A business is an activity which is carried on with the intention
of earning the profits. If the operations of a typical manufacturing
organization are considered, it involves the purchasing of raw
material, processing the same with the help of various factors
of production like labour and machinery, manufacturing the final
product and selling the finished product in the market to earn
Thus production, marketing and 100 business financing are the
key operational areas in case of any business organization,
out of which finance is the most crucial one. This is so as
the functions of production and marketing are related with the
function of finance. If the decisions relating to money and
funds fail, it may result into the failure of the business organization
as a whole. Hence, it is utmost important to take the proper
financial decisions and that too at a proper point of time.
In practical situations, in order to overcome temporary financial
problems, the organizations tend to take the hasty decisions
which may prove to be fatal over a longer span of time.
Scope of financing to the Business Organization
According to the modern approach, the function of finance is
concerned with the following three types of decisions -
a) Financing decisions
b) Investment decisions
c) Dividend policy decisions
100 business financing
decisions are the decisions regarding the process of raising
the funds. This function of finance is concerned with providing
the answers to the various questions like,
a) What should the amount of funds to be raised In simple words,
the amount of funds to be raised by the organization should
not be more or less than what is required as both the situations
involve the adverse consequences.
b) What are the various sources available to the organization
for raising the required amount of funds For the purpose of
raising the funds, the organization can go for internal sources
as well as external sources.
c) What should be the proportion in which the internal and external
sources should be used by the organization
d) If the organization, particularly the corporate form of organization,
wants to raise the funds from different sources, it is required
to comply with various legal and procedural formalities.
e) During the last decade of twentieth century, lots of changes
have taken place in the capital market, which refers to the
market available to the companies to raise the long term requirement
of funds. The question arises what is the nature of capital
market operations What kinds of changes have taken place recently
affecting the capital market in the country
Investment decisions are the decisions regarding the application
of funds raised by the organization. The investment decisions
relate to the selection of the assets in which the funds should
The assets in which the funds can be invested are basically
of two types
a) Fixed assets: Fixed assets indicate the
infrastructural facilities and properties required by the organization.
Fixed assets are the assets which bring the returns to the organization
over a longer span of time. The investment decisions in these
types of assets are technically referred to as Capital Budgeting
Decisions. Capital Budgeting decisions are concerned with the
answers to the questions like,
1. How the fixed assets or proposals or projects should be selected
to make the investment in What are the various methods available
to evaluate the investment proposals in the fixed assets
2. How the decisions regarding the investment in fixed assets
or proposals or projects should be made in the situations of
risk and uncertainty
b) Current assets:
Current assets are the assets which get generated during the
course of operations and are capable of getting converted in
the form of cash or getting utilized within a short span of
time of one year. Current assets keep on hanging the form and
shape very frequently. The investment decisions in these types
of assets are technically referred to as working capital management.
Working capital management decisions are concerned with the
answers to the questions like
1. What is the meaning of Working Capital Management What are
the objectives of working capital management
2. Why the need for working capital management
3. What are the factors affecting the requirement of working
4. How to quantify the requirement of working capital
5. What are the sources available for financing the requirement
of working capital
6. Working capital management is concerned with the management
of current assets on overall basis as well as individual basis.
In practical situations, current assets may be found in the
form of cash and bank balances and inventory. Working capital
management is concerned with the management of these particular
components of current assets as well.
Dividend policy decisions
Profits earned by the organizations belong to the owner of the
organization. In case of the corporate form of organization,
shareholders are the owners and they are entitled to receive
the profits in the form of dividend. However, there is no specific
law or statute which specifies as to how much amount of profits
should be distributed by way dividend and how much amount of
profits should be distributed by way of dividend and how much
amount of profits should be retained in the business. The alternatives
available to the organization i.e. to distribute the profits
in the form of dividend on one hand and retention of profit
in the business have reciprocal relationship with each other.
If the dividends paid are higher, retained profits are less
and vise versa. I f the organization pays higher dividend, shareholders
are very happy as the get more recurring income and the company
may be able to gain the confidence of the shareholders. However,
the organization can be in the financial problems as payment
of dividend results in to withdrawal of profits from the business.
On the other hand, if the organization pays less dividends,
the organization may be in the favorable situation. However,
the shareholders are likely to be offended. As such, the organization
is required to take the decisions regarding the payment of dividend
in such a way that neither the shareholders are offended nor
the organization is in financial problems. As such, dividend
policy decisions are the strategic financial decisions and are
concerned with the answers to the questions like-
a. What are the forms in which the dividends can be paid to
b. What are the legal and procedural formalities to be completed
while paying the dividend in different forms
Goals/Objects of getting Finance in a Business Organization
As a basic principle any business activity aims at earning the
profits. According to this principle, all the functions of the
business will have the profit as the main objective. Similarly,
the finance function will also have the profit as the main objective.
