Finance Function

Finance functions can be viewed from two different approaches; traditional approach and modern approach. Under the traditional approach finance, functions are based on only to the procurement of fund to the organization or finance function means obtaining fund to the organization or finance means funds for business enterprise.

The traditional approach has explained the finance function in a narrow sense. The term procurement in above definition was used in a broad sense so as to include the whole gamut of raising funds externally. The traditional approach can be limited to the raising and administering funds and then was woven around the view point of the suppliers of funds such as investors, investment bankers and so on, i.e., the outsiders. In this approach, no consideration was given to those who had to take internal financing decisions. The limitation was that internal decision making i.e. insider-looking out was completely ignored. The another criticism of traditional approach of finance function is, it is focused on the financing problems of corporate enterprises. In another way, it can also be criticized that, it focuses to the episodic events such as promotion, incorporation, merger, consolidation, reorganization and so on. Therefore, it does not give consideration to the day-to-day financial problem of the company. Conclusively, the traditional approach focus to the procurement of fund basically long-term fund, to the specific events and lacking to explain the management of working capital and allocation of acquired fund as finance function.

The another approach of finance function consists modern approach and evolved to solve the various shortcomings of the traditional approach. The modern approach views the finance function in a broad sense. According to it, the finance function covers both acquisitions of funds as well as their allocation. Therefore apart from the acquisition of the funds, the efficient and wise allocations of funds to various uses are the functions of finance in broad sense. The modern approaches of finance function give the answer of the following questions:
  • What is the total volume of funds an enterprise should commit?
  • What specific assets should an enterprise acquire? 
  • How should the funds required be financed?
To answer the above questions finance functions include three major decisions, financing, investment and dividend decision, function of raising funds, investing them in assets and distributing returns earned from assets to shareholders respectively. While performing these functions a firm attempt to balance cash inflows and outflows. This is called liquidity decision, and can be added it to the list of important finance decision or functions. Finance functions or decision include the following: 
  • Investment or long term assets mix decision
  • Financing or capital mix decision
  • Dividend or profit allocation decision
  • Liquidity or short-term asset mix decision

No comments:

Post a Comment

Infolinks