Tuesday, July 29, 2014

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A Comprehensive Definition of Finance - What Is Financial Mangement All About?

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The term finance presents different meanings to different people and institutions depending on the issues and circumstance that are being considered.

Finance is a body of principles and theories that deal with the sourcing and deployment of funds by both individuals and organizations (Umoh, 1997:74).

Finance is the science of managing money comprising three decision areas including investing, financing and dividend (Van Horne, 1989:74).

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The following factors emerge from the above two definitions:

• Finance involves the acquisition of funds.

• Finance involves the allocation of funds.

• Finance requires key decision inputs.

• Both individuals and organizations are interested in finance.

Bearing these in mind, the term financial management can now be defined as the process concerned with the study of the various. Issues and instruments and employed in funds acquisition, management and retirement (Imo, 1999:174).

Financial management is concerned with the study of the problems involved in the acquisition and use of funds by an organization (corporate or non-corporate) as well as function of profit planning for the business organization.

One issue that is very crucial about the above definition is the inclusion of profit planning which itself is considered the main objective of every business organization.

Financial management will be rendered ineffective and irrelevant in concept and purpose f its functions are not geared towards profit-making and maximization. Thus, financial management is mainly concerned with providing answers to the following questions:

• What total volume of funds should be invested into the business?

• What specific assets should the business acquire and in what form should the assets be held? That is what optimal mix or combination of current and fixed assets should the business attempt to maintain?

• How should the required funds be financed? How should the side of the balance be composed? The liability side of the balance sheet constitutes the sources of fund.

• What minimum level of profit should the firm desire to achieve? It should be noted here that there is no amount of profit achieved by a firm that may be considered as optimum. This is because a firm can achieve higher profit given the same amount of resources if there has been more effective and efficient management of these resources. A firm's desire to attain a minimum level is promised on such minimum standard which a firm should desire to attain.

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1 comment:

  1. We should learn some basic tips regarding finance and its importance. Most probably finance is very crucial for us both for personal and business; therefore we should take care of our financial issues very seriously. I would like to pick some of the basic points from here regarding financial issues and hope to get success while implement.
    Finance Coach

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