But this was only a traditional belief. Now, profit cannot be
the sole and only goal or objective of the finance function,
due to the following problems connected with this objective.
a. The term profit is an ambiguous concept which isnt having
precise connotation. E.g. Profits can be long term and short
term. Profits can be before task or after task and so on. Which
type of profits should be maximized if profit maximization
is accepted as the goal of finance function, is the other question
b. The profit always goes hand in hand with risks. The more
profitable ventures necessarily include more amount of risk.
The owners of the business will not like to earn more and more
profits by accepting more risk. If the profit maximization is
accepted as the goal of finance function, it totally ignores
the risks factor.
c. Profit maximization as the goal of financial function ignores
the time pattern of returns.
d. Profit maximization as the objective doesnt take into consideration
the social considerations as well as the obligations to various
interests of workers, consumers, society and the ethical trade
practices. If these factors are ignored, the organization cant
survive for long. Profit maximization at the cost of social
and moral obligations is a short-sighted policy.
As such, profit maximization cant be a prime objective of the
finance function. The objective has to be one having broad a
base, which is more precise, which considers risk factor and
time value of money and which consideration to social and ethical
elements also. The alternative is in the form of wealth maximization
as the objective of the finance function.
Due to the limitations attached with the profit maximization
as an objective of the 100
business financing function, it is no more accepted s the
basic objective. As against it, it is now accepted that the
objective of the business should be to maximize its wealth and
value of shares of the company. The object can also be stated
as maximization of the value.
The value of an asset is judged not in terms of its cost but
the benefit it produces. Similarly the value of a course of
action is judged in terms of benefits it produces less the cost
of undertaking it. The benefits can be measured in terms of
stream of future expected cash flows, but they must take into
consideration not only their magnitude but also the extent of
Thus, wealth maximization goal as decision criteria suggests
that any financial action which creates wealth or which has
discounted stream of future benefits exceeding its cost, is
desirable and should be accepted and that which does not satisfy
this test should be rejected.
The goal of wealth maximization is supposed to be superior to
the goal of profit maximization due to the following reasons:
a) It uses the concept of future expected cash flows rather
than the ambiguous term of profits. As such measurement of benefits
in terms of cash flows avoids ambiguity.
b) It considers time value of money. It recognizes that the
cash flows generated earlier are more valuable than those generated
earlier. That is why while computing value of total benefits;
the cash flows are discounted at a certain discounting rate.
At the same time, it recognizes the concept of risk also, by
making necessary adjustments in discounting rate. As such, cash
flows of a project involving higher risk are discounted at a
higher discounting rate and vise versa.
Thus, the discounting rate used to discount future cash flows
reflects the concepts of both time and risk.
Due to the above reasons, the wealth maximization is considered
to be superior to profit maximization as an objective or goal
of finance function. However, it should be noted that wealth
maximization goal is only an extension of profit maximization
goal. Both wealth maximization and profit maximization will
mean the same thing if the time period is too short and risk
element is minimum.
Getting Finance in relation with other functions in a business
Other than getting finance, every business generally operates
in three main functional areas, such as Production, Marketing
and Personnel. All these functions are closely related to finance
function due to the simplest reason that for executing these
functions, funds are required which is the area covered by finance
E.g. To produce good quality of finished goods, the business
needs good infrastructural facilities like building, machineries
etc, a regular flow of production facilities like quality, raw
material, work in progress, consumable stores, quality control
equipments, good maintenance facilities, etc. All these activities
need the investment to be made either in terms of fixed capital
and / or working capital which is the area of finance. To market
the finished goods properly in market, the business has to have
proper investment in the finished goods to guarantee regular
flow of goods in the market; it may be required to have good
distribution systems which may call for investment in terms
of fixed assets or labour force. All these activities need the
investments to be made either in terms of fixed capital and
/ or working capital which is the area of finance function.
The personnel department deals with the availability of proper
kinds of laborers at proper time, their proper training and
their job responsibilities. All these activities need funds
e.g. to pay salaries, wages and other facilities to workers,
funds are needed, to provide training facilities to workers,
it may be necessary to invest in some fixed assets like building
or equipment etc.
To conclude, it may be stated that all the functions or activities
of a business are ultimately related to 100
business financing. The success of a business depends on
how best all these functions can be coordinated.
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