Overview of Finance - Finance Module

**OVERVIEW OF FINANCE** **MODULE 1:** **What is Finance?** Finance is defined by Webster's Dictionary as "the system that includes the circulation of money, granting of credit, the making of investments, and the provision of banking facilities." It may be defined as the science of managing and c...

**OVERVIEW OF FINANCE** **MODULE 1:** **What is Finance?** Finance is defined by Webster's Dictionary as "the system that includes the circulation of money, granting of credit, the making of investments, and the provision of banking facilities." It may be defined as the science of managing and creating money, administration and operations of institutions like banks, investment companies, cooperatives, lending groups that facilitate credits and a unit or department that directs the organizations' assets, liabilities, and equities. At large, finance boils down to "funds and resources." In simple terms, finance is concerned with decisions about money, or more appropriately, cash flows. Finance decisions deal with how money is raised and used by businesses, governments, and individuals. To make sound financial decisions you must understand three general, yet reasonable, concepts: *Everything else being equal*: - More value is preferred to less - The sooner cash is received, the more valuable it is - Less risky assets are more valuable than (preferred to) riskier assets. **GENERAL AREAS OF FINANCE** - Financial Markets and Institutions - Investments - Financial Services **General Areas of Finance** - **Financial Markets and Institutions** Financial institutions, which include banks, insurance companies, savings and loans, and credit unions, are an integral part of the general financial services marketplace. The success of these organizations requires an understanding of factors that cause interest rates and other returns in the financial markets to rise and fall, regulations that affect such institutions, and various types of financial instruments, and various types of financial instruments, such as mortgages, automobile loans, and certificates of deposit that financial institutions offer. - **Investments** This area of finance focuses on the decisions made by businesses and individuals as they choose securities for their investment portfolios. The major functions in the investments area are - **Financial Services** Financial services refer to functions provided by organizations that deal with the management of money. Persons who work in these organizations, which include banks, insurance companies, brokerage firms, and similar companies, provide services that help individuals and companies determine how to invest money to achieve such goals as home purchase, retirement, financial stability and sustainability, budgeting, and so forth. **Managerial (business) finance** Managerial finance deals with decisions that all firms make concerning their cash flows, including both inflows and outflows. Managerial finance is important in all types of businesses, whether they are public or private, and whether they deal with financial services or the manufacture of products. The duties encountered in managerial finance range from making decisions about plant expansions to choosing what types of securities should be issued to finance such expansions. Financial managers also have the responsibility for deciding the credit terms under which customers can buy, how much inventory the firm should carry, how much cash to keep on hand, whether to acquire other firms (merger analysis), and how much of each year's earnings should be paid out as dividends versus how much should be reinvested in the firm. **Roles of Financial Managers** **Allocation or Utilization of Funds** **Management of Funds** **The finance manager or comptroller supervises** the chief accountant, the purchasing manager, the investment manager, the budget and planning manager, the treasury department, and the risk management and insurance department. **Goals of the Financial Manager** - Acquisition of funds with the least cost from the right sources at the right time; - Effective cash management; - Effective working capital management; - Effective inventory management; - Effective investment decisions; - Proper asset selection; and - Proper risk management. **Goals of the Financial Manager** - ***Acquiring funds form the right sources at the right time*** with the least cost provides an advantage toward goal attainment. Establishing the right connection or networking is important in this respect. Sources of funds include banks, financial institutions and financial intermediaries, insurance companies, mortgage and loan associations, and individual and corporate investors. - ***Effective cash management*** needs a detailed cash flow budget so that the sources and uses of funds can be carefully planned. Taking advantage of cash discounts in paying trade payables, prioritizing the use of cash, and other similar strategies help in managing cash. Similarly, ***inventories need to be managed effectively**. Overstocking* is undesirable; it ties up capital. *Understocking,* likewise, is undesirable because the firm misses sales opportunities that could have increased profits. Purchasing the right inventory at the right time from the right sources gives the company an edge over its competitors. Disposing slow-moving inventories needs to be done, that is why some companies resort to barter in the barter exchanges where slow-moving inventories can be sold. Determining where to invest excess funds to create additional income is ***making an investment decision**.* Too much cash lying in the bank or checking accounts that do not ears interest are not advisable. Any excess cash needs to be invested to earn income, either in the form of interest or dividends. Investing in the right assets is a must for successful management of a firm. Engaging in new projects and buying new assets are investment activities. ***Proper asset allocation*** is important. Selecting the right machinery and equipment needed by a company in its operation is important to attain its production goal that creates sales. Deciding on buying a computer and the type of computer to buy will help the company attain improvement in organizational efficiency. ***Risk management*** is a task so important to the firm to weigh risks associated with certain business decisions. Buying stocks or investing in something needs risk analysis and assessment. In general, the riskier the project, the higher should be the return. Every management decision involves risk, more so every financial decision. Risk management is a primary task for the financial manager.