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Role
of Finance in Economics
Economic
activity either at the macro level or
at the micro level largely depends on
the financial management. Economic prosperity
is directly related to sound financial
management either at the individual
sector or in the corporate area. Study
of finance, therefore, assumes immense
significance for overall economic growth.
To manage finance for effective running
of any economic activity is the essence
of Finance study, which is very essential
for understanding any business growth
and even its business future. To any
individual, management of his own fund
in effective way is his financial management.
He finds his way out to invest his surplus
fund over his overall expenditure in
other prospective venture with the hope
that the surplus fund, so available
from his normal income, would generate
more and more income to involve him
in greater economic activities. He may
invest this surplus fund in purchasing
shares from other corporate sector with
the hope of getting back multiple returns
within a short spell of time. Judicious
investment in sound corporate sector
is other side of prudent financial management
of any individual entity, which may
be termed
as
risk venture. This investment of surplus
fund in any favorable quarter with the assured
prospective return also helps in tide over
the situation if any unforeseen situation
arises resulting involvement of sufficient
and immediate fund. In case of corporate
entity, financial management is more complex
where larger risk and liability is involved
where supreme corporate goal is to achieve
more profit and credibility. Required corporate
finance is attained either by accepting
public money offering equities of the organization
to the general public, floating bonds to
the public for a specific period accepting
money in exchange or by borrowing from the
banking institutions. While offering share
to the debtors or the general public, the
ultimate objective is to strengthen the
capital base of the organization to act
as bull-work against any odd situation out
of sluggish market or sheer competitiveness
with other concerns.
A good financial manager
of any corporate entity should use his prudence,
accurate judgment capacity and above all
his vision of the future happenings and
select the path in right direction to attain
the corporate objectives of higher profitability.
Offering of share of the company or borrowing
loans – both are liabilities to the organization.
Proper utilization of such collected fund
with an aim to neutralize such borrowed
money along with total development of the
corporate entity, demands lots of acumen
from the finance manager of the organization.
It requires more than the skill of a financial
accountant.
On
the contrary, change of capital structure
and more involvement of public money through
the equity, may change, if not obstruct,
the corporate attitude and shift towards
a particular line. The finance manager while
broad basing the borrowing periphery should
also keep this in mind. Similarly, investment
of its surplus fund in other suitable corporate
bodies with the objective of steady and
better rather say multiple returns is other
arena of financial management which may
be named as Fund management of any corporate
body. The other goal of it is to arrange
or procure liquid money in the quickest
possible of time if the organization so
demands. While personal finance or corporate
finance at the micro level follows some
normal rules and procedures coupled with
general motive of increasing assets, in
case of Public finance at the macro level
needs lots of other factors, dependant of
Government’s avowed policy of well-being
of the people, etc. Through out the world
it is observed that most of the Governments
don’t follow the standard dictum – “cut
according to your cloth”. For acquiring
Public Finance, Government holds some other
objectives in mind, foremost of which is
social objective keeping aside the profit
motive behind all of its financial management.
As because Government is for the general
people, any activity of the Government surrounds
the well being of its people first and foremost.
And
to achieve that goal, Public finance
is required by the Government. Therefore,
the financial management of Public finance
is a different ball game quite devoid
from the established path of the finance
management. It is often found that total
revenue of the Government from all sectors
always go below the total expenditures
as because Government keeps in mind
social objective and political consideration.
It results deficit financing, a new
jargon in the economic buzzword, which
is not always loathsome in normal parameter.
Unlike the individual entity or the
corporate entity, it is rather easy
and less risky for the Government to
raise the money for attainment of its
objectives, which is primarily invested
in infrastructures to accelerate the
pace of development and improvement
of the people. This public finance is
achieved through disinvestments of its
own assets, by issuing various Bonds,
by borrowing from foreign countries
or
international monetary authorities
or as a last resort by printing money.
Government hopes that by investing that
acquired money in the infrastructure
set-up total development and progress
of the country is possible and by which
resurging economy will be buoyant once,
which in turn, will repay the entire
borrowed amount. Even some economists
opine that financial deficit should
be invited and encouraged. To their
views it prevents stagnation, retardation
or slow improvement of the economic
activities. However, in that case even,
management of finance is largely required
to meet up the Government’s objective
while ensuring that the country does
not fall under any debt-trap or any
major policy shift is happened contrary
to the interest of the nation. Another
big task of finance management at macro
level is the budgeting, envisioning
several factors in mind in time-bound
way. To enhance revenues from all sectors
and critical balancing between the revenue
earnings and its judicious expenditure
for all-round development of the economic
growth is the first and foremost word
of a successful budget.
Role
of Banks in Finance management
Bank
plays the role of a facilitator in case
of individual, corporate entity or even
to any country like the World Bank. Bank
collects money from the public and lends
it to the same segment of people. Its one
hand accepts the money from the public giving
some financial benefit, which in turn, is
lent to other needy borrowers for meeting
their urgent requirement or achieving their
goal of development. Thus, Bank has a very
distinguished role to play very different
from other sectors. It is said that sound
banking system is the symptom of sound economic
activity of any country as the Banks work
as a bulwark against any adverse situation
faced by the country. Though the ultimate
aim of any Banking business is to earn profit,
but volatility of the uncertain market and
resultant sudden liquidity crisis, may move
the Bank up and down. As the ultimate looser
may be the public in large, Government has
to incorporate some Banking Regulations
assuring safekeeping of public money. On
the one hand, Bank provides succor to the
individual or corporate body by providing
the required finance, international bank
like the World Bank which is conglomeration
of various countries’ fund, comes to aid
various countries for their overall development
or to mitigate stagnation of economy. Bank,
therefore, directly or indirectly acts as
the fund manager of any sector.
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