Finance – The Life Blood of an Organization
Finance – The Life Blood of an Organization
Finance is considered as the lifeblood of an industry because finance is the master key that provides access to all the sources for being employed in manufacturing and merchandising activities. The success of an organization largely depends on efficient management of its finances.
There are four main functional areas in any business organization. These are – Marketing, Finance, Human Resource and IT. All of these areas are indispensable for the proper functioning of the organization. It is obvious to even a layman that finance is considered as a critical resource by each and every economic entity be it an individual or a firm. Without financial resources no economic activity can be brought to fruition. It would not be an over statement to say that finance is the life blood of all organizations. The work of a financial manager is crucial for the healthy functioning of the business. In a survey of the CEOs in US it was concluded that the most important skill required for future CEOs would be their financial skills.
He is the one who does the financing of the firm. Financing refers to the process of raising funds required for proper working of the business firm. It is imperative to consider all the options which are available to raise finance and employ the one which is the least costly. For any company the two options to collect money are debt and equity. It is common knowledge that getting capital in the form of debt is cheaper. Equity is the owner’s money contributed to the firm.
Once the firm has acquired money it is crucial for it to invest this money wisely in terms of physical assets. This process in termed as investment in the common business parlance. In order to ensure future growth and survival of the firm it is important to invest the money wisely. Without growth the firm is dead. Hence, investment seeks to capitalize on the various growth opportunities for the company. These can come in the form of establishing new plants and factories, expanding product portfolio, venturing into new markets, coming up with major marketing and promotion campaigns etc. The finance manager is supposed to have keen business acumen in order to make wise investment decisions.
An investment decision is also critical as it involves an outlay of large amounts of capital. In addition once the decision regarding investment is made it is irreversible. One cannot go back on the investment decision. Does that mean that one should not make new investment decisions? There is an adage in the finance community that there is no bigger risk than taking no risk at all. Thus proper investment is a must. Post investment, the firm conducts its operations over the financial year and generates profits/loss. The profit earned can be used in two ways – It can be retained in the company and used for future investments and growth or can be distributed as dividend. The finance manager has to take this dividend decision as well. Investors of the company contribute to owner’s equity with the hope of getting returns on their money invested. Thus decision regarding dividend is important to have a satisfied group of owners.
The fourth major decision of a finance manager is regarding working capital. Working capital refers to the amount of money required for the smooth functioning of the day-to-day business operations. Money is required to ensure the conduct of the daily business activities. Even individuals spend money daily so that their activities are not hampered. In the daily functioning of the business petty cash is needed. In addition, from the daily sales money is generated by the company and it adds up to its financial resources. The inflow and outflow of money does not happen or occur at the same time. There would be times when the firm will have surplus cash and there will be times when there will be cash deficit. It is obvious that in case of cash surplus there is destruction of value due to inflation if the cash is kept idle. Thus a finance manager has to keep a keen eye on surplus cash and invest it in appropriate avenues so as to generate fruitful returns. In instances when the firm is short of cash it is again the finance manager’s job to arrange money from the cheapest sources of funds.
Summarizing, without proper financial management the firm cannot thrive and the managers ought to have a keen appreciation of the financial concepts and tools. Thus Finance is regarded as the life blood of a business enterprise, the success of an organization largely depends on efficient management of its finances.
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