Finance is the science of funds management, or the allocation of assets and liabilities over time under conditions of certainty

and uncertainty. Financial Management is nothing but management of the limited financial resources the organization has, to its utmost advantage. Resources are always limited, compared to its demands or needs. This is the case with every type of organisation. Proprietorship or limited company, be it public or private, profit oriented or even non-profitable organisation. F !"T#$!% $F F#!&!"' Finance function is the most important function of a business. Finance is, closely, connected with production, mar(eting and other activities. #n the absence of finance, all these activities come to a halt. #n fact, only with finance, a business activity can be commenced, continued and e)panded. Finance e)ists everywhere, be it production, mar(eting, human resource development or underta(ing research activity. nderstanding the universality and importance of finance, finance manager is associated, in modern business, in all activities as no activity can e)ist without funds. Financial *ecisions or Finance Functions are closely interconnected. &ll decisions mostly involve finance. +hen a decision involves finance, it is a financial decision in a business firm. #n all the following financial areas of decision-ma(ing, the role of finance manager is vital. +e can classify the finance functions or financial decisions into four ma,or groups.&/ #nvestment *ecision or 0ong-term &sset mi) decision .1/ Finance *ecision or "apital mi) decision ."/ 0i2uidity *ecision or %hort-term asset mi) decision .*/ *ividend *ecision or Profit allocation decision .&/ #nvestment *ecision #nvestment decisions relate to selection of assets in which funds are to be invested by the firm. #nvestment alternatives are

numerous. Resources are scarce and limited. They have to be rationed and discretely used. #nvestment decisions allocate and ration the resources among the competing investment alternatives or opportunities. The effort is to find out the pro,ects, which are acceptable. #nvestment decisions relate to the total amount of assets to be held and their composition in the form of fi)ed and current assets. 1oth the factors influence the ris( the organisation is e)posed to. The more important aspect is how the investors perceive the ris(. The investment decisions result in purchase of assets. &ssets can be classified, under two broad categories.i/ 0ong-term investment decisions 3 0ong-term assets .ii/ %hort-term investment decisions 3 %hort-term assets 0ong-term #nvestment *ecisions- The long-term capital decisions are referred to as capital budgeting decisions, which relate to fi)ed assets. The fi)ed assets are long term, in nature. 1asically, fi)ed assets create earnings to the firm. They give benefit in future. %hort-term #nvestment *ecisions- The short-term investment decisions are, generally, referred as wor(ing capital management. The finance manger has to allocate among cash and cash e2uivalents, receivables and inventories. Though these current assets do not, directly, contribute to the earnings, their e)istence is necessary for proper, efficient and optimum utilisation of fi)ed assets. .1/ Finance *ecision $nce investment decision is made, the ne)t step is how to raise finance for the concerned investment. Finance decision is concerned with the mi) or composition of the sources of raising the funds re2uired by the firm. #n other words, it is related to the pattern of financing. #n finance decision, the finance manager is re2uired to determine the proportion of e2uity and debt, which is

(nown as capital structure. There are two main sources of funds, shareholders4 funds .variable in the form of dividend/ and borrowed funds .fi)ed interest bearing/. These sources have their own peculiar characteristics. The (ey distinction lies in the fi)ed commitment. 1orrowed funds are to be paid interest, irrespective of the profitability of the firm. $n the other hand, the shareholders4 funds are permanent source to the firm. The shareholders4 funds could be from e2uity shareholders or preference shareholders. 'very firm tries to employ both borrowed funds and shareholders4 funds to finance its activities. +hen the return on capital employed .e2uity and borrowed funds/ is greater than the rate of interest paid on the debt, shareholders4 return get magnified or increased. #n period of inflation, this would be advantageous while it is a disadvantage or curse in times of recession. ')ampleTotal investmentReturn "omposition of investment'2uity *ebt : ;8 interest Return on investment : 578 #nterest on *ebt ;8 on Rs.<6,666 Rs. 5=,=66 'arnings available to '2uity shareholders Rs. 57,666 Rs. =,>66 Rs. 96,666 Rs. <6,666 Rs. 5,66,666 578.

