increased profits.
Purchasing the right inventory at the right time from the right sources gives
the company an edge over its competitors. Disposing slow-moving inventories
needs to be done, that is why some companies resort to barter in the barter
exchanges where slow-moving inventories can be sold.
 Determining where to invest excess funds to create additional income is
making an investment decision. Too much cash lying in the bank or
checking accounts that do not ears interest are not advisable. Any excess cash
needs to be invested to earn income, either in the form of interest or
dividends. Investing in the right assets is a must for successful management of
a firm. Engaging in new projects and buying new assets are investment
activities.
Goals of the Financial Manager

 Proper asset allocation is important. Selecting the right machinery

and equipment needed by a company in its operation is important to
attain its production goal that creates sales. Deciding on buying a
computer and the type of computer to buy will help the company attain
improvement in organizational efficiency.
 Risk management is a task so important to the firm to weigh risks
associated with certain business decisions. Buying stocks or investing in
something needs risk analysis and assessment. In general, the riskier
the project, the higher should be the return. Every management
decision involves risk, more so every financial decision. Risk
management is a primary task for the financial manager.