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The Role of Finance in Business. Accountants Accountant’s function is to develop and provide data measuring the performance of the firm, assessing its.

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Presentation on theme: "The Role of Finance in Business. Accountants Accountant’s function is to develop and provide data measuring the performance of the firm, assessing its."— Presentation transcript:

1 The Role of Finance in Business

2 Accountants Accountant’s function is to develop and provide data measuring the performance of the firm, assessing its financial position, and paying taxes. The accountant is responsible for preparing financial statements such as the income statement, balance sheets, and cash flows. It is normally passive work, in the sense that, the work has a very independent nature to it such as preparing forms and financial statements. It is a good job for people who want to work independently and are very organized.

3 Finance Managers The financial manager or consultant places primary emphasis on decision making. It uses the financial statements prepared by accountants to make decisions about the firm’s financial condition and to advise others about possible losses and profits. In some cases, finance is more a type of leadership position. A financial manager has to deal not only with finance, but also with economics, accounting, statistics, math, and management. For example, people working with stocks and bonds have to understand and analyze how the underlying companies are performing

4 Primary Finance Activities Raising of Funds - In order to meet the obligation of the business it is important to have enough cash and liquidity. A firm can raise funds by the way of equity and debt. It is the responsibility of a financial manager to decide the ratio between debt and equity. It is important to maintain a good balance between equity and debt. The Finance Concept ensures that company financial goals are in line with organization priorities.

5 Allocation of Funds Once the funds are raised through different channels the next important function is to allocate the funds. The funds should be allocated in such a manner that they are optimally used. In order to allocate funds in the best possible manner the following point must be considered The size of the firm and its growth capability Status of assets whether they are long term or short tem Mode by which the funds are raised. These financial decisions directly and indirectly influence other managerial activities. Hence formation of a good asset mix and proper allocation of funds is one of the most important activity

6 Profit Planning Profit earning is one of the prime functions of any business organization. Profit earning is important for survival and sustenance of any organization. Profit planning refers to proper usage of the profit generated by the firm. Profit arises due to many factors such as pricing, industry competition, state of the economy, mechanism of demand and supply, cost and output. A healthy mix of variable and fixed factors of production can lead to an increase in the profitability of the firm. Fixed costs are incurred by the use of fixed factors of production such as land and machinery. In order to maintain a tandem it is important to continuously value the depreciation cost of fixed cost of production. An opportunity cost must be calculated in order to replace those factors of production which has gone thrown wear and tear. If this is not noted then these fixed cost can cause huge fluctuations in profit.

7 Understanding Capital Markets Shares of a company are traded on stock exchange and there is a continuous sale and purchase of securities. Hence a clear understanding of capital market is an important function of a financial manager. When securities are traded on stock market there involves a huge amount of risk involved. Therefore a financial manger understands and calculates the risk involved in this trading of shares and debentures. Its on the discretion of a financial manager as to how distribute the profits. Many investors do not like the firm to distribute the profits amongst share holders as dividend instead invest in the business itself to enhance growth. The practices of a financial manager directly impact the operation in capital market.

8 The Relation of Finance to Other Business Functions Establishment Financing relates to other business functions through its role in establishment. Without financing, the business most likely would not exist, to say nothing of other business functions. Production in Anticipation of Demand Financing enables production in anticipation of demand. This is a necessary aspect of many businesses. For example, a store has products on its shelves, not merely a storefront with catalogs. Likewise, a carpenter does not wait until he gets a project to buy his tools.

9 The Relation of Finance to Other Business Functions Promotion Financing also enables promotion. The promotion of a business is an expensive venture, in some cases costing just as much as the cost of goods sold or staffing. Financing is required to fund promotion. A business will not get many customers if it does not advertise its presence, its product/service offerings and its value proposition (e.g. low price, great value, special features).

10 The Relation of Finance to Other Business Functions Growth Financing also plays a role in the growth of a company. Without having advance orders and payment, growth would not be a possibility without financing. In most cases, company growth is preceded by an investment in more employees, more inventory, another location, etc. Contingencies Adequate financing also ensures that the company will be able to handle any contingencies that arise. A contingency is any sort of unexpected expense. As such, examples range from busted pipes to an ordering mistake that requires rush delivery to amend, or to hiring a temporary worker to cover someone who has an extended leave from the job. Anything can happen, but without financing the company would not be able to afford it.

11 Capital investment decisions / Working capital management? Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

12 Capital Investment decisions / Working Capital Management Capital investment decisions also can be called ‘capital budgeting’ in financial terms. Capital investment decisions aim includes allotting the capital investment funds of the firm in the most effective manner to make sure that the returns are the best possible returns. Assessing projects as well as the allocation of the capital depends on the project requirements are some of the most crucial capital investment decisions aspects. The aim of a business while making capital investment decisions is maximizing the wealth of the shareholder by acquiring assets and yielding profit and to be able to do this, as the owner of your business, you should to be able to find out and determine as to what projects of capital investment would yield a cash flow which is positive

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