Return on e2uity .ignoring ta)/ is =68, which is at the e)pense of debt as they get ;8 interest only. #n the normal course, e2uity would get a return of 578. 1ut they are en,oying =68 due to financing by a combination of debt and e2uity. The finance manager follows that combination of raising funds which is optimal mi) of debt and e2uity. The optimal mi) minimises the ris( and ma)imises the wealth of shareholders.

."/ 0i2uidity *ecision 0i2uidity decision is concerned with the management of current assets. 1asically, this is +or(ing "apital Management. +or(ing "apital Management is concerned with the management of current assets. #t is concerned with short-term survival. %hort term-survival is a prere2uisite for long-term survival. +hen more funds are tied up in current assets, the firm would en,oy greater li2uidity. #n conse2uence, the firm would not e)perience any difficulty in ma(ing payment of debts, as and when they fall due. +ith e)cess li2uidity, there would be no default in payments. %o, there would be no threat of insolvency for failure of payments. ?owever, funds have economic cost. #dle current assets do not earn anything. ?igher li2uidity is at the cost of profitability. Profitability would suffer with more idle funds. #nvestment in current assets affects the profitability, li2uidity and ris(. & proper balance must be maintained between li2uidity and profitability of the firm. This is the (ey area where finance manager has to play significant role. The strategy is in ensuring a trade-off between li2uidity and profitability. This is, indeed, a balancing act and continuous process. #t is a continuous process as the conditions and re2uirements of business change, time to time. #n accordance with

the re2uirements of the firm, the li2uidity has to vary and in conse2uence, the profitability changes. This is the ma,or dimension of li2uidity decision wor(ing capital management. +or(ing capital management is day to day problem to the finance manager. ?is s(ills of financial management are put to test, daily. .*/ *ividend *ecision *ividend decision is concerned with the amount of profits to be distributed and retained in the firm. *ividend- The term @dividend4 relates to the portion of profit, which is distributed to shareholders of the company. #t is a reward or compensation to them for their investment made in the firm. The dividend can be declared from the current profits or accumulated profits. !ormally, companies distribute certain amount in the form of dividend, in a stable manner, to meet the e)pectations of shareholders and balance is retained within the organisation for e)pansion. #f dividend is not distributed, there would be great dissatisfaction to the shareholders. !on-declaration of dividend affects the mar(et price of e2uity shares, severely. $ne significant element in the dividend decision is, therefore, the dividend payout ratio i.e. what proportion of dividend is to be paid to the shareholders. The dividend decision depends on the preference of the e2uity shareholders and investment opportunities, available within the firm. & higher rate of dividend, beyond the mar(et e)pectations, increases the mar(et price of shares. ?owever, it leaves a small amount in the form of retained earnings for e)pansion. The business that reinvests less will tend to grow slower. The other alternative is to raise funds in the mar(et for e)pansion. #t is not a desirable decision to retain all the profits for e)pansion, without distributing any amount in the form of dividend. There is no ready-made answer, how much is to be distributed and what portion is to be retained. Retention of profit is related to

A Reinvestment opportunities available to the firm. A &lternative rate of return available to e2uity shareholders, if they invest themselves. 5. Routine Finance Decision It is also the incidental finance function, which is performed to execute the executive finance effectively. Routine finance function does not require specialized skills of finance. hey are of clerical nature. !o they are called clerical finance function too. hese function cover procedures and system and involve a lot of paper work and time, some of them are "elow# !upervision for cash receipts and dis"ursements !afe&uardin& of cash "alances (ustody and safe&uardin& of valua"le documents like securities and insurance policies akin& care of mechanical details of financin& Record keepin& of the financial performance of the firm Reportin& to the top mana&ement !uperviion of fixed assets and current assets.

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