Finance is, in fact, life blood for all the activities of a business. This best can be elaborated with an example.
Imagine you have discovered a new food recipe which is extremely delicious and largely accepted among people. Business Start up: You decided to open restaurant to make this food recipe as your new profitable business. How will you start? Definitely you will need money (dollars) to buy premises, renovate it and advertise about it so that people will start visiting.Day to day operations: The restaurant will not become profitable over night. You have to keep it running for weeks, even months. Again money i.e. dollars are required to meet day to day expenses like salaries of staff, rent of premises, purchase of food ingredients, electricity & gas expenses etc.
Have you noticed from the example, dollars i.e. finance is life blood in every aspect whether startup or daily operations of the business. This is true for each and every business and explains the importance of finance in a business.
Financial Management: An Introduction
Since finance is back bone for a business the logical need arises “There should be a method that optimize the finance for a business.” The subject “Financial Management” has evolved over the period to satisfy this need.
Financial management can be defined as:
“Planning, controlling and deciding the activities related to finance of a business.”
Thus financial management is concerned with deciding such answers like
1) Investments: include deciding
- Long term investment: which projects should be started and which should be rejected.
- Short term investment: which short term investments should be purchased using surplus cash.
2) Financing: includes deciding the question that whether finance for
- Short term day to day working capital; and
- Starting new long term projects;
be arranged from
- Equity i.e. from share holders or owners of the business; or
- Debt i.e. from third parties by issuing bonds / debentures / bank loans etc.
3) Return to owners: How much to payout to the owners of the business.