UNDERSTANDING FINANCE

Finance
– is a broad term that describes activities associated with money, debt, credit,
investments, and capital market. The oversight, creation, and study of money, banking, credit,
investments, assets, and liabilities encompasses that make up the financial systems.

The American Heritage Desk Dictionary defines finance as the management of money, banking,
investments, and credit. It is also defined as a science of management of money and other assets.

CHARACTERISTICS OF FINANCE
 BOTH A SCIENCE AND AN ART
Finance is considered a science because it is a field of specialization, and strictly
deals with financial facts and truths. Finance is also considered an art, because financial
practices do not remain static but become adaptive to the changes in the business environment
over time.
 APPLICATION OF ECONOMIC AND ACCOUNTING CONCEPTS AND
PRINCIPLES
Finance is an application of the concepts and principles of both economics and
accounting.
Economics – concerned with the efficient utilization of scarce resources to satisfy the
needs and wants of the people.
Accounting – deals with recording and preparation of business transactions.

 SYSTEM, STRUCTURE, AND PROCESS

The field of finance provides and clearly defines a systematic, structured, and procedural
mechanism on the various financial activities affecting the business.

 MANAGEMENT, ALLOCATION AND UTILIZATION

Economically, the fundamental concern of finance, is to ensure that the limited financial
resources are correctly managed, allocated, and utilized in order to achieve the financial goal of a
business.

 FINANCIAL RESOURCES, INVESTMENTS, AND EXPENDITURES

Finance is deal the efficient handling of the resources, investments, and

expenditures of the business.

AREAS OF FINANCE
Finance is broadly classified into two:
1. Private finance
2. Public finance

Private finance is subdivided into:

1. Business finance
2. Personal finance

Business finance is further subdivided into the ff areas:

1. Financial management
2. Capital market
3. Financial investment

FUNCTIONS OF A FINANCE OFFICER

-The finance officer plays a crucial role in the whole business organization. He or she acts as the
wary financial traffic officers to almost all business transactions with monetary considerations.
- The finance officer is responsible for managing the finances of the organization.
- The finance officer is heavily engaged in making decisions for the business to attain its
objectives at the optimum level.

Classification of Decision-Making Function of the finance officer:

1. Operating decisions are financial decisions affecting the routine operating activities of a
business such as manufacturing, marketing, purchasing, and the like.

2. Investment decisions deal with choosing small and large projects with several investment
opportunities. The different projects are critically evaluated in terms of return of investment and
expected cash flows.

3. Financing decisions deal with raising or acquiring of funds from outside sources and not from
the ordinary results of the business operation. In other words, financing decisions are made when
the business needs to borrow money.

A business can raise money from the following activities or sources:

1. Operations
2. Investors or lenders
3. Owners

QUALIFICATIONS OF A FINANCE OFFICER

 1. Possesses sound knowledge of accounting and economic concepts and principles
2. Has profound understanding of operation science. Statistics, and marketing research
3. Has gained technical experience in finance and provided professional judgement
4. Has good communication skills in both oral and written forms
5. Has impressive relationship with banks and other financial institutions
6. Has outstanding relationship within the business and among other functional areas
7. Is ethically and morally upright and socially responsible

Financial management provides pathways to attain goals and objectives in an organization. It refers to
the effective and efficient planning, organizing, directing and controlling the financial activities and
processes of an organization. This includes but is not limited to fund procurement, allocation of financial
resources, utilization of funds, etc.
The importance of financial management is:

 It provides guidance in financial planning.

 It assists in acquiring funds from different sources.
 It helps in investing an appropriate amount of funds.
 It increases organizational efficiency.
 It reduces delay production.
 It cut down financial costs.
 It reduces cost of fund.
 It ensures proper use of fund.
 It helps business firm to take financial decisions.
 It prepares guideline for earning maximum profits with minimum cost.
 It increases shareholders’ wealth.
 It can control the financial aspects of the business.
 It provides information through financial reporting.
 It makes the employees aware of saving funds.

8 Major Roles and Functions of Financial Management

1. Financial decisions and controls - Financial management and financial managers play a
crucial role in making financial decisions and exercising control over finances in the
organization.
2. Financial Planning - The finance managers are responsible for the planning of financial
activities and resources in the organization.
3. Capital Management - It is the responsibility of financial management to estimate the
capital requirements of the organization from time to time
4. Allocation and Utilization of financial resources - Financial management ensures that
all financial resources of the organizations are used and invested effectively and
efficiently.
5. Cash Flow Management - It is extremely important for organizations to have sufficient
working capital and cash flow to meet their operational expenses and emergencies.
 6. Disposal of Surplus - The decisions on how the surplus or profits of the organizations is
utilized is taken by the financial managers of the organizations.
7. Financial Reporting - Financial management maintains all necessary reports related to
the finance of the organization.
8. Risk Management - Financial management prepares the organization to forecast risks.
Types of Financial Managers
Controllers - Controllers facilitate the preparation of financial statements that summarize the
organization’s financial position.
Credit Managers - Credit managers monitor the collection of due accounts, foresee credit ceilings, and
set the credit-rating criteria etc.
Insurance Managers - Insurance managers oversee losses and shortcomings of the organization.
Treasurers / Finance Officers - Treasurers, also known as finance officers oversee fund investment of
the organization and make sure the budget meets the organizational goals.
Cash Managers - Cash managers abide by the annual budget that is initially made, and keep track of the
cash flow, in and out of the organization’s business and investments.
Risk Managers - Risk managers make sure that the company is never exposed to financial uncertainty.