if you want to know what are business finance and its functions? then you are at the right place because in this article we are going to take about what is business finance and its functions.

OVERVIEW OF BUSINESS FINANCE

Finance may be defined as the art and science of managing money or funds. Finance can also be defined as the science of money management.

It is the provision of money at the time when it is needed and includes activities such as investing, borrowing, lending, budgeting, and forecasting.

WHAT IS BUSINESS FINANCE AND ITS FUNCTIONS?

The finance function is the procurement of funds and their effective utilization in business concerns.

The concept of finance includes capital, funds, money, and amount. Studying and understanding the concept of finance has become an important part of every business concern and other stakeholders as well.

This session looks at the meaning of business finance, the role of finance managers, the objectives of the firm, decision areas in finance, and agency problems.

 INTRODUCTION TO BUSINESS FINANCE

We welcome you to this session. This is the beginning of your understanding to finance. You don’t have to worry yourself so much if you don’t have any understanding of finance.

We shall take you through the course step by step so that you will be able to manage your personal finances in a much better way and manage the funds of your organization well too.

In this session, we look at finance and the field of finance, the financial system, and the different types of financial markets.

Read also: Meaning of business finance

Objectives by the end of this article, you should be able to:

(a) explain what finance is

(b) outline the interrelated areas of finance

(c) understand the financial system and how it operates

(d) distinguish between money market and capital markets

(e) appreciate the role of financial intermediaries

Now read on …

Finance is the science and art of managing money. At the individual level, it is concerned with how much of their earnings to spend, save, and how to invest the savings.

At the corporate level, it involves how the firm decides whether to reinvest the profit or distribute the profit back to investors. The business concern needs finance to meet their requirements in the economic world.

Any kind of business activity depends on the finance. Hence, it is called as the lifeblood of the business organization. Whether the business concerns are big or small, they need finance to fulfill their business activities.

WHAT IS BUSINESS FINANCE

Finance may be defined as the art and science of managing money or funds. Finance can also be defined as the science of money management.

It is the provision of money at the time when it is needed and includes activities such as investing, borrowing, lending, budgeting, and forecasting.

Read also: Different Ways to Finance Your New Smartphone in India

The finance function is the procurement of funds and their effective utilization in business concerns. The concept of finance includes capital, funds, money, and amount.

Studying and understanding the concept of finance has become an important part of every business concern and other stakeholders as well.

THE FIELD OF FINANCE

Finance, as a discipline, is a body of facts, principles, and theories relating to raising and using money by individuals, businesses, and governments. Finance consists of three interrelated areas namely:

• Money and capital markets – which deals with financial markets and financial institutions
• Investment – which focuses on decisions made by individual and institutional investors as they choose securities for their investment portfolios; and
• Financial management – which basically involves decisions within firms.

 FINANCE AS A DISCIPLINE

Finance as a discipline is related to a number of disciplines, notably economics, accounting, law, managerial science, and taxation. It is therefore imperative for finance scholars and professionals to understand the relationships between finance and these disciplines.

Economics gives a framework for understanding risk analysis, comparative return, and pricing theory. Businesses operate in an economic environment and therefore must contend with basic economic variables such as interest rates, inflation, taxes, disposable income, and gross domestic product. Financial managers in particular must appreciate the impact of economic variables and employ them correctly to achieve financial goals.

Accounting usually referred to as the language of finance, communicates financial information through financial statements and reports from which financial decisions are made. The financial manager’s duty is to interpret and use these statements in allocating financial resources judiciously to reap the best return possible for shareholders in the long term.

Read also: What Is A Running Finance and What Are Its Uses?

Law governs almost every aspect of actions taken by the financial manager. Rules and regulations and laws govern business operations so as to protect shareholders’ interests. In fact, companies are created by laws and also operate under laws. Hence the financial manager must honor their legal obligation to avoid unnecessary legal action against the business.

Managerial science and statistics provide tools to aid financial managers’ decision-making. Time series and trend analysis can be used in forecasting some aspects of the capital budget. In addition, a statistical measure of variance can be used for risk analysis while regression analysis and linear programming can help in capital rationing and understanding the behavior of costs respectively.

WHAT IS A FINANCIAL SYSTEM?

A financial system is a set of implemented procedures that track financial activities. The financial system is complex, encompassing many different types of private-sector financial institutions, banks, insurance companies, mutual funds, finance companies, and investment banks. All of which are heavily regulated by the government.

The financial system can be defined at the global, regional or firm-specific level. On a regional scale, the financial system is the system that enables lenders and borrowers to exchange funds. A financial system is a system that covers financial transactions and the exchange of money between investors, lenders, and borrowers.

These are made of intricate and complex models that portray financial services, institutions, and markets that link depositors with investors. Finance plays an important role in the economy. Like banks, credit unions, and other financial institutions provide credit, they help expand the economy by directing funds from savers to borrowers.

Efficient financial management requires the existence of some objective or goal because judgment as to whether or not a financial decision is efficient must be made in light of some standard. Although various objectives are possible, we assume in this course that the goal of the firm in respect of shareholders and that of other stakeholders.

FINANCIAL INTERMEDIATION – WHAT IS FINANCIAL INTERMEDIATION

A financial intermediary (such as a bank) simultaneously interacts with savers (or lenders) and borrowers and produces a set of services that facilitate the transformation of its liabilities (such as deposits) into assets (such as loans).

A financial intermediary is an entity that facilitates a financial transaction between two parties. The function of facilitating liabilities (or assets) into assets (or liabilities) is called intermediation.

Through intermediation, financial intermediaries allow indirect lending (and borrowing) between savers and borrowers.  Such an intermediary or a middleman could be a firm or an institution. Some examples of financial intermediaries are banks, insurance companies, pension funds, and investment banks.

Functions of financial intermediaries

• The primary function of financial intermediaries is to convert savings into investments.
• Financial intermediaries move funds from parties with excess capital to parties needing funds
• Intermediaries like commercial banks provide storage facilities for cash and other liquid assets, like precious metals.
• They assist clients to grow their money via investment. Intermediaries like mutual funds and investment banks use their experience to offer investment products to help their clients maximize returns and reduce risks.

Advantages of financial intermediaries

Financial intermediation can improve economic efficiency in at least five ways, by:

(i) Facilitating transactions: They help in saving time and cost. Since these intermediaries deal with a large number of customers, they enjoy economies of scale.

(ii) Facilitating portfolio creation: Through a financial intermediary, savers can pool their funds, enabling them to make large investments, which in turn benefits the entity in which they are investing.

(iii) Easing household liquidity constraints: FIs provide liquidity when they convert an asset into cash easily and quickly without loss of value in terms of money.

When this issue claims against themselves and supply funds they, especially banks, always try to maintain their liquidity

(iv) Spreading risks over time: They help in lowering the risk of an individual with surplus cash by spreading the risk via lending to several people. Also, they thoroughly screen the borrower, thus, lowering the default risk.

(v) Reducing the problem of asymmetric information: They accumulate and process information, thus lowering the problem of asymmetric information.

SUMMARY IN THIS SESSION

we explained the meaning of finance and finance as a discipline. We also looked at the financial system and the role of financial intermediaries.

Financial markets such as money markets and capital markets and instruments traded in these markets were all explained.

We explained that capital markets can be primary markets or secondary markets. Why are you smiling? You understand the issues, right? Don’t give up.

By: Eric Adjei

Co-Author 

A professional with six (7) years’ experience in finance and accounting. Demonstrating expertise in accounting procedures, computerized accounting system management and financial operations. Financially astute with excellent analytical, problem solving, management, people supervision, organizational, business administration, operation and commercial management and teaching skills.