What is Finance?

If you are going to start or run a small business, you must know that one of the hardest jobs is to find money when it is really needed. Unless you have rich relatives willing to contribute, you have to do a lot of searching for those needed funds, then you have to plan for their usage, to manage and to control them. You have to find the best way to get a true feel for finance.

Finance is the function in a business, in both the private and public sectors, that is responsible for obtaining funds for the firm and managing funds within it, that is preparing budgets, doing cash flow analyses, and planning for the expenditure of funds on such assets as plant, equipment, on promotion of a new product, and remuneration of staff. In every business, the careful consideration of the way in which funds are raised, and the monitoring of the way they are used is a vital aspect of the firm's operation. Most organizations have finance departments, or a manager in charge of financial operations. Among the functions a finance manager performs are:

- Planning - Collecting funds (Credit Management)

- Budgeting - Auditing

- Obtaining funds - Managing taxes

- Controlling funds - Advising top management on financial matters (or Funds Management)

The fundamental charge is to obtain money and then plan, use, and control money effectively.

You must be sure, that without a carefully calculated financial plan, the firm has little chance for survival. Financial planning involves an analysis of the short-and long-term money flows to and from the firm. The objective of financial planning is to optimize profits and make the best use of money. Financial planning involves three steps:

1) forecasting financial needs (financing daily operations, managing accounts receivable, the purchase of inventory and the purchase of major assets);

2) developing budgets to meet those needs;

3) establishing financial control to see how well the company is following the financial plans.

By forecasting financial needs we ask questions such as:

What business are we in and should we be in 5 years from now? How much money should we invest in automation and new equipment over the next decade?

A budget is a financial plan, that allocates resources based on projected revenues. There are usually several budgets established in a firm: an operating budget, a capital budget, a cash budget and a master budget.

Obtaining funds - is a very important finance function, because the amount of money needed for various tune periods and it's sources are fundamental questions in sound financial management.

Financial control means that the actual revenues, costs, and expenses are periodically reviewed and compared with projection.

In our day-to-day life we are familiar with such finance

functions as buying merchandise on credit and collecting payments from buyers. The major problem that arises with credit purchasing is that as much as 25 per cent of the firm's assets could be tied up in accounts receivable (to refresh your accounting memory, accounts receivable is money, owed to a business from customers who bought goods or services on credit). This outflow of funds causes financial managers to focus their attention on efficient collection overdue payments. Both credit and collection are important responsibilities of financial managers. They must be sure that the firm does not lose too much money to bad debt losses.

Managing taxes means analyzing of tax implications of various managerial decisions, and designing strategies to minimize the taxes paid by the business. The importance of tax responsibility of the management is constantly being increased because tax laws and tax liabilities have been changed and tax computation is under strict scrutiny of tax authorities.

Then comes auditing. Auditors (internal or independent) check on the journals, ledgers, and financial statements prepared by the accounting department to be sure that all transactions have been treated in accordance with established .accounting rules and procedures, and to measure a company's health.

And finally, financial people provide information and analyses to top management to assist them in decision making - advising top management on financial matters.

All these functions depend greatly on the information provided by the accounting statements.

Answer the following questions:

1. Explain the role and importance of finance.

2. Describe the responsibilities of financial managers.

3. Outline the steps in financial planning by explaining the process of forecasting financial needs, developing budgets, and establishing financial controls.

4. Name three finance functions important to the firm’s overall operations and performance?

5. What are the three primary financial problems that often cause firms to fail financially?

6. In what ways do short-term and long-term forecasting differ?

7. What does an internal auditor do? Why is it important that this function remain independent?

8. Can you identify the main types of budgets?

9. Money is said to have a time value. What exactly does it mean?

10. What sources can an entrepreneur go to in order to start up a new business?

11. How does a company calculate its needs for working capital?

12. How can a company improve its cash flow?