Importance of Finance in a Business

Accounting is the way to keep score of a company's activities, but finance brings a business to life. Finance passes through every part of a firm's operations. Few decisions are ever made without input from the people in financial management.

The primary aim of finance function is to arrange as much funds for the business as are required from time to time.

This function has the following aims:

1. Acquiring Sufficient Funds:

The main aim of finance function is to assess the financial needs of an enterprise and then finding out suitable sources for raising them. The sources should be commensurate with the needs of the business. If funds are needed for longer periods then long-term sources like share capital, debentures, term loans may be explored.

A concern with longer gestation period should rely more on owner’s funds instead of interest-bearing securities because profits may not be there for some years.

2. Proper Utilisation of Funds:

Though raising of funds is important but their effective utilisation is more important. The funds should be used in such a way that maximum benefit is derived from them. The returns from their use should be more than their cost.

It should be ensured that funds do not remain idle at any point of time. The funds committed to various operations should be effectively utilised. Those projects should be preferred which are beneficial to the business.

3. Increasing Profitability:

The planning and control of finance function aims at increasing profitability of the concern. It is true that money generates money. To increase profitability, sufficient funds will have to be invested. Finance function should be so planned that the concern neither suffers from inadequacy of funds nor wastes more funds than required.

A proper control should also be exercised so that scarce resources are not frittered away on uneconomical operations. The cost of acquiring funds also influences profitability of the business. If the cost of raising funds is more, then profitability will go down. Finance function also requires matching of cost and returns from funds.

4. Maximising Firm’s Value:

Finance function also aims at maximising the value of the firm. It is generally said that a concern’s value is linked with its profitability. Even though profitability influences a firm’s value but it is not all. Besides profits, the type of sources used for raising funds, the cost of funds, the condition of money market, the demand for products are some other considerations which also influence a firm’s value.

How your financial life is going to change completely from April 1 ?

April 1 is the first day of the next financial year, 2018-19. The Budget proposals for the new financial year, announced on February 1, will come into force from tomorrow. Below are the key changes which are going to affect individuals as well as companies: 

All taxpayers 
All taxpayers will pay a bit of more tax due to hike in and education cess. Budget 2018 had proposed to hike cess on income tax from 3% to 4% thereby increasing the tax payable by all categories of  tax payers. Due to this change, the tax liability for highest tax bracket (assuming Rs 15 lakh income) goes up by Rs 2,625. For the middle income tax payers (between Rs 5 lakh and Rs 10 lakh), tax liability increases by Rs 1,125, and for the lowest bracket (Rs 2.5 lakhs to Rs 5 lakhs) by Rs 125 

Senior citizens 
If you have lots of money earning interest, you need not bother about tax as much as you used to. The exemption limit on income from interest for senior citizens will now be five times higher to Rs 50,000 per year. Those planning to upgrade or buy insurance will benefit from higher limit of deduction for health insurance premium and medical expenditure which has been raised to Rs 50,000 from Rs 30,000 under section 80D of the I-T Act. 

Investors 
Investors will pay tax on long-term capital gains (LTCG) exceeding Rs 1 lakh from sale of shares. However, indexation benefit for computing tax liability on sale of shares after January 31 will be available. 

Transporters
The businesses that transport goods worth over Rs 50,000 from one state to another will have to carry an electronic or e-way bill from April 1. An anti-evasion measure that would help boost tax collections by clamping down on trade that currently happens on cash basis, the e-way bill provision of the Goods and Services Tax (GST) was introduced on February 1. 

Financial management refers to the efficient and effective management of money (funds) in such a manner as to accomplish the objectives of the organization. It is the specialized function directly associated with the top management. The significance of this function is not seen in the 'Line' but also in the capacity of the 'Staff' in overall of a company. It has been defined differently by different experts in the field.

The term typically applies to an organization or Company’sfinancial strategy, while personal finance or financial life management refers to an individual's management strategy. It includes how to raise the capital and how to allocate capital, i.e. capital budgeting. Not only for long term budgeting, but also how to allocate the short term resources like current liabilities. It also deals with the dividend policies of the share holders.

Related Articles