Finance Function
Finance Function
(a) For a long time, “the finance function” was viewed simply as the task of providing the funds needs by the enterprise on the terms most fovourable in light of the objectives of the business (Hunt William and Dorarson, Basic Business Finance, 4th Ed. 1971) Thus, the emphasis was placed on procurement of funds. It was held activities involved in seeing that an individual or the organisation has the cash with which to pay is its bill promptly, were the functions of finance.
Emphasis on procurement of funds on most favourable terms limited the scope of business finance to :-
– discussion of the instruments (share, debentures, etc.) institutions (commercial banks, development banks, investment trusts, insurance companies) and practices through which funds were secured.
– discussion of legal and accounting relationship between a business enterprise and its sources of funds (legal problems and disputes connected with the issuance, ownership, distribution and exchange of financial instruments).
– analysis of the firm from view-point of an outside such as lender or investor.
– Provision of funds to support programmes and activities of firm is the central core of finance function, Further, getting funds on most favourable terms and in most suitable ways is regarded as the basic part of finance function, But later on, it was realized that finance should cover more activities that only supply of funds.
(b) The emphasis on procurement of funds as the only major function of finance of continued till the early fifties. Later on due to several developments, “effective utilisation of resources was also regarded as a vital function of finance. Thus, the scope finance has widened. The developments which led the practitioners practitioners and theorists to recognize the effective utilisation of resources as function if finance are:
– increase in the pace of technological development reducing the life cycle of individual products.
– growing competition and resultant pressures on profit margin.
– failure of companies as a result of unwise use of debt. funds during the depression of thirties in U.S.A.
– sustained economic growth after world War II.
– need of decentralization of activities as a result of continued development of large scale enterprises. Greater and greater institutionalization of the flow of savings and investments needing professionalization of the investment of funds.
– developments in the tool of analysis (mathematical models, use of computer facilitating large scale processing of masses of data).
– regulations requiring the companies to disclose more and more financial data for facilitating the analysis of financial condition and performance.
– development of portfolio theory in the 1960s and its applications to financial management.
The function of effective utilisation of resources focuses on :
(a) allocation of funds to specific assets, and
(b) establishment of best possible mix of financing in relation to the over all valuation of firm